INTERVIEW: Carbon markets to adopt increasingly compliance-heavy approach: ACX

It is inevitable that the voluntary carbon market will become a smaller subset of a larger carbon ecosystem as governments and jurisdictions adopt binding measures to price the commodity, co-founders of carbon-focused trading exchange ACX told S&P Global Commodity Insights.

Thomas McMahon and William Pazos said in an interview the much-needed financialization of the carbon market was slowly gathering pace, aided by a proliferation of carbon-pricing regimes and taxes around the world.

With several countries starting to view carbon as a national asset class, a market infrastructure is needed to support its development, supporting the growth of a company like ACX, which operates in Brazil, Singapore and the UAE.

"The strategy of ACX is to deliver a distributed network of exchanges. So today, if a carbon credit comes up for sale in Brazil, it shows up in Abu Dhabi. And it will show up in Singapore. The settlement happens immediately across all platforms," Pazos said.

"The strategy is that when the carbon spigot opens, we have taken the time to put all the plumbing in place. That is the method to our madness," he said.

Do you know what determines the price of a carbon credit? Find out on our video series about the VCM.

Compliance domination

Carbon markets are in a state of flux, with many countries and jurisdictions opting for a fusion of compliance and voluntary markets.

While compliance systems in the EU and China, for instance, are examples of cap-and-trade schemes that are widely accepted as effective, the voluntary market has come under severe scrutiny this year, with the efficacy of projects and offsets questioned by a range of stakeholders.

Partly in the context of that perceived lack of transparency, Pazos said the VCM was destined to become a subset of more compliance-driven structures to help eliminate the uncertainty and risk around projects and standards in carbon.

"In my personal opinion, I think 90% of the market will end up being compliance credits, just by definition," he said, adding that a hybrid of both market styles was already being seen in countries such as Brazil, Colombia, Mexico, Singapore, South Africa and the UAE.

Industry watchers estimate compliance carbon markets have grown in value to around $900 billion in recent years, while the voluntary market is valued at around $2 billion.

"I think it is much more likely for us to find ourselves in a reality where there will be regional standards that will be driven by governments," Pazos said.

"If it turns into a compliance market the 'V for voluntary' disappears, you must sort of comply and I think that step is inevitable. We are seeing just pieces of it all over the world. The question is when is the tipping point?"

Carbon price

McMahon said the EU decision to implement the Carbon Border Adjustment Mechanism will further spur the commoditization and financialization of carbon.

CBAM essentially levies a carbon tax on imports of selected energy-intensive materials and products into the EU, removing the gap between the carbon price under the EU Emissions Trading System and the export country of origin's carbon price.

"CBAM is going to force everything ex-here to price like Europe in some way shape or form," McMahon said.

Despite opposition from many countries, CBAM has effectively put the onus on every government to come up with a price for carbon.

"So put that in the compliance logic alongside of CBAM and the narrowing down of what is tenderable or good delivery in each country or region. Now you have got a market and you have got the concept of a rising price in time," McMahon said.

ACX, formerly known as the AirCarbon Exchange, operates environmental exchanges in Abu Dhabi, Rio de Janeiro and Singapore using blockchain-based trading platforms. It has been on a quest to increase its global reach in recent months.

ACX has plans to expand its network to seven exchanges, with a client base expected to reach 250 by the end of the year from 180 currently, according to Pazos.

It has also broadened its scope in recent months, with the exchange now also trading other environmental assets such as biofuels and Renewable Energy Certificates (I-RECS) along with carbon.

McMahon said one of the distinguishing features of ACX compared to its peers was that it operated its own technology and ecosystem, along with being fully regulated.

Platts, part of S&P Global, assessed EU Allowances for December 2023 at Eur85.23/mtCO2e ($92/mtCO2e) on Sept. 1. EUAs averaged Eur85.23/mtC02e in 2022 and Eur53.52/mtCO2e in 2021, S&P Global data showed.