TECH TUESDAY is a weekly content series covering all aspects of capital markets technology. TECH TUESDAY is produced in collaboration with Nasdaq.
In the latest step toward boosting transparency and trust in carbon markets, Nasdaq has launched a new technology that securely digitizes the issuance, settlement, and custody of carbon credits.
The Nasdaq technology capabilities enables carbon market operators and registries to create standardized digital credits and distribute them with full auditability throughout the transaction lifecycle. Nasdaq has also developed a carbon taxonomy framework with the InterWork Alliance that can readily incorporate new types of credit as the market evolves, along with a comprehensive set of application programming interfaces (APIs) that allow participants to seamlessly interact across the market.
Nasdaq also announced a new tech partnership with Puro.earth, a standards and registry platform for engineered carbon removal, to register CO2 Removal Certificates (CORCs). The registry tracks the issuance, retirement, and the transfer of the assets, providing full traceability and transparency to avoid double counting carbon removal projects.
Gerard Smith, Vice President, Digital Assets & Carbon for Marketplace Technology at Nasdaq, commented: “This is a great example of how our technology can support the growth of the voluntary carbon removal market, which still places a heavy reliance on manual interactions and onerous data collection tools. By providing a comprehensive set of APIs, alongside standardized contracts, Puro.earth can seamlessly interact with a full range of market participants.”
The global carbon-credit market has evolved gradually, and unevenly, since trading began as part of the 1997 UN Kyoto Protocol. Growth accelerated in recent years – the voluntary carbon market reached $2 billion in 2021, up fourfold from 2020, and the market value is projected to increase to $10 billion to $40 billion by 2030, Boston Consulting Group said in a January 2023 report. But there remain challenges with regard to scalability, as well as market structure issues that need to be addressed.
To continue their long-term growth story, carbon markets need high-level support from government policy makers and regulators, as well as market confidence that projects deliver meaningful emission reductions. There is also the need for buyers and sellers of carbon credits to have a trustworthy, efficient trading experience, an area where Nasdaq and other infrastructure providers are moving the chains.
In a 2021 report, McKinsey highlighted pieces to the puzzle of scaling carbon markets. These pieces include the standardization of carbon contracts and the need to establish trading and post-trade infrastructure, partly via the deployment of APIs, which are sets of defined rules that enable different applications to communicate with each other.
“In the voluntary carbon market, the heterogeneity of carbon credits means that credits of particular types are being traded in volumes too small to generate reliable daily price signals,” McKinsey said in a 2021 report. “Making carbon credits more uniform would consolidate trading activity around a few types of credits and also promote liquidity on exchanges.”
Regarding trade and post trade, McKinsey noted that a resilient, flexible infrastructure would enable the voluntary carbon market to function effectively, by accommodating high-volume listing and trading of reference contracts. “Post-trade infrastructure, comprising clearinghouses and meta-registries, is also necessary,” the consulting firm stated. “In addition, an advanced data infrastructure would promote the transparency of reference and market data. Sophisticated and timely data are essential for all environmental and capital markets…Buyers and suppliers would benefit from new reporting and analytics services that consolidate openly accessible reference data from multiple registries, through APIs.”
Roland Chai, Executive Vice President and Head of Marketplace Technology at Nasdaq, said that fragmented technology choices in the trading and settlement of carbon credits has limited the growth of the asset class.
“A lack of system flexibility, standardization, and connectivity has made it challenging for critical infrastructure providers and institutional investors to access the market in a meaningful way,” Chai said in the Nov. 29 release announcing Nasdaq’s new technology. “Bringing institutional grade technology to underpin the market will drive ever-greater liquidity across carbon marketplaces and open the possibility of greater interoperability between registries in the future.”
Creating tomorrow’s markets today. Find out more about Nasdaq’s offerings to drive your business forward here.
