Trading and transparency in carbon markets

The complexity of carbon markets means that transparency can be a real challenge. With thousands of different projects generating credits, hundreds of participants in both OTC and exchange markets and many different registries tracking credits and retirements, the lack of integration across these markets makes transparency even more difficult to achieve.

There are several initiatives underway to improve market transparency generally, from projects to combine records from multiple registries to equivalencies allowing for credits to be used across different reporting regimes, and market data providers developing new carbon baskets. Although progress is being made, these market integrations can take a long time to come to fruition and in the meantime, businesses exposed to carbon are also exposed to many risks, from price to regulatory, that can be improved by having access to more transparent data.

Below, we explore some of the areas where organisations may be able to get ahead of the market by making their own progress on data and transparency.

Transparency over market involvement

The starting point for any organisation involved in carbon offsetting is to be clear which market(s) or emissions trading scheme they are participating in. As mandatory offsetting schemes grow, an increasing number of businesses will find themselves obliged to participate in these markets, so the relevant staff need to be aware of both the current state of mandatory carbon markets and how future changes will affect the business.

And although some of these market changes appear to require long-term action, they can have a surprisingly near-term impact for the unprepared. For example, the EU has proposed a new carbon border tax that will only be paid from 2026 but includes mandatory reporting from January 2023.

Transparency in carbon compliance markets

Compliance markets typically have fewer variables to manage for each carbon credit so less complex data needs than voluntary markets. This is because they are regulated and exchange standardised credits, where 1 credit is the equivalent of 1 ton of real-world CO₂ emissions.

However, this does not mean that these markets have less need for data transparency. A regulated market means exposure to regulatory risk, so organisations need to ensure that their processes are both compliant and can be transparently audited. And as climate change is an emotive and urgent challenge for many stakeholders, the reputational risk of non-compliance is also significant.

Information transparency within the organisation is also important. As with any other market, decisions need to be made based on your organisation’s exposure, positions, and inventory, and evolved as situations change. As carbon markets develop liquidity, they will likely move faster and the importance of having accurate, real-time data will be even more important.

The ability to create transparency across your organisation is therefore an important competency right now and of even greater significance in future. Your people need a real-time view of the market, your open positions and your operations as things change throughout the day so that they can make the best decisions to protect the organisation from risk and create new opportunities from these still-emerging markets.

Price transparency in voluntary markets

Voluntary carbon markets see more debate around transparency than compliance markets. Generally, market participants are vocal in their demand for greater transparency, but this is not unanimous. As there is no universally accepted definition of “net zero”, it is possible for organisations to “greenwash”, or claim that they are offsetting emissions when they are either not balancing their full carbon footprint or are investing in cheaper credits that do not stand up to scrutiny. There is currently no obligation to disclose the price paid for credits, and with critics arguing that some credits are priced too low to be credible, there may be some businesses that prefer to keep their exact investments in the lower end of the market quiet.

However, most businesses that make a net zero commitment are taking steps to fulfil it properly. There is an increased interest in project quality and transparency, and the roll-out of new standards such as Fairtrade-certified credits shows that some buyers are prepared to pay above market rates for credits that can be shown to provide additional value.

Carbon prices are steadily becoming more transparent, with several data sources aiming to compile transaction data from registries or by collecting data directly from market participants. This is still a challenge given that most of these credits are traded OTC and there are many variables that are reflected in each credit’s pricing. For example, S&P Global Platts produce 20 price assessments and 4 stand-alone prices, with baskets for carbon avoidance and carbon removal credits. Reflecting the many standards that create further transparency issues, their data includes credits certified by The Gold Standard, Climate Action Reserve, Verified Carbon Standard, Architecture for REDD+ Transactions and American Carbon Registry.

This growing transparency is a help to all market participants as they are able to ensure they can price credits appropriately, according to all a credit’s attributes and the market price. However, it does mean that there is a lot of pricing data for each organisation to manage, and mistakes can be costly. It is therefore not enough to simply have access to this data; your organisations need the systems and processes to manage and control its use.

Transparency between registries

Registries form an essential part of the carbon credit lifecycle. They record the credits created by certified projects, credit ownership, and most importantly, retirement – when credits are taken off the market as they have been used to offset the owner’s real-world CO₂ emissions. Many of the transparency issues occur because there are multiple carbon registries that are not properly integrated.

The lack of registry consolidation is a major barrier to the transparency and credibility of carbon credits, and has been identified as a primary bottleneck in scaling voluntary carbon markets. There is currently no universal registry, which means that there is a risk of double counting from credits being entered on multiple registries. However, this transparency is steadily improving, with some exchanges developing direct integrations with registries, greater co-operation between registries, and the recent announcement of a “meta-registry” which aims to connect these disparate systems.

The industry has been working towards greater transparency almost since its inception, so it is difficult to know when these moves towards transparency will have their intended impact. In the meantime, organisations need the tools to manage data from multiple sources and track each credit across their operations, no matter how the data arrived or was transformed. They also need to have adequate due diligence and auditing systems in place so that they can trace and verify every credit with complete transparency.

Use transparency to become a supplier of choice

Organisations can improve transparency in their own operations by having effective systems to manage carbon credits in place. This transparency makes operations more effective and leads to better decisions as well as protecting the organisation from a wide range of risks.

For organisations in standardised markets, more efficient data processes mean your people can respond to market changes for different types of credits on different exchanges as they happen and can manage your exposure to the risks created by your positions. With faster access to more information, they can also make better-informed decisions that can create greater profitability.

And in voluntary carbon markets clients want more transparency than is currently possible. By improving data processes within your organisation and providing assurance over how you source and manage carbon credits, you can provide clients with the transparency they need to pay a fair price for credits and establish your organisation as supplier of choice.

 

Technology can help you incorporate multiple data sources into one completely transparent system that provides clarity across your organisation. Find out more about NetZero OS – the environmental markets solution.