The voluntary carbon market is a marketplace where buyers and sellers of carbon credits can find and trade carbon reductions that are generated by sustainable projects. These credits can then be used to offset the greenhouse gas emissions that are produced by a business or an individual.
Voluntary markets are a vital part of the global climate-change effort, helping businesses and consumers to reduce their carbon.credit exchange footprints while achieving environmental goals. But they require a robust infrastructure, scalable technology and sophisticated risk management. Trading in a voluntary market has proven challenging, due to its highly heterogeneous nature. This means that every project is different, and every buyer has different requirements, requiring an efficient way to match buyers with corresponding suppliers of credits.
Nasdaq’s scalable, secure platform matches buyers and sellers based on multiple parameters, enabling them to purchase the right credits that are suited to their needs and regulatory requirements. It offers order types, matching models and algorithms, order validations and attributes, and safeguards to protect the integrity of the market.
As demand for carbon credits increases, so does the volume of transactions. This requires a robust, standardized, real-time exchange infrastructure. Developing an exchange that supports the entire lifecycle of trading and monitoring carbon credits would improve price transparency, lower transaction costs for both parties, accelerate credit issuance and cash flow for project developers, and make corporate claims related to the use of offsets more credible.
The voluntary carbon market has faced challenges due to its complexities and inefficiencies, particularly around price transparency. This creates a number of concerns, including potential for fraud and money laundering. The lack of price transparency also makes it difficult for project developers to track the impact of their projects.
In addition, the volatility of the price of carbon credits impedes efficient matching of buyers and suppliers of credits on a market-wide basis. This creates a high degree of transaction costs and inefficiencies, which in turn depresses the market’s liquidity.
Carbon markets are gaining momentum in many countries, and governments are increasingly establishing mandatory schemes to limit the amount of carbon emissions. These include cap-and-trade programs, which limit the amount of pollution a company can emit and require companies to spend money on credits if their emissions exceed the limits set by the program.
Compliance markets, on the other hand, allow companies to buy or sell allowances that represent a specific amount of carbon emissions, based on their internal standards for reducing carbon emissions. These markets are typically run by governments, but can also be established by private companies that meet certain environmental regulations.
The most popular example of a compliance market is the European Union’s Emissions Trading System (ETS). The system has helped industrialized nations reduce their greenhouse-gas emissions, which in turn has decreased global temperatures and improved the economic well-being of many developing countries.
Another example of a compliance market is the Clean Development Mechanism, adopted under the Kyoto Protocol and designed to help industrialized countries achieve their carbon-reduction goals by investing in projects that reduce emissions in developing nations. The CDM is a large, international compliance market with significant trading volumes.