TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
Voluntary carbon markets (VCMs) are growing around the world, connecting carbon project owners with financiers, investors and public authorities, generating financial returns and supporting climate action.
But carbon credits are a nascent asset class, and voluntary markets are experiencing growing pains such as opacity, thin liquidity and a lack of standardization, all of which increase frictions and costs across the credit trade life cycle.
Last month, Nasdaq and the ValueExchange published the results of a global survey examining VCM ecosystem challenges and opportunities, with responses from more than 130 decision-makers across project owners, financial investors, commercial banks, brokers, and market operators. A key takeaway was that price transparency, market inefficiencies and fragmentation are preventing scale, with many respondents looking for more automation and standardization to solve growth obstacles.
In terms of specific findings, a few key takeaways stand out:
- Nearly one-third (30%) of survey respondents reported low confidence in the pricing of carbon assets; this rate of low confidence rises to 66% for commercial banks, an important provider of capital in the VCM ecosystem.
- Manual processes are a significant issue, as is fragmentation: 63% of respondents handled project listings via phone and email, but 79% would like to manage such activities through a registry platform.
- 42% of carbon credits are traded locally (issued and traded in the same country of origination), creating “liquidity puddles” that are difficult to access and isolated
- Almost half of survey respondents across project owners, financiers, intermediaries, and investors said they interact with four or more registries.
As a way forward, respondents emphasized the importance of standardization and automation. Standardization in credits will help improve transparency while also enabling better pricing and greater product differentiation. Automation is a clear need as reliance on phone calls and emails leads to costs and constrictions.
These market structure improvements are necessary to unlock the potential of VCMs, both financially and climate related. In a September 2023 whitepaper, the World Economic Forum, in collaboration with consultancy Bain & Company, said the VCM market has the potential to increase from an estimated $1.3 billion in 2022 to more than $50 billion by 2030. But such a growth trajectory would need substantial assistance from governments, which can set forth sensible, VCM-friendly policy and regulation, and from the industry, which can build a suitable market infrastructure.
“Current government policies and market standards have failed to provide adequate strategic inducement to motivate boards and investors to deploy capital at scale,” the WEF whitepaper stated. “While early adopters and market builders invested heavily to create the necessary capabilities to navigate a complex landscape, the next wave of companies needs a simplified structure, tangible incentives to participate, clear guidance for credible market participation, and market infrastructure that provides transparency on credit quality as well as de-risking purchase.”
Roland Chai, Executive Vice President and Head of European Market Services, at Nasdaq said: “Global carbon markets are at a critical juncture. Truly scalable, trusted carbon markets can have a profound and lasting impact; the question is how we get there. By identifying the structural inefficiencies holding the market back, we can propose long-term solutions and help build global consensus. Addressing these barriers to scale can only come from a coordinated push from policymakers, market infrastructure providers, and participants across the financial services ecosystem.”
Download the report here to explore the full findings and access other content resources around the study and Nasdaq’s carbon technology.
