The voluntary carbon market is booming, with large companies setting net-zero targets and interest in meeting international climate goals. Many of these buyers are turning to digital carbon exchanges, and some are even preferring to trade their carbon credits as tokens enabled by blockchain technology.

A carbon credit exchange is a permit that allows its holder to emit one ton of CO2. It can be purchased by an individual or, more commonly, by a company looking to offset the emissions generated by their operations, such as industrial production or delivery vehicles. Carbon credits can be created through a variety of projects that reduce, avoid or destroy greenhouse gases. A farmer that plants trees to reduce emissions is an example of this, but there are also forestry and energy projects that generate carbon credits, as well as new technologies such as direct air capture (DAC).

To ensure that the underlying projects generating the carbon credit meet certain requirements, a number of standards have been developed. These are organizations, usually NGOs, that set out methodologies for the project type and determine whether or not it will produce the appropriate amount of CO2. The market for these carbon credits was originally based on cap-and-trade regulations, which introduced a marketplace-based approach to limit emissions by giving entities incentives to cut their pollution and penalizing those who do not.

Today, the market for these carbon credits is split into two parts: the compliance and the voluntary markets. The compliance markets are regulated by governments that set limits on how much emissions certain sectors can release, and entities must purchase credits to make up for their own releases.

The regulated market has been in place since 2005, and its first commitment period ended in 2012. The Paris Agreement continued to build on this with Article 6, which implemented a system for carbon trading.

In the broader voluntary market, the growth of which has been stimulated by recent corporate net-zero targets and interest in meeting global climate goals, the carbon market is highly heterogeneous. Each credit has different attributes, and matching an individual buyer with a supplier is often a time-consuming process that’s conducted over the counter. This is changing with the introduction of standard products at exchanges such as Xpansiv CBL and ACX.

These standard products, like the Nature-based Global Emissions Offset (N-GEO) and the ACX Global Nature Token, are guaranteed to have certain characteristics, such as a specific type of underlying project, a fairly recent vintage and certification from a restricted group of standards.

This helps to simplify the trading of these credits, which are then sold in a bid/offer market. This helps create price transparency and allows for the scalability of the platform to add more asset types, including futures and CERs, as the carbon market develops further.