Nasdaq Study Shows Structural Reform Needed to Unlock Global Carbon Markets

Rhea-AI Summary

Nasdaq's global survey on the voluntary carbon market reveals challenges in price transparency, market inefficiencies, and fragmentation, hindering market scale. Carbon credit registries are crucial to addressing these issues and unlocking industry potential.

Positive

• None.

Negative

• Challenges in issuance, verification, trading, reporting, and retirement processes constrain demand and market evolution.
• Low confidence in pricing of carbon assets hampers trading efficiency and supply modeling.
• Inconsistency across credit types, manual interactions, and lack of standardization limit market accessibility and scale.
• Widespread fragmentation with multiple registries leads to isolated liquidity pools and increased costs.
• Registries are identified as key facilitators for market improvement, driving confidence through quality assurance and standardization.

Insights

Environmental Economist

The findings from the Nasdaq survey shed light on the economic complexities of the voluntary carbon market (VCM). The primary concern highlighted is the lack of price transparency, which is a fundamental issue in any market as it leads to inefficiencies and hinders the discovery of the true market price. This is particularly problematic in a market that is pivotal to the global response to climate change. The survey indicates that market fragmentation and inefficiencies are also major barriers to scaling up, which is concerning given the urgent need to grow these markets to meet climate goals.

From an economic standpoint, the reliance on manual processes and the lack of standardization contribute to high transaction costs, which can deter market participation and investment. These structural issues are creating bottlenecks that prevent the market from achieving the necessary scale. The role of carbon credit registries is important in this context, as they can facilitate standardization and automation, leading to reduced transaction costs and increased market confidence. However, the challenge remains in coordinating a global effort to reform these registries and align market participants towards common standards.

Market Infrastructure Analyst

The voluntary carbon market's infrastructure is evidently in need of modernization. The survey highlights that 66% of commercial banks lack confidence in pricing, which is a significant impediment to capital deployment. This is indicative of a broader issue where the current market structure doesn't support efficient risk modeling or capital allocation. The reliance on manual interactions for project listings is another concern, as it suggests that the market is lagging behind other financial markets in terms of technological adoption.

Exchange trading is identified as a potential solution to increase transparency and liquidity, with a majority of respondents favoring this model. This aligns with broader financial market trends where centralized trading venues enhance price discovery and market efficiency. The support from governments and regulatory authorities for exchange venues is a positive sign, yet the focus must also shift to improving post-trade infrastructure. The role of registries as facilitators of market confidence and standardization cannot be overstated, as they hold the key to unlocking the market's potential through the adoption of new technologies and international standards.

Sustainability Strategy Consultant

The survey's implications for businesses and investors are multifaceted. The growing demand for carbon credits, driven by ESG priorities, indicates a shift in corporate strategy towards sustainability. However, the current market limitations are stifling this demand, which suggests that companies may face challenges in meeting their sustainability targets. The desire of corporates to double their exposure to carbon credits also signifies the increasing importance of carbon markets in corporate sustainability strategies.

For the market to evolve in a way that supports these corporate ambitions, it will require not just technological improvements but a strategic overhaul of market practices. Companies looking to expand their activity in the VCM must advocate for and participate in the development of a more standardized and transparent market. In doing so, they can ensure their investments in carbon credits are both impactful and aligned with their ESG goals. The survey underscores the need for a coordinated approach among all market participants to overcome the current challenges and enable the VCM to reach its full potential.

Price transparency, market inefficiencies, and fragmentation remain critical structural barriers to scale

Carbon credit registry reform is the most important facilitator of growth

NEW YORK, March 27, 2024 (GLOBE NEWSWIRE) -- Nasdaq (Nasdaq: NDAQ) today published the results of a global survey examining the voluntary carbon market (VCM) ecosystem, with responses from over 130 decision-makers across project owners, financial investors, commercial banks, brokers, and market operators, produced in partnership with the ValueExchange.

The survey reveals that the market for voluntary carbon credits is growing and attracting more diverse participants, but price transparency, market inefficiencies and fragmentation are preventing scale. Carbon credit registries are seen as having the power to address many of these challenges and unlock the potential of the industry.

Roland Chai, Executive Vice President and Head of European Market Services, at Nasdaq said: “Global carbon markets are at a critical juncture. Truly scalable, trusted carbon markets can have a profound and lasting impact; the question is how we get there. By identifying the structural inefficiencies holding the market back, we can propose long-term solutions and help build global consensus. Addressing these barriers to scale can only come from a coordinated push from policymakers, market infrastructure providers, and participants across the financial services ecosystem.”

Demand for carbons credits is being constrained

Demand for carbon credits arises from a broad range of players and objectives: 67% of corporates are driven by their ESG priorities, 50% of commercial banks purchase credits to decarbonize their investment portfolio, and 45% of investors are primarily seeking a financial return. There is also a clear desire for companies to expand their activity with more than half of corporates expressing a desire to double their exposure to the asset class.

