As companies commit to cutting carbon emissions, the market for trading credits is growing. Purchasing a credit can help an emitter offset the equivalent of one ton of carbon dioxide in the atmosphere. The credits are created through projects that reduce emissions, such as reforestation and afforestation or by investing in clean technology that helps reduce energy consumption.
But with no centralized exchanges and a fragmented ecosystem of standards, projects, and brokers, it can be difficult for trading firms to determine which are high-quality versus low-quality credits. Additionally, over-the-counter trade is a time-consuming process, making it inefficient and expensive for businesses to participate.
The first carbon.credit exchange on a formal exchange, the Chicago Climate Exchange (CCX), was launched in 2009. It was a public market that allowed participants to buy and sell emissions reductions and credits that could be used as substitutes for fossil fuels. The CCX ultimately failed due to its market design flaws, which included a flooding of the market with offsets that unbalanced supply and demand, a lack of clear rules on how to meet emissions reduction targets, and negligible penalties for failing to comply.
Despite its ills, the market for voluntary carbon markets (VCM) remains large. Last year saw a record $1 billion worth of transactions, and commodities giants Vitol, Glencore, and Trafigura all opened carbon trading desks to take advantage of the growing interest. But illiquidity, the lack of price discovery and pricing transparency in the VCM, is threatening the success of these efforts.
This is partly due to the influx of new players, such as banks, investment funds and big industrials that want to offset their own emissions or those of their clients. But also because of speculative trading by third parties seeking gains from a growing market. The market needs a radical overhaul, says Gilles Dufrasne, who leads the Carbon Market Watch, an advocacy group for the sector.
A key part of the solution lies in introducing a central carbon exchange. This would improve market liquidity, reduce costs and volatility and make it easier for traders to calculate the emissions associated with their trades on a trade-by-trade basis. This will be crucial to demonstrate that they are not simply offsetting their own emissions with credits from projects that are not necessarily delivering on their environmental claims, he adds.
BBVA Corporate & Investment Banking has already made a step towards this goal with the launch of its own carbon credit exchange trading desk. The desk will offer its clients the opportunity to purchase and sell VCM products in a safe, secure, and transparent environment. It will be backed by the same rigorous risk-management and compliance standards that apply across all of BBVA’s global businesses. The aim is to support its clients in their transformation toward a more sustainable business model.
