Carbon credits represent a reduction in greenhouse-gas emissions from a project. Buyers can use these to offset their own emissions or help meet their company's regulatory compliance obligations. Traditionally, the carbon credit market has been fragmented and illiquid. As a result, buyers can struggle to get clear pricing signals and supplier financing often takes too long. As the world's climate ambition grows and more companies set ambitious carbon reduction targets, a robust voluntary carbon marketplace is critical. But what are the challenges that this marketplace must address to become a reality?

The market for carbon credit exchange is a complex ecosystem that includes standards, projects, brokers, and certifying agencies. The fragmented nature of this ecosystem makes it difficult for buyers to track high-quality versus low-quality carbon credits, and trades are often conducted over-the-counter, creating barriers to entry. Moreover, the current system does not provide robust post-trade infrastructure and risk management services for investors.

To facilitate trade and ensure market integrity, a new carbon exchange is using distributed ledger technology (DLT) to support standardized trading of verified and validated carbon credits. This platform, ACX, is leveraging existing DLT infrastructure to enable instantaneous T-0 trade execution, clearing, and settlement, as well as to provide a foundation for a broader set of asset-backed securities. It also seeks to securitize carbon credits around market demand, allowing more traders to gain exposure to the asset class, as opposed to the traditional approach of organizing them around individual projects.

As the number of carbon projects rises, it is increasingly important that carbon markets develop robust infrastructure to facilitate their growth. Resilient and scalable infrastructure should enable the listing and trading of reference contracts, and provide for post-trade activities including clearinghouses, meta-registries, and counterparty default protection. It should also enable the growth of supply-chain funding and advanced data infrastructure to strengthen the quality and transparency of carbon sourcing.

In addition, a core carbon principle and taxonomy should be established to ensure that all credits adhere to credible atmospheric integrity standards. This should be hosted and curated by an independent third party, and include clear quality thresholds as well as a taxonomy for additional attributes that can be used to distinguish credits.

To be eligible for sale in the marketplace, a carbon credit must be'retired' by another party who claims it to be an offset of their own emissions. This process is a complex, time-consuming, and inefficient one that is typically transacted over the counter. To ensure the integrity of carbon markets, credits must only be retired from activities that are genuine and verifiable, and that they contribute to measurable climate benefits. This will require that corporate buyers prioritize measurable reductions in their own value chains, and that they only rely on credits that meet the highest integrity standards. In addition, they should publicly disclose the nature of the carbon credits that they have purchased and retired. This will ensure that carbon credits are not being misused or abused.