Carbon Market Design

Carbon Market Design: Maximizing Liquidity and Ensuring Success

The Paris Agreement highlighted the importance of utilizing markets in the fight against climate change. Well-designed carbon markets offer cost-effective emissions reductions and are more efficient and appealing to businesses compared to taxation or direct regulation. Implementing effective carbon markets is a crucial component of global efforts to combat greenhouse gas (GHG) emissions. A properly designed market attracts new capital, ensures liquidity, and sends reliable carbon price signals.

The key to a successful carbon market lies in its design, particularly in maximizing liquidity, which is the lifeