Launched in Singapore in 2019, ACX (AirCarbon Exchange) brings traditional commodities trading infrastructure to the voluntary carbon market. Environmental Finance spoke with William Pazos, managing director and co-founder of ACX (AirCarbon Exchange), about how the digital exchange is seeking to eliminate market friction and facilitate the growth of voluntary carbon offset transactions in a carbon constrained world

Environmental Finance: Why did you decide to launch the ACX (AirCarbon Exchange)?

William Pazos: Together with my partner and co-founder, Thom McMahon, we developed the concept of bringing traditional commodities architecture to the carbon markets. It was clear that the lack of transparency and fungibility in carbon hobbled the development of a robust market.

Unlike carbon offsets, traditional commodities don't trade on an individual basis. Instead, warehouses host the underlying commodities and digital receipts that represent them trade on the exchange.

We pioneered the same concept for carbon markets. Instead of a physical warehouse, we hold carbon credits in a trust structure that allows for digital receipts representing credits to be traded on ACX.

The first contract we developed was the CET [CORSIA Eligible Token]. It allows buyers to gain exposure to ICAO's [International Civil Aviation Organisation] Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). Every CET is backed by a carbon credit eligible under the CORSIA regime.

We've since created other tokens, such as the Global Nature Token (GNT), which provides exposure to forestry projects from 2012 and a GNT+ which sets the cut off at 2016. We also have a Sustainable Development Token (SDT) contract, which are projects perceived by the market to have higher additionality criteria and additionally address a minimum of three UN Sustainable Development Goals (SDGs) as co-benefits.

EF: Who is using the exchange at the moment and who do you hope will use it in the future?

WP: The current carbon market construct alienates speculative and opportunistic capital – to its own detriment. Looking at traditional commodities architecture again, 95% of any market is made up of financial service providers and liquidity providers. In the carbon markets this is reversed; the project developers selling the 95% of trades and only 5% are investors. This is partly because it is a complicated marketplace that has different registries, types of projects, methodologies, and quality standards etc.

Illiquid, non-fungible assets prevent the market from scaling. We have attracted many pools of capital that have been side-lined due to the illiquidity and complexity of the market. Standardising contracts and taking a lot of the friction out of the market has unlocked that speculative capital.

Among our over 160 members representing 29 countries we count traditional trading firms, hedge funds, corporations looking to buy and retire credits, and family offices. This new demand will create significant upward price pressure on carbon credits, which will in turn release investment into the underlying carbon projects that generate carbon credits.

EF: What other challenges are constraining the development of voluntary carbon markets?

WP: Voluntary carbon credits are currently bespoke instruments that hinder scaling. This is because they remain the remit of marketing teams and heads of sustainability at corporates. This has created a significant focus on the story behind the underlying credit and not on the validity of the reduction above business-as-usual.

As the price of carbon appreciates and carbon offsetting becomes a mandatory exercise, corporate treasury teams will take the lead. Treasury teams expect assets to mirror traditional financial instruments. We have created a marketplace in anticipation of the market moving in this direction.

EF: What are your thoughts on the aims and recommendations of the Taskforce for Scaling Voluntary Carbon Markets (TSVCM)?

WP: The general premise behind the Taskforce is valid and creating core carbon principles is needed. Unfortunately, the Taskforce has morphed into a very top-heavy governmental body. I fear that the Taskforce is now more likely to stifle innovation more than promote the carbon markets.

The idea of a governing body that legislates quality is not needed. Price is a much better gauge of quality than the opinions of a legislated body. I'm still participating in the TSVCM discussions to contribute my market-based perspective.

EF: What's next for ACX (AirCarbon Exchange)?

WP: We are becoming a truly global exchange. Our existing presence in Abu Dhabi, covering the MENA region, is being followed by an active presence in the UK, Canada, Brazil, and soon South Africa. We will continue to push innovation. Other older carbon exchanges are now adopting our securitisation model and creating tradeable instruments. This is excellent in that it fosters arbitrage opportunities and strengthens price signals. This is an interesting development that we support.