Carbon credit exchanges help bring buyers and sellers together to reduce greenhouse gas emissions. They provide an incentive for companies to invest in carbon-reduction projects, as well as a way to offset emissions that cannot be eliminated. But many companies struggle to find high-quality carbon credits that reflect real reductions and come with additional social and environmental co-benefits. And with limited pricing data, buyers often struggle to ensure they are paying a fair price for their purchases. The overlapping roles of standards, rating agencies, projects and brokers can also make it difficult for companies to match supply and demand.

To be effective, carbon.credit exchange markets need to be large, transparent and verifiable. This market design is vital as more and more companies make net-zero or other ambitious climate commitments. But despite the many efforts to centralize trade in the voluntary carbon market, such as the short-lived CCX, it remains a fragmented ecosystem. The market is characterized by low liquidity, scarce financing and inadequate risk-management services. It is also flooded with questionable claims of emissions reductions. Moreover, buyers are faced with an inconsistent market in which matching a credit to a buyer is an over-the-counter process that can be slow and inefficient.

Currently, there are four types of carbon markets that offer traders and investors the opportunity to purchase or sell carbon credits. The compliance or regulated markets are born out of laws mandating emission reductions. They operate through the regulated trading programs of industrialized countries, collectively known as Annex 1, and in the Clean Development Mechanism for developing nations.

In contrast, the voluntary market is a collection of private-sector initiatives backed by non-governmental organizations (NGOs). It has emerged from the desire of companies to have a measurable and verifiable means to mitigate their carbon footprint, while maintaining their ability to operate in a competitive marketplace. This has led to a diverse set of standards, verification methodologies and project designs.

The most recognizable type of carbon credit is the certified emission reduction (CER), which is a credit that has been verified and validated through an independent third party for its ability to reduce greenhouse gases. However, the voluntary market is also home to a myriad of other products and credit types, including forestry projects, reforestation, soil carbon sequestration and energy efficiency.

A carbon credit’s price is influenced by its specific characteristics, such as the type of underlying project and the location of the project. Additional attributes, such as the size of the underlying project and its vintage, can also drive prices up or down.

In the current voluntary market, carbon credits are highly heterogeneous, with each having a unique set of attributes that buyers value differently. To improve quality and efficiency, the market needs to standardize these attributes into a common taxonomy that can be used by traders and buyers to match up credits. In addition, establishing liquid reference contracts with daily price signals will enable credit-price risk management and the growth of supplier financing services.