Carbon credits trading predicted to hit $4bn

Reuters/Carlos Barria

• Abu Dhabi’s ACX offers carbon offset contracts
• 180 companies registered, with 80 to follow
• Previously no clear way to own carbon credit

Carbon credits could become a $4 billion global asset class within the next half-decade, the co-founder of the Air Carbon Exchange told AGBI.

Originally based in Singapore, the Air Carbon Exchange (ACX) is registered at Abu Dhabi Global Market and regulated by the ADGM Financial Services Regulatory Authority.

Abu Dhabi sovereign fund Mubadala bought a “strategic” stake in ACX in November, ahead of the UAE hosting the Cop28 climate change conference in late 2023.

Deutsche Bourse’s DB1 Ventures is another shareholder in the exchange.

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“We work closely with the Mubadala group of companies and educate them on their energy transition. With Cop28 coming up, it’s great positioning for us,” said Thomas McMahon, ACX’s co-founder and co-CEO.

ACX has designed spot – or immediately tradable – carbon offset contracts in partnership with eight carbon offset registries including Verra, Gold Standard and Corsia (Carbon Offsetting and Reduction Scheme for International Aviation).

The registries continue to be the issuer and repository of the credits, with electronic certificates of these credits then traded on the ACX.

The ACX Corsia Eligible Tonnes contract, for example, is among about nine different kinds of contracts currently tradable on the exchange.

Another is the ACX Global Nature Tonnes Series, which represent carbon credits generated by nature-based projects such as reforestation schemes.

Other contracts cover carbon credits created via renewable energy projects and household offsets that are based on providing cleaner cooking fuels for homes in developing countries.

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Around 180 companies from 33 countries are registered to trade carbon credits on ACX, with a further 80 businesses in the process of completing the necessary paperwork to do so.

As well as the public exchange, members also get access to the ACX’s Carbon Markets Board (CMB), an over-the-counter platform where most trades are arranged.

Of the 16 million transactions completed since the ACX launched in late 2022, 85 percent have been over-the-counter.

Hybrid exchange

“We created a hybrid exchange: traditional markets architecture at the front, digital markets architecture at the back,” McMahon said.

“The CMB allows individual entities, whether it’s brokers or project developers or beneficial owners, to post specific carbon projects for sale with a clear price and volume.”

The ACX’s first blockchain-based trade was made in late July. The trade was completed in three days, which is quicker than the usual time frame of two to eight for over-the-counter sales, according to the company.

“As an asset class, (carbon credits) went to $105 million when we began in 2021 and peaked in mid-2022 at $500 million. It will be in excess of $2 billion next year and more than $4 billion in five years,” McMahon said.

He drew a parallel between carbon credits and oil. Until the creation of the Brent crude futures contract in 1988, it had been difficult to get a per-barrel price or own a barrel of oil, he explained.

“Benchmarks get built. So, we wanted to apply a logic around a benchmark price for the voluntary carbon market,” McMahon said, noting there were previously no standards relating to buying and selling carbon credits.

“Project developers were beholden to private financing or sponsors and at a very high cost.

“There were no standards of investment, so banks couldn’t say, ‘I’ll finance that’, and then look for a hedge-able instrument that allowed them to offset the risk, which is what you do in every other financial product or commodity.

“That was the gap we wanted to fill. We wanted to create the standards of pricing and remove the opacity.”

Regulations governing trading

Prior to ACX, there was no clear way to own a carbon credit, so McMahon’s team worked with the likes of Verra to create a so-called omnibus trust structure at their registries that “allowed  for efficient ownership and financialisation of deposited credits”.

The ACX then collaborated with the ADGM Financial Services Regulatory Authority to create regulations to govern carbon credit trading.

McMahon also highlighted some similarities with London Bullion Market Association, which licenses or endorses gold refineries and warehouses worldwide.

Those that receive such accreditation can charge a premium for their gold, whereas those that do not must sell at a discount.

A similar phenomenon will occur in carbon credits – those approved by the leading registries will be worth more than those without such an endorsement, McMahon predicts.

Mena is among the biggest growth regions in terms of buy-side demand for carbon credits, McMahon said, in part due to it having the biggest per capita carbon intensity globally.

“The opportunity is that for the first time banks can invest in a carbon project via ACX and put it on their balance sheet,” he added.

“We will have the ability to create tri-party pricing and borrowing and lending agreements on an exchange like you see in other traditional markets, but no one has ever seen it in carbon.

“I want to scale it into a global marketplace and be a leader on changing the nature of how you transact carbon and how it becomes financialised.”