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Carbon exchanges, or climate exchanges as they can be more broadly known, work in the same way as any other commodity or stock exchange. They are electronic platforms that facilitate the clearance of carbon offset or carbon credit trades. These can be either spot trades or futures and other financial derivatives. Clearing facilities for OTC (over-the-counter) trades can also be provided by a carbon exchange as can the hosting of auctions for larger-scale transactions.
Why Trade Via a Carbon Exchange?
The principle and benefits of businesses, investors or institutions buying and selling carbon offsets via a carbon exchange is the convenience and security that is offered. Trades conducted via the primary carbon exchanges benefit from clearing facilities that neutralise counter-party risk. This is especially crucial with regards to futures contracts and larger scale transactions and many compliance market deals are of significant worth. The carbon exchange clearance facilities taking on the responsibility of due diligence and ultimate responsibility is of great worth both in terms of convenience and risk management. The transparency and ease of the electronic platform also makes trading carbon offsets on a carbon exchange an attractive alternative to the more complicated nature of ironing out a direct transaction between parties, conducting due diligence and so on. Once an account has been set up and the user is familiar with the interface, a few clicks of a mouse is all that is required to conduct a transaction. Another major advantage to carbon exchanges is the access that they provide to pricing of the various types of carbon offsets, and particularly with regard to the developing voluntary carbon market. The various standards and types of projects can prove confusing to voluntary buyers and trading via a carbon exchange allows them to compare prices of different types of carbon offsets on the basis of location, standard, technology and vintage. As of yet, only a couple of the major carbon exchange operators offer a platform for trading of voluntary carbon offsets as well as compliance market varieties. The Carbon Trade Exchange based in London, as well as Climex are the two European carbon exchanges upon which VERs can be traded. Internationally, the Chicago Climate Futures Exchange also facilitates the transaction of trades for voluntary, non-Kyoto, carbon offsetting.