Carbon credit exchanges connect buyers and sellers of emission reduction units (ERUs). There are two significant markets within the carbon market: a regulated market set by “cap-and-trade” regulations at state and regional levels, and a voluntary market where businesses and individuals buy credits to offset their own emissions.
The regulated market has a cap on the number of emissions that can be emitted by companies in a certain period of time. As a result, companies are incentivized to reduce their emissions and if they have more credits than they need, they can sell them to others who need more. This is a major component of so-called cap-and-trade programs, which are being implemented in the US and around the world.
Another key feature of the regulated market is that it establishes a price on carbon, since a limited number of permits are issued for each period. The price on carbon is established through a combination of factors: the volume of credits traded at a given point in time (the more volume, the lower the price), geography, vintage, and project type (e.g., reforestation, CCS, renewable energy, and land-use change).
While the regulated market is driven by mandatory requirements to reduce emissions, the voluntary market has seen a recent resurgence in activity. This is fueled by an increasing number of corporations, governments, and individuals that take responsibility for their own carbon footprints and are seeking to demonstrate a commitment to environmental sustainability. The resurgence has also been triggered by commitments made by countries to reduce their emissions under the Paris climate agreement.
In the voluntary market, there are brokers and retail traders that link supply and demand, just as in other commodity markets. These traders purchase a portfolio of credits from the supplier, bundle them into packages that range from hundreds to thousands of tons of carbon dioxide equivalent, and then sell them to end buyers with some level of commission. For a large portion of the volumes transacted on Platts CBL, these deals are done through a carbon credit exchange aggregator, which takes the lead in linking supply and demand with the help of an extensive network of brokers.
Another player unique to the carbon markets are standards, which are organizations — typically nongovernmental agencies — that design and develop methodologies for specific types of projects. For example, reforestation projects follow specific guidelines for planting and harvesting trees to ensure the level of CO2 absorption that will generate credits over time. For this reason, reforestation projects are often called “standards-based” or “certified emission reduction” (CER) projects. In addition to reforestation, CERs are also available for projects that remove or avoid GHG emissions from landfills and livestock waste, as well as methane collection from natural gas pipelines. Platts collects bid, offer and trade information to calculate prices for these types of projects in the voluntary marketplace. These prices are referred to as carbon market indications and include four standalone prices: the CORSIA-eligible CEC, the CNC, the Renewable Energy Carbon credits and Methane Collection.
