A new global carbon exchange will be launched in Singapore this year

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A new Singapore-based global exchange for high-quality carbon credits will be launched by the end of the year.

The exchange, Climate Impact X, or CIX, is a joint venture from Asia’s largest lender DBS Group, British bank Standard Chartered, Singapore state investor Temasek and market operator Singapore Exchange.

Companies are under growing pressure to reduce their carbon emissions and adopt sustainability plans. Many large corporations such as Amazon, IBM, Microsoft and Unilever have set ambitious goals to achieve net zero carbon emissions over the next 20 to 30 years.

But, in some cases, reducing emissions can be very costly. In other instances, it is impossible. When a company is unable to reduce its emissions, it can purchase a carbon credit as a way to offset the greenhouse gases its operations are releasing into the atmosphere.

The (carbon credit) market is characterized by low liquidity, scarce financing, inadequate risk-management services, and limited data availability.

There is an urgent need for carbon credits as a viable, cost-effective solution for those companies to reduce emissions where their decarbonization strategy does not allow them to fully achieve their short-term commitments, Mikkel Larsen, chief sustainability officer at DBS, said Friday on CNBC’s “Squawk Box Asia.”

Larsen is also interim CEO at Climate Impact X.

What is a carbon credit?

A carbon credit is generated by projects that help reduce, remove or avoid greenhouse emissions. The credits are validated by a set of independent standards created by NGOs and carbon market participants.

“Carbon credits are certificates representing quantities of greenhouse gases that have been kept out of the air or removed from it,” global management consulting firm McKinsey & Company said in a report this year.

“While carbon credits have been in use for decades, the voluntary market for carbon credits has grown significantly in recent years,” McKinsey said, adding that it estimates that in 2020, buyers retired carbon credits for some 95 million tons of carbon-dioxide equivalent. When a credit is claimed, it is canceled in the registry — or retired — and can no longer be sold.

The voluntary carbon credit market is different from the mandatory ones, where regulators set carbon emission targets and allow companies to trade the surplus.

Generating revenue sources

Larsen explained that when carbon credits are “done right,” they can generate revenue streams for conservation project developers working in areas such as reforestation.

“I emphasize the point about being done right because one thing that plagued the market already has, of course, been this idea that they don’t live up to what they promise to,” he said. “I see these as absolute critical sources of income for the vast majority of project developers.”

CIX will have two platforms catered to the needs of buyers and sellers: an exchange and a project marketplace.

The carbon exchange will facilitate the sale of large-scale, high-quality carbon credits, mostly to multinational corporations and institutional investors.

The project marketplace enables the purchase of high-quality carbon credits directly from specific projects. It allows a broader range of companies to participate in the voluntary carbon market by backing solutions to conserve, restore and protect natural ecosystems, in order to help them meet their sustainability goals.

CIX will use satellite monitoring, machine learning and blockchain to promote transparency, integrity and quality of the carbon credits.

Market outlook

High-quality carbon credits are currently scarce because accounting and verification methods tend to vary and the benefits are seldom well defined, according to McKinsey.

“The market is characterized by low liquidity, scarce financing, inadequate risk-management services, and limited data availability,” the consulting firm said. “Today’s voluntary carbon market lacks the liquidity necessary for efficient trading, in part because carbon credits are highly heterogeneous.”

McKinsey cited a global private sector taskforce that estimated demand for carbon credits could increase by a factor of 15 or more by 2030, and the overall market could be worth upward of $50 billion.

There are already multiple carbon exchanges in operation, including the Carbon Trade Exchange in London and Sydney as well as the AirCarbon Exchange in Singapore.

CIX is betting on the reputation and know-how of its backers as well as Singapore’s governance, regulation and infrastructure to inspire confidence among potential participants in the carbon credit market.

“CIX is a promising solution to the problem we face today of fragmented carbon credit markets characterized by thin liquidity and credits of questionable quality,” Ravi Menon, managing director of the Monetary Authority Singapore, said Thursday when the project was first announced.

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