Voluntary Carbon Markets

SIX White Paper

20 Pages Posted: 14 Jun 2022

See all articles by Eric Nowak

Eric Nowak

Swiss Finance Institute; Universita della Svizzera italiana (USI Lugano)

Date Written: March 15, 2022


Climate change is the biggest threat humankind is facing nowadays. More greenhouse gases (GHG) have been released into the atmosphere in the last 30 years than in the entire history of our planet, causing average temperatures to rise by about one degree Celsius thus far. If this continues, 50 billion tons of GHG are released into the atmosphere each year, according to calculations of the Intergovernmental Panel on Climate Change. Moreover, temperatures will increase by two degrees Celsius within the next 25 years. This may have catastrophic consequences that range from the rise of sea levels and the ensuing disappearance of whole cities and even islands to the increase of the occurrence of fatal climate catastrophes.

There has been an increase of initiatives to combat climate change in recent years, but these are not enough. One of the most powerful economic tools to fight climate change is carbon pricing. Carbon pricing can be defined as assigning a fair market value or price to the GHG released into the atmosphere. In compliance carbon offset markets prices are often set by governments or
regulators, while in voluntary carbon offset markets they follow market forces. The fight against climate change can only be won if both compliance and voluntary carbon offset markets function efficiently and potentially should have interoperability between the compliance and voluntary markets. This implies that proper ways to guarantee transparent price discovery, liquidity, and the
provision of needed funding to finance projects must be found and followed.

While compliance carbon markets like cap-and-trade systems seem to function well, organized marketplaces for voluntary carbon offset markets are still in their infancy and most transactions are still over-the-counter (OTC) and fragmented. These OTC markets suffer from a lack of pricing transparency, due to fragmentation and lack of standardization, as well as a lack of liquidity and funding opportunities. All these frictions lead to a lack of transparent price discovery and less project funding. Because of these frictions, not enough projects to protect the environment are being undertaken.

Hence, there is a clear need for organized trading platforms for voluntary carbon credits to solve the existing market frictions. It is a significant opportunity for Financial Market Infrastructure (FMI) providers to step in and solve this need. An FMI provider would be able to trade standard voluntary carbon credits and more complex products such as prepurchase agreements that aim at supplying financing for developers of voluntary carbon offset projects or funds that allow investors to diversify
their portfolio of carbon credits. Furthermore, there is an increasing trend to tokenize voluntary carbon offsets, which gives FMI providers such as SIX a unique opportunity to create a professional and liquid marketplace for these tokens and become the global market leader in this promising new and growing area.

Keywords: Climate Change, Climate Finance, Carbon Emissions, Voluntary Carbon Certificates

JEL Classification: G12, G14, Q21, Q28, Q54

Suggested Citation

Nowak, Eric, Voluntary Carbon Markets (March 15, 2022). SIX White Paper, Available at SSRN: https://ssrn.com/abstract=4127136

Eric Nowak (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Universita della Svizzera italiana (USI Lugano) ( email )

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