Abu Dhabi Global Market to Launch World’s First Voluntary Carbon Credit Trading | Shearman & Sterling LLP

As discussed in previous Shearman & Sterling article Overview of energy and infrastructurecompanies and governments are under significant pressure to reduce their carbon emissions, not only from mandatory schemes but also, increasingly, from internal ESG strategies.

When a company is not able to eliminate all its carbon emissions by using alternative technologies and inputs in its activities, it can use carbon credits to “offset” all or part of these and thus obtain a net reduction in emissions across all of its activities. A carbon credit is a certificate or permit representing the right to emit a certain amount of carbon dioxide (or the equivalent amount of another greenhouse gas).

Carbon credits can be traded in mandatory carbon markets such as the European Union Emissions Trading Scheme. Increasingly, they can also be created and traded in voluntary carbon markets around the world, examples of which have been established in Singapore, Sydney, New York and London.

Abu Dhabi Global Market (ADGM) is now set to launch a voluntary carbon market.

On March 29, 2022, ADGM, Abu Dhabi’s international financial center, announced the establishment of the world’s first fully regulated voluntary stock exchange and clearinghouse.

ADGM partners with AirCarbon Exchange (ACX), a digital carbon trading exchange, to form the exchange and clearing house. ACX will be established as a recognized investment exchange and will be regulated by the ADGM.

ACX intends to offer its clients a regulated and transparent price discovery mechanism and efficient trading when launched later this year. This will allow companies to trade and finance carbon credits in the same way as conventional financial assets, which will enable more investment in global carbon reduction and offset programs (such as reforestation and new renewable energy projects), in line with global decarbonization goals. and treaty commitments.

The ADGM will be the first jurisdiction in the world to regulate carbon credits and offsets as emissions instruments in a voluntary market.

Initially, ACX intends to use its distributed ledger technology to produce digital tokens for carbon credits that will be used for trading in the spot market. The digital tokens will be held by the recognized clearinghouse, ACX Clearing Corporation, which will settle and clear all digital tokens using blockchain smart contracts.

It is also expected that ACX will offer carbon credit futures as commodity derivatives to trade in the future.

What differentiates this exchange from other voluntary carbon exchanges is the regulatory aspect. Voluntary carbon trading is not regulated, unlike mandatory carbon trading. While all voluntary carbon exchanges offer entities the opportunity to purchase carbon credits to mitigate their carbon emissions, there are reports of customers on these voluntary carbon exchanges having difficulty finding high-quality carbon credits and complaining about price opacity. Similarly, buyers on the voluntary carbon market would sometimes face limited transparency around the development of the offset project. This has led to concerns that voluntary carbon credit schemes may be a form of greenwashing, i.e. the acquisition of poor quality carbon credits by a company may mislead stakeholders, including consumers, by making them believe that its commercial activities are less harmful to the environment than they really are. As explored in previous publications, there have been calls for greater regulation of the voluntary carbon market, prompted by concerns about inconsistencies in verification processes and uncertainty surrounding the true environmental impact of some initiatives, it is therefore hoped that the regulatory robustness of the ADGM – ACX partnership will bring more certainty and integrity to carbon credit trading.

As noted by the task force on scaling up voluntary carbon markets, which was launched in 2020 by Mark Carney, the UN special envoy for climate action and financial adviser to the Kingdom. UK, the establishment of an active secondary market could increase transparency and reduce volatility in carbon credit pricing, as well as enable customers to manage risk. Therefore, companies considering participating in carbon credit trading may find that ADGM-ACX carbon credit trading mitigates some of the risks and challenges noted in this article and elsewhere.

Special thanks to intern Yvonne Addai who co-authored this publication.

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