November 30, 2023

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With efforts behind the creation of truly global markets for trading carbon dioxide (CO2), carbon credits are poised to become one of the world’s largest assets traded. There are encouraging signs supporting this trend. The compliance carbon market is now valued at an impressive $851 billion across 30 markets worldwide. Similarly, the voluntary carbon-offsets market is expected to grow from around $2 billion in 2022 to about $100 billion in 2030 and around $250 billion by 2050. Yet in order to achieve the projected market size, many exchanges will have to set up new platforms to support the inevitable acceleration of this developmental trajectory. The problem is that, as things stand today, there are very few active regulated markets offering the option to trade carbon credits. 

Carbon offsets: an overview

Faced with escalating expectations from the public and shareholders to tackle climate change, many businesses recently have publicly pledged to reduce their carbon footprints towards net-zero carbon emission goals. To reach these goals, these companies are purchasing so-called “voluntary carbon offsets” products. 

 

These carbon offset products refer to tradable “rights” or certificates associated with actions that decrease the concentration of carbon dioxide (CO2) in the atmosphere. The buyer of an offset can credit themselves for efforts that either remove carbon from the atmosphere or withhold fresh emissions. Offsets enable those businesses that find it challenging to reduce emissions to assert that they have supported initiatives funding the reduction of atmospheric carbon, essentially offsetting the emissions generated by their own business activities.

 

Because large multinationals are now dedicating substantial resources to acquiring voluntary carbon offsets, this has transformed into big business, incorporating project developers, auditors, standard-setters, brokers and exchanges. 

 

Notwithstanding these developments, the creation of a network of carbon exchanges is critical towards developing a working carbon market. Referring to the position of carbon exchanges, Dr. Rene Karsenti, Senior Adviser/former President at International Capital Market Association (ICMA) and Advisory Board Member at Exberry comments, “Establishing transparent, regulated, and globally interoperable carbon credit exchanges holds immense potential for unlocking substantial capital to support climate change solutions, complementing funding sources such as green bonds in capital markets.”

Article 6.4: Framework for a global carbon credit market

In parallel, the United Nations was tasked to operationalise a new UN carbon crediting mechanism under the Paris Agreement, and provide crucial guidance on greenhouse gas removals and mechanism methodologies. In December 2015, Article 6.4 of the Paris Agreement was approved by the 21st session of the Conference of the Parties (COP), creating a centralised governance system for countries and the private sector to trade emissions reduction anywhere in the world. The regulatory framework for Article 6.4 is due to be approved at COP28 in December 2023.

 

According to The Oxford Institute for Energy Studies

 

“There is widespread expectation that the Article 6 rulebook will create the conditions for effective and robust international carbon markets to thrive, including continued, significant growth in private sector investments through voluntary carbon offset projects. Increasing the credibility and integrity of these markets and greater alignment between voluntary and compliance markets can increase the adoption and the efficiency of these markets in achieving their goals.”

Inconsistencies to be overcome

Some of the biggest issues with carbon markets, however, are the lack of standardisation and regulation. It is almost impossible to find a carbon asset that can be traded globally and will have the same value everywhere. 

 

Challenges in today’s voluntary carbon markets stem from inefficient trading due to lack of liquidity and standardisation of products. This is because carbon credits are highly heterogeneous – by their very nature each credit has distinct attributes linked to the underlying project, such as project type or geographic location. Consequently, the variability among credits results in a time-consuming and inefficient over-the-counter process of matching individual buyers with corresponding suppliers.

 

Ideally what is needed is the provision of a regulated environment for trading carbon credits facilitated by carbon exchanges. A properly-run exchange can provide buyers and sellers with more certainty, thus building higher integrity within carbon markets.  While parties are working towards establishing a global centralised and regulated market, what will be critical for the success of Article 6.4 is the establishment of other parallel exchange venues.

Industry initiatives

Market participants and infrastructure providers are stepping up to the plate and beginning to provide much-needed answers. In September 2022, Abu Dhabi Global Market (ADGM) became the first jurisdiction to regulate voluntary carbon credits as financial instruments, executing its inaugural carbon credits trade the following month.  

 

There has also been development in the design of a new Carbon Markets solution by Exberry and its partners. This provides regulated exchanges with a comprehensive turnkey solution that facilitates much-needed connectivity, interoperability and liquidity in the world of regulated carbon exchanges. The pioneering solution is designed to accelerate the creation of a regulated carbon exchange network, providing an efficient solution that seamlessly connects with other regulated markets to provide liquidity and meet growing industry demand. Exberry for Carbon Markets effectively enables exchanges around the globe to provide their clients with the opportunity to buy and sell carbon assets across regulated markets.

 

Dr Karsenti continues,The Exberry for Carbon Network offers a unique technological solution, acting as the ‘glue’ to facilitate seamless interoperability and the efficient creation of new connected markets. This solution empowers global exchanges to enable clients to trade carbon assets across regulated markets. Exberry’s technology is crucial for servicing the rapidly expanding regulated carbon market, contributing significantly to the transformation and implementation of such essential financial infrastructure. 

 

With regulated carbon markets projected to become a multi-billion-dollar industry by 2030, Exberry and its partners play a pivotal role in addressing this pressing need,” he concludes.

Connected carbon ecosystems

The ongoing efforts to accelerate regulated carbon market exchange networks and achieve net-zero goals emphasise the pivotal role that innovative solutions play in shaping the future of sustainable and efficient carbon trading ecosystems. This push towards market development underscores the need to establish essential elements such as connectivity, interoperability and liquidity. As the demand for carbon markets is poised to increase significantly, the requirement for modern, flexible and cost-effective trading technologies becomes even more pronounced. 

 

At Exberry, we look forward to a future where trading platforms can provide seamless interoperability that will be integral to servicing

For more information

Are you a regulated exchange who is ready to realise your carbon trading offering? Contact us to explore how Exberry’s cutting-edge technology can help revolutionise the future of carbon markets.

Next-Gen Consultancy for Financial Markets

Ambitious financial exchanges need to keep growing. Yet in the world of capital markets this is not always a straightforward task. Each jurisdiction has its own national characteristics and different way of doing things. If an exchange decides to build its own trading or clearing infrastructure, unless it is happy paying an exorbitant cost, it will typically have to wait a number of years for delivery. So, what are the alternatives for exchanges?

Exchanges pivotal for EU’s Capital Markets Union

The EU’s Capital Markets Union (CMU) is receiving strong backing, with widespread enthusiasm evident among stakeholders who are optimistic about its successful rollout. A significant concern has been the persistent lack of on-screen liquidity in European markets, dominated as they are by over-the-counter (OTC) trading. This contrasts sharply with the US where, according to the European Central Bank (ECB), 75% of corporate financing is conducted through capital markets, compared to Europe’s reliance on traditional bank loans.

All Markets Rise: Maximising Exchange Profit by Modernising Across All Sectors

Imagine a scenario in which a large, successful financial exchange is making profits across all its markets alike, from equities, fixed income and derivatives, to commodities and FX. Yet, sadly, this vision is far from reality. Oftentimes smaller and less liquid markets, such as for fixed income and derivatives, find it difficult to obtain the modernisation of infrastructure they need, even when it is just a simple feature request.

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