However, despite the diversified demand for carbon credits, current market structures are stifling demand as well as the broader evolution of the market. Challenges in issuance, verification, trading, reporting, and retirement processes prevent 18% of all survey respondents from participating in today's voluntary carbon markets. A further 11% saw their volumes capped at less than half of their targets due to the same issues, with 40% constrained by at least a quarter.

Price transparency, inefficiencies, and market fragmentation

Nearly one-third (30%) of all respondents had low confidence in the pricing of carbon assets, leaving them unable to efficiently discover price or benchmark credits on the demand side. A lack of pricing transparency prevents brokers from trading and investors from holding the asset, leaving volumes capped at an artificially low level. This rate of low confidence rises to 66% in commercial banks, which constrains supply because financiers can’t accurately model risk or efficiently deploy capital.

The overall structure of voluntary carbon markets is characterized by inconsistency across credit types, with a heavy reliance on manual interactions and onerous data collection tools. This lack of standardization not only hampers trading but also limits the accessibility of local markets to foreign investors. The persistent need to perform manual due diligence and pricing for individual projects remains a significant barrier to scale: For example, 63% of respondents handled project listings via phone and email, but 79% would ideally like to manage such activities through a registry platform. Higher costs stemming from non-standardization and manual methods will inevitably drive commercial banks, corporates, and investors to seek out larger deals, cutting out smaller project owners, leading to decreased deal volumes and bottlenecked financing.

These challenges are further compounded by widespread fragmentation. Almost half of survey respondents across project owners, financiers, intermediaries, and investors are forced to interact with four or more registries. With little to no standardization or interoperability, this market inefficiency and fragmentation forces small “puddles of liquidity"—each isolated, devoid of scale, and requiring entirely bespoke, manual resources to interact.

How global carbon markets can achieve scale

A clear and proven source of transparency for all securities is exchange trading, which is the preferred market model for 58% of all respondents. Positively, pioneering exchange venues are receiving extensive support from governments, regulatory authorities, and banks, addressing some market constraints. However, much more work is needed to address post trade infrastructure.

Two-thirds of respondents (66%) see registries as the most important facilitator to improving markets and leading change. As the guarantors of quality in the voluntary carbon markets, registries have two core levers to drive confidence. The first is their traditional strength of project verification and methodology, where evolution continues. And second, as the key enabler of buyer confidence, is their ability to drive standardization in the products that they hold, in the data that describes them, and in the availability of that data across multiple platforms.

Through standardization they can enable automation and connectivity, which accelerates due diligence, increases price transparency, and reduces transaction costs. In doing so they can address the fundamental confidence issues that undermine the industry today and help to put the world’s voluntary carbon markets on a scalable growth path.

Magnus Haglind, Senior Vice President and Head of Marketplace Technology, at Nasdaq said: “Without a credible foundation for building trust, liquidity, and connectivity across voluntary carbon markets, they cannot scale. We must evolve the structure of the market, drawing on the institutional knowledge and framework of other global asset classes, to establish an institutional ecosystem around carbon credits. Registries lie at the heart of the solution, with the ability to embrace new technologies, set internationally consistent standards, and accelerate the market’s growth trajectory.

About Nasdaq
Nasdaq (Nasdaq: NDAQ) is a leading global technology company serving corporate clients, investment managers, banks, brokers, and exchange operators as they navigate and interact with the global capital markets and the broader financial system. We aspire to deliver world-leading platforms that improve the liquidity, transparency, and integrity of the global economy. Our diverse offering of data, analytics, software, exchange capabilities, and client-centric services enables clients to optimize and execute their business vision with confidence. To learn more about the company, technology solutions, and career opportunities, visit us on LinkedIn, on X @Nasdaq, or at www.nasdaq.com.

Nasdaq Media Contact:
Andrew Hughes
+44 (0)7443 100896
Andrew.Hughes@nasdaq.com

-NDAQG-

FAQ

What are the main challenges hindering the scale of the voluntary carbon market according to Nasdaq's survey?

The main challenges include price transparency, market inefficiencies, and fragmentation.

What percentage of survey respondents face issues in issuance, verification, trading, reporting, and retirement processes in the current voluntary carbon market?

18% of all survey respondents face issues in these processes.

Why is low confidence in pricing of carbon assets a significant problem in the market?

Low confidence in pricing hampers trading efficiency and supply modeling.

What is the preferred market model for 58% of all survey respondents in the voluntary carbon market?

Exchange trading is the preferred market model for 58% of respondents.

How do registries play a crucial role in improving voluntary carbon markets according to the survey?

Registries facilitate confidence through quality assurance, standardization, and automation, reducing transaction costs and increasing transparency.