Tackling Climate Change: Why Exchanges Play a Crucial Role

Tackling Climate Change: Why Exchanges Play a Crucial Role

Carbon pricing is an important economic tool in the fight against climate change. In a new white paper, SIX and the Università della Svizzera Italiana analyze how FMI providers can contribute to tackle the climate crisis. In the following interview, Maneesh Wadhwa, Senior Business Development Manager Exchanges at SIX, gives insights about their findings.

Maneesh Wadhwa, what is carbon pricing and why is it so important?

Carbon pricing is defined as assigning a market value to Green House Gas released in the atmosphere. The overarching challenge is to reduce or limit these emissions to curb the rise of average temperatures, which would have irreversible, catastrophic effects on life on this planet.

In this context, carbon pricing is one of the most powerful economic tools to combat climate change. It means that you pay not only for the energy used, but also for the damage caused to the environment. This, in turn, fosters investments in renewable energies, which do not emit Green House Gas, and therefore makes our planet sustainable for future generations.

How are carbon markets organized?

We can distinguish between compliance carbon offset markets and voluntary carbon offset markets. In the former, carbon offsets are bought by companies, governments or other entities in order to comply with mandatory caps. The prices are often set by governments or regulators. In the latter, carbon offsets are bought by individuals, companies, organizations or sub-national governments intending to alleviate their emissions or meet carbon reduction or net-zero targets. These prices follow market forces.

While compliance carbon credit markets such as the European Union Emissions Trading System exist since 2005 and these cap-and-trade systems seem to function well, whereas markets for voluntary carbon offsets are still in their infancy. It is important to mention that in order to fight climate change, we need both markets to be efficient and eventually have interoperability between the two markets.

Organized trading platforms for voluntary carbon credits can ensure price transparency, liquidity and bring together demand and supply.

What are the current problems with voluntary carbon offset markets?

Fragmentation and the lack of standardization are among the key problems. Most transactions for voluntary carbon offset markets still take place over-the-counter, which leads to a lack of pricing transparency, liquidity and funding opportunities.

These frictions hamper the launch of projects at scale to protect the environment and need to be resolved. That is why proper ways to guarantee transparent price discovery, liquidity, and the provision of needed funding to finance projects must be found and followed.

How can Financial Market Infrastructure (FMI) providers solve this problem?

FMI provides can step in and solve the much-needed organized trading platforms for voluntary carbon credits to channel the capital flows at scale and thereby ensure price transparency, liquidity and bring together demand and supply.

Additionally, we are noticing a trend to tokenize voluntary carbon offsets, which represents a unique opportunity for FMI providers to position themselves as market leaders. The potential is enormous: The market for voluntary carbon markets is expected to grow to 50 billion US-Dollars until 2030 to address the climate crisis.

Maneesh Wadhwa, thank you for this interview