Whether it is to address corporate sustainability objectives or comply with regulations, businesses around the world are looking for ways to reduce greenhouse gas emissions. One way is to buy carbon credits, which are certificates indicating that a project has reduced or removed emissions from the atmosphere. These credits are sold in what is known as a carbon market.

There are both mandatory and voluntary carbon markets. In the former, participants receive an allowance, or credit, for each tonne of carbon dioxide equivalent they emit. They can then sell or trade this credit in a carbon market to other participants, who need them to meet their own emission targets. As the volume of traded carbon credits increases, so too do the opportunities for companies to invest in carbon reduction projects.

In addition to the aforementioned carbon trading schemes, there are also a number of voluntary initiatives in place that aim to support and promote a sustainable global economy. These voluntary initiatives are not mandated by governments or regulatory bodies and are instead driven by a desire among many companies to improve their environmental performance.

Voluntary markets are not as well established as mandatory ones, but they can still play a vital role. In particular, they can provide important incentives to companies that are unable to reduce their emissions by other means. The use of carbon offsets can help these companies avoid penalties that are imposed under mandatory schemes, such as fines and additional taxes.

The carbon.credit exchange is a complex and rapidly growing sector, with numerous brokers and retail traders connecting buyers and sellers through private conversations and over-the-counter deals. Larger players, such as the Xpansiv CBL and AirCarbon Exchange, have built platforms to facilitate this activity. These companies purchase large bundles of credits directly from the source, and then resell them to end users, typically with a commission added on top.

As more and more corporations set ambitious goals for achieving net-zero emissions, demand for carbon credits will increase. This will spur more investment in high-quality projects that make a difference. To make the most of this opportunity, however, it is important that companies understand how to distinguish between legitimate and fraudulent carbon projects. For example, a company looking to offset its emissions should only purchase credits from projects that have demonstrated “additionality,” meaning that the project’s impact is on top of what would have happened anyway.

Achieving the full potential of the carbon credit market will require improved standards in three areas: participant eligibility, oversight and market functioning. A digital process for verifying carbon projects would lower issuance costs, shorten payment terms and accelerate credit issuance. It will also improve the credibility of corporate claims about using offsets to mitigate greenhouse gas emissions. Finally, clear demand signals will help encourage project developers to scale up their supply. This could be accomplished by establishing long-term supply commitments that are recorded in a carbon market registry and/or by setting targets for future reductions.