What is the role of brokers in a carbon credit exchange?
In order to offset carbon emissions, companies purchase credits from projects that reduce their greenhouse gas (GHG) output. Carbon credit brokers are middlemen who facilitate transactions between buyers and sellers. They act as a link between the two parties and typically charge a commission for their services. While most carbon trading happens in private conversations and over the counter, some exchanges exist to provide a centralized platform for buyers and sellers of carbon credits. These include the Chicago Mercantile Exchange, gCCEx, NASDAQ OMX Commodities Europe and Xpansiv.
There are four main players in the carbon market: project developers, retail traders, brokers and end users. Project developers design and finance carbon reduction projects that produce carbon credits for sale. These are often forestry projects that reduce deforestation or capture and store carbon dioxide in soil or water. Retail traders buy large amounts of credits from multiple suppliers, bundle them in portfolios and sell them to end buyers. They are often paid a commission by the buyer. Brokers are similar to brokers in other commodity markets and facilitate trades between investors and exchanges.
End users are companies, NGOs and individuals that buy carbon.credit to offset their GHG emissions. They can use the credits to meet their corporate sustainability or carbon reduction goals or to hedge against the financial risks associated with a transition to a low-carbon economy. This group includes consumers and organizations that seek to mitigate their environmental footprint, including utilities, banks, insurance companies and oil and gas majors.
The price of a carbon credit depends on its vintage, quality and co-benefits. The latter are positive impacts generated by the project that go beyond reducing GHG emissions. These can include creating jobs, increasing biodiversity and supporting local communities. The quality of a carbon credit is assessed by a third-party verifier, who ensures that the project has followed a defined set of methodologies or requirements. The project must also be officially registered with a carbon crediting program in order to be eligible for trading.
While the voluntary carbon market (VCM) has a role to play in the fight against climate change, it has become too fragmented and lacks effective risk-mitigation structures for participants. The heterogeneity of carbon credits in the VCM makes it difficult to establish reliable daily prices for credits and promote liquidity on exchanges. Making carbon credits more uniform could consolidate trading activity around a few types of credits and help create a more liquid market.
As the global economy moves to a low-carbon future, more and more organizations will look to purchase carbon credits to offset their emissions. As the world grapples with rising global temperatures, it will be increasingly important for all stakeholders to collect, analyze and report carbon emissions data. This will enable them to understand their emissions, make informed decisions and ultimately take steps to reduce their carbon footprint. A key element to this will be the development of a robust and trusted carbon emissions data management system.