In order to limit global temperature increase to 1.5°C, many companies and governments will need to drastically reduce their net greenhouse gas emissions. While some of this reduction can be accomplished through the adoption of new technologies, energy sources, and operating practices, most will need to buy carbon credits from other organizations to fulfill their commitments. As the number of net-zero pledges has grown, the ability to access a financial framework to actualize these commitments will be critical. To do so, an effective voluntary carbon market will need to provide the ability to purchase and retire credits from trustworthy sources.
International agreements that promote and support climate ambition and market mechanisms can help drive the growth of carbon credit exchanges. However, the success of these initiatives will depend largely on their ability to build resilient infrastructure that supports a robust carbon market. This includes trading, post-trade, and supply chain finance; meta-registries that support post-trade activities (such as verification and certification); advanced data infrastructure; and a reliable set of reference contracts.
The most well-established carbon credit exchange are private companies and organizations that operate independent of any government. These entities define project standards and host registries that regulate the minting and retirement of credits. They are supported by an ecosystem of other companies that serve as buyers of credits, brokers, and traders. These market players are the foundation of the carbon marketplace and are necessary for a functioning global economy.
These private firms and organizations are the "supply side" of the carbon marketplace, enabling individual companies and governments to offset their own emissions with others' reductions. They also provide an essential market signal to buyers, indicating the availability of quality projects that meet their needs. They also host registries that track the purchase and retirement of credits, a process known as offsetting.
This supply side of the marketplace is crucial, and efforts to strengthen its integrity can help to boost the credibility of voluntary markets. To achieve this, there is a need to establish core carbon principles and a standard attribute taxonomy to guide quality thresholds for carbon credits. There is also a need for liquid, transparent reference contracts that can be used as price signals.
Despite the failure to agree on the details of a compliance carbon market at COP 28, countries continue to pilot the use of Article 6. Under this mechanism, one country may sell emission reductions that it has authorized for transfer to another. The receiving country then adds those reductions to its NDC. Nevertheless, uncertainty over how a future Article 6 market would interact with the voluntary market has led some developing countries to ban exports of credits.
Whether the ongoing impasse over the details of a compliance carbon market at the UN level reflects legitimate concerns about the quality of voluntary projects or political obstructionism is not clear. However, there is growing recognition that a more coherent and resilient infrastructure for the carbon market is essential to enable ambitious climate ambition and clean energy growth.