A carbon credit exchange is a marketplace that matches buyers with sellers of emission reductions. Companies that emit too much carbon need to offset those emissions by buying credits from renewable energy or other projects that reduce greenhouse gas (GHG) emissions. This helps the company stay below its emissions "cap" and avoid penalties from regulators.

There are a number of factors that determine the validity of a carbon credit. These include: the type of underlying project, whether it's community-based or industrial; its location; its vintage; and its delivery time. In addition, projects that generate additional co-benefits and help meet the United Nations Sustainable Development Goals (SDGs) may trade at a premium over other types of carbon projects.

To qualify as a carbon credit exchange, the project must produce GHG reductions that are unique and that can be measured. This is often referred to as the'reduction threshold'. The reductions must also be verifiable, which is achieved through the use of a methodology specific to the underlying project. Most carbon crediting programs have a library of methodologies already approved and can offer guidance to projects that want to develop new methodologies.

The credits must also be permanent. The carbon must not be released back into the atmosphere and must remain in a registry of retired credits. If a carbon credit is canceled, it moves to the register of'reversals' and becomes unusable. To avoid reversals, some projects create buffer pools that hold credits that can be replaced in the event of a reversal.

Despite these requirements, the voluntary carbon market is complex and not well regulated. The CFTC has tried to regulate the market, but it is limited by its statutory authority. However, the agency has recently issued a set of final guidance on how to standardize VCC derivative contracts.

In the future, the CFTC will likely continue to regulate the VCC market and develop standards that will promote transparency, liquidity, and the integrity of VCC derivatives. However, there is still a lot of work to be done to establish a robust supply of verified carbon credits within the price range where VCC derivatives can be traded. To this end, a number of industry participants, including carbon credit standard setting bodies, a crediting program, private sector integrity initiatives, spot platforms, DCMs, intermediaries, and end-users, are collaborating to form an informal working group.

This group has met several times to discuss how to improve the quality of the market. In 2024, the working group will issue a report on its findings. The group will then convene with the CFTC to discuss next steps. This is an important step towards ensuring that the voluntary carbon market is able to fulfill its potential to deliver emissions reductions. Ultimately, this will provide a crucial mechanism for companies to actualize their net-zero commitments. This will require a strong VCC market and centralized infrastructure for trading. To do this, the market needs to become more accessible, robust and transparent.