Sliced: Climate Markets Need Their TRACE moment
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Written by: Daniel Ortega Pacheco, Raj Pattni, Tripurari Prasad, and Sean Penrith
In 2002, the bond market underwent a quiet revolution. The Financial Industry Regulatory Authority (FINRA) introduced TRACE, a simple but powerful system that made transaction prices public. Trading costs dropped by 50%, and the market ballooned to over $128 trillion. That’s the power of price transparency.
Carbon markets are overdue for their TRACE moment.
Today’s voluntary carbon markets (VCMs) are full of potential but stuck in limbo. Billions in institutional capital sit on the sidelines, deterred by opaque pricing, fragmented standards, and weak benefit-sharing. Without reform, carbon credits will remain a boutique offset tool, not a credible climate finance asset class.
To evolve, VCMs must do what bond, commodity, and infrastructure markets have done before: embrace transparency and standardization. That starts with publishing prices and proving impact.
Price transparency: The keystone to scale
Carbon credits are notoriously hard to price. Most transactions happen over the counter with little disclosure. Buyers chase different attributes – removal vs. avoidance, vintage, co-benefits – while project methodologies vary widely. The result: no single reference price, no liquidity, and no reliable way for investors to assess risk.
This isn’t how functioning markets operate. In traditional finance, clear price signals drive efficient capital allocation. In VCMs, the lack of price discovery increases risk and suppresses scale.
What needs to change:
- Standardized contracts that specify credit quality, vintage, and delivery terms
- Trusted benchmarks, such as the Core Carbon Principles, informed by institutions like ICVCM and VCMI, help buyers assess fair value
- Mandatory transaction disclosure in public registries, including prices and project characteristics
Transparency doesn’t stifle flexibility. It enables trust.
Progress is already underway. A global coalition of market experts has been working through multistakeholder initiatives to harmonize credit data and streamline transaction reporting. These technical efforts, including the development of a common carbon credit data model and digital market infrastructure standards, are quietly laying the groundwork for scalable price transparency. But for these reforms to succeed, broad adoption and regulatory backing are essential.
Infrastructure for fungibility and liquidity
Each carbon credit today is a bespoke product: tied to a specific project, methodology, and risk profile. That makes trading slow, expensive, and illiquid. Institutional capital – pension funds, development banks, ESG, impact and sustainable investing funds – won’t enter a market without standardized products and tools to hedge institutional risk.
To unlock liquidity, the market needs:
- Tiered credit classifications, similar to bond ratings, grouping credits by risk and impact
- Carbon-backed financial instruments (e.g., ETFs, futures) that improve tradeability
- Standard risk assessment tools so investors can compare like-for-like
Until credits are fungible and reliably priced, carbon cannot become a mainstream financial asset.
Benefit-sharing: The metric that builds trust
Carbon markets aren’t only about emissions. They’re about people too. For credits to maintain integrity and attract impact and sustainability-driven investors, they must demonstrate measurable local benefits: improved livelihoods, biodiversity, access to clean water, and more.
Yet today, benefit-sharing mechanisms are murky, inconsistent, and rarely priced in. Many buyers can’t tell how much revenue actually reaches frontline communities. This creates reputational risk and undermines confidence.
A single, simple fix: require issuers to report a “benefit-per-tonne” metric, standardized and verified by third parties, showing how proceeds are distributed and what impact is delivered. Think of it as the ESG label for carbon.
Just as ESG scores influence bond markets, benefit-per-tonne metrics could become a trusted signal for investors navigating the carbon space.
Fee disclosure: Shine a light on the middlemen
Many brokers and platforms charge high markups without clear accountability. A 2023 journalistic investigation found that fewer than 10% of intermediaries disclose their fees or commissions.
Here’s what that means in practice: a buyer may pay $20 per tonne, thinking the majority supports reforestation. In reality, only $5 might reach the project developer, and just $2 ends up in the hands of local communities.
This erodes trust and invites greenwashing accusations.
A simple proposal: Require intermediaries to publish fee structures and profit margins as a condition for listing credits on registries or exchanges. Transparency here isn’t punitive – it’s market-making.
What comes next
We’ve seen this movie before. Infrastructure and bond markets scaled only when they standardized pricing and reporting. Real estate sustainability benchmarks like GRESB enabled impact comparisons across assets, attracting $850 billion in capital by 2022. Transparency doesn’t just de-risk. It drives growth.
Carbon markets are standing at a similar inflection point. There is $27 trillion in pension and real asset funds actively seeking investments with verified climate and community impact. But capital won’t flow into a market where the rules are unclear, prices are hidden, and impacts can’t be proven.
Conclusion: Publish the price, prove the impact
Carbon credits could power climate action at scale. To do that, they must earn investor trust by embedding transparency at every level from pricing to revenue flows.
It’s time for carbon markets to publish the price, prove the impact, and unlock the capital waiting on the sidelines.
Let’s give carbon its TRACE moment.
This article was originally published on Carbon Herald, here.
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