Revamping Carbon Markets: From Voluntary Exchange Challenges to Standardized, Tradeable Carbon Certificates
There are currently two types of carbon markets: mandatory (compliance) and voluntary programs, often known as "cap and trade" or "cap and invest." While both aim to reduce carbon emissions, the voluntary carbon market (VCM) is the largest but not suitable for trading derivatives.
The VCM operates independently of the compliance market, with carbon projects needing to be registered by various self-appointed registrars, each using their own unique protocols. Once registered, carbon credits are sold they are "retired" or "expired," then placed on a carbon exchange or digitized for a single trade. Although this system is designed to support a more sustainable future, investors and consumers must thoroughly research to verify sustainability claims. This includes reviewing the fine print and monitoring projects over time—sometimes up to 20 years—to ensure reforestation is achieved and that the forest remains intact.
Developing a new approach where carbon certificates can be traded as a hedge offers valuable risk management tools. Currently, carbon exchanges act as brokers of carbon credits, which often results in the transfer of non-uniform products. Our carbon certificates, however, are based on a consensus-driven standard, ensuring they are uniform, transparent, scalable for trading, and therefore provide price discovery.