Carbon credit exchanges help make trading in the voluntary carbon market smoother and more accessible. However, the complexities of carbon pricing can still be challenging for companies to navigate. This is why many investors choose to buy credits on a compliance market, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), or a regulated carbon market set by a government or region. A carbon credit represents ownership of the equivalent of one metric ton of reduced, avoided or removed greenhouse-gas emissions. It can be traded, sold or retired (claimed as having been eliminated). Companies that are regulated under cap-and-trade systems are allocated an allowance of emissions to produce each year. If they produce less than their allowance, they can sell their excess carbon credits. Conversely, if they produce more than their allowance, they must buy carbon credits from the market to stay within their emissions target. The value of a carbon.credit can vary significantly based on time and geography, but it also depends on market trends and regulations. For example, the price of a credit can increase or decrease when regulators reduce their emission targets or when a new carbon tax is introduced. There are two significant markets for carbon credits: a regulated market set by "cap-and-trade" programs at the regional and state levels, and a voluntary market that is not subject to regulation. Many environmental commodity exchanges - mostly in North America and Europe - have developed carbon credit exchanges that list carbon credits for sale, and work with registries to enable transactions. There are a wide variety of projects that generate carbon credits, including renewable energy generation, industrial processes and agricultural practices. Each project has its own benefits and costs, but they all have the potential to help mitigate climate change by reducing greenhouse gas emissions. Purchasing carbon credits on the voluntary market can be easier than on a regulatory marketplace, but prices in this sector do not always reflect the true economic value of the additional impacts that a particular project provides. This can leave communities vulnerable to the risk of losing funding, which may result in them stopping their activities. This is why Gold Standard advocates for a minimum price to ensure that projects deliver the maximum social and environmental impact at a cost-effective level. Finding effective ways for buyers to signal their demand for carbon credits would help encourage project developers to scale up supply. For example, longer-term demand signals might be made in the form of up-front commitments to reduced emissions by organizations or as agreements with project developers to purchase carbon credits in the future. Similarly, clear standards to stop fraud and establish anti-money-laundering guidelines could help improve market integrity. The McKinsey Global Institute for Sustainable Development is exploring how companies, standard-setting bodies, financial institutions, and market-infrastructure providers can work together to develop more liquid and sustainable voluntary carbon markets. McKinsey's Christopher Blaufelder is a partner in the Zurich office; Cindy Levy is a senior associate in the London office; Peter Mannion is an associate partner in the Dublin office; Dickon Pinner is a senior partner in the San Francisco office; and Jop Weterings is the director of environmental sustainability in the Amsterdam office.
