The global effort to combat climate change is intensifying, and with it, the demand for innovative market-based solutions known for fostering liquidity with efficiency, transparency and integrity.  At the heart of this movement lies the concept of Internationally Transferred Mitigation Outcomes (ITMOs) established under Article 6 of the Paris Agreement, which aim to reduce or remove global emissions by enabling countries to transfer verified carbon credits linked to greenhouse gas reductions. These efforts will help multiple nations achieve their climate targets within a clearly defined framework. As sovereign carbon markets evolve to incorporate ITMOs, the need for robust, secure, and efficient registry technology becomes paramount. 

The Potential of ITMO Markets

As formal mechanisms established under the Paris Agreement, ITMOs have strong potential to bring standardization and structure to the exchange of carbon credits that can help accelerate liquidity creation while fostering international cooperation and support for sustainable development globally.

Several bilateral agreements have already been established to facilitate ITMO trade to date, reflecting a growing commitment to global climate mitigation efforts. Example agreements include  Switzerland’s agreement with Peru to offset a portion of CO2 emissions through projects in Peru; Switzerland, Ghana and Vanatu’s agreement to collaborate to contribute to sustainable agricultural practices in Ghana and improve access to renewal energy in Vanatu; and Japan’s agreements with Thailand, Indonesia, Vietnam and others through the Joint Credit Mechanism to improve areas like energy efficiency measures, reduce emissions via forestry and land-use projects and develop energy-efficient and industrial processes amongst other improvements.  

The structured and unified framework, with international backing, should provide ITMOs a legitimate foundation with strong governance and accountability to foster trust among participants, while driving higher demand and larger transactions than currently recognized with other market-based mechanisms.

The Role of Technology across the ITMO Lifecycle

Establishing registries with scalable and resilient technology will be crucial to the development of a robust, fast-growing ITMO market. Advanced and scalable infrastructure will be essential for managing increasing volumes, adapting to volatile market conditions and facilitating smooth ITMO transactions and cross-border transfers at scale across the ITMO lifecycle. Effective registries will provide the same sophisticated operational capabilities and qualities proven by their application in capital markets, which can help solidify an effective market structure as ITMO registries develop:

Issuance and Transfer: Efficient and transparent asset creation, issuance and transfer of sovereign carbon credits with full auditability are necessary to ensure accurate ownership and facilitation of transfer from issuing countries to acquiring countries and corporates.

Settlement: Robust and reliable ownership transfer mechanisms are critical to ensuring smooth transaction terms and accounting processes between parties to enhance trust and transparency in the market and drive further liquidity.

Custody: Safekeeping of carbon credits in a secure custody solution is critical for electronically storing and managing post-settlement events, such as the retirement of credits.

Technological Innovations to Enable the ITMO Lifecycle

Robust technological infrastructure will be essential for managing the complexities of ITMO transactions and facilitating successful cross-border transfers. Advanced solutions, such as smart contract-driven digital assets and distributed ledger technologies (DLT), offer innovative and promising solutions for creating ITMO registries. These technologies will support solutions that provide cryptographically secure and immutable records of transactions, reducing the risk of fraud and enhancing trust among market participants. Moreover, advanced data analytics and artificial intelligence can improve the accuracy and efficiency of monitoring, reporting, and verification processes, ensuring that mitigation outcomes are accurately quantified and credited.

Scalability and Resilience are Mission-Critical

As the ITMO market evolves, the scalability of ITMO registries will be essential for accommodating the growing volume of transactions as more countries and companies engage in carbon trading. Resilient technology ensures that the system can withstand cyber, volume- and volatility-based operational disruptions, maintaining the integrity and continuity of the market. Investment in robust IT infrastructure is therefore one of the most critical components for the long-term success and sustainability of the ITMO market. Solutions like Nasdaq’s robust, ISO 27001-certified and SaaS-deployed global infrastructure can provide peace of mind to market participants while helping ITMO markets meet their compliance and security needs with dynamic scalability as markets grow. 

Opportunity Ahead

The emergence of the ITMO market represents a significant evolution in the global carbon trading landscape and the importance of efficient and secure market-based carbon technology cannot be overstated. The establishment of bilateral agreements, the production of REDD+ credits and other trends in the developing ITMO markets indicate both a need for ITMO registries and a growing need for scalable, reliable, and interoperable solutions, like those provided by Nasdaq’s Financial Technology business, to support them. As nations and companies continue to collaborate and innovate, the ITMO market holds the promise of driving substantial progress in the fight against climate change, fostering a more sustainable and resilient world for future generations.

TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.