Banking & Finance World’s first carbon credit exchange boosts green projects By Megha Merani May 25, 2022 ADGM Abu Dhabi's financial centre and free zone ADGM will regulate the carbon credit exchange Abu Dhabi Global Market pioneers the milestone exchange allowing companies to trade carbon credits like conventional financial assets The launch of the world’s first regulated carbon credit exchange and clearing house to regulate carbon credits will help mobilise capital for renewable energy projects in the MENA region. It will also help companies reach their decarbonisation goals, experts have said. The announcement by the financial centre and free zone Abu Dhabi Global Market (ADGM) means corporations will be able to trade and finance carbon credits like conventional financial assets when the AirCarbon Exchange (ACX) launches in the emirate this year. “Carbon markets exist because other structures have not solved the problem of mobilising capital towards [renewable energy] projects,” Ruchir Punjabi, co-founder of Distributed Energy and renewables.org, told AGBI. “Western capital, for example, does not understand the risk profile of putting solar in emerging markets. The only capital available to companies in emerging markets is the banks and that doesn’t align with the return profile of solar [projects].” ADGM’s exchange will help UAE control existing and future carbon markets in the MENA regionJoel Michael, founder and CEO at Oceans & Us According to Punjabi, carbon credits have primarily been traded through marketplaces not exchanges. He said: “The difference is that, in a marketplace, the market defines the price – and every carbon credit – based on its source, how it was issued, where it comes from, and who the buyer is. What an exchange does is that it basically removes the subjectivity from the carbon credit market. It’s made more fungible.” Carbon credit is a specific financial term for a tradable environmental certificate or license recognising the right to emit a certain tons of carbon monoxide or the corresponding amount of another greenhouse gas. The global carbon credit market is estimated to account for $2.407 billion in terms of value by the end of 2027, according to a 2021 report by Coherent Market Insights. The regulatory framework will allow corporations to trade and finance carbon credits like conventional financial assets, thus increasing participation and investment in global carbon reduction and offset programmes, ADGM said in a statement. The exchange will be established as a recognised investment exchange (RIE) regulated by ADGM. There will also be a recognised clearing house (RCH) known as ACX Clearing Corporation to custodise, clear and settle commodities in commodity derivatives. Carbon credits are issued based on the quantity of carbon produced during the year. “This is an important development, given the UAE’s focus on climate action, as the first country in the Gulf to commit to net zero by 2050,” Joel Michael, founder and CEO at Oceans & Us and sustainability advisor to the New Zealand Trade and Enterprise in Dubai, said. “It will help UAE to control existing and future carbon markets in the MENA region and support more companies to reach their decarbonisation goals.” Vivek Tripathi, founder and CEO at Dubai startup and carbon offset platform Olive Gaea, said: “Businesses and industries in this part of the world have limited opportunities to reduce [their] emissions in a cost-effective way – and, in that context, this trading exchange definitely helps. “It boils down to the basic economics of demand and supply. You have a cap requirement as a business, you’d look out to see how best can you mitigate that emissions level. With every incremental dollar that you spend on abating or financing any scheme to reduce emissions, you’d try to find the minimal cost. Trade exchanges establish that minimal cost, which businesses can internalise while they put their project costs together.” He added however that an overall regulation or cap on the emissions is still missing in the region. The UAE is aiming to attract inflows from global capital markets as investors increasingly seek ESG-compliant investments through the Net Zero by 2050 Strategic Initiative, ADGM said. Earlier this year, ADGM also became the world’s first international financial centre to become carbon neutral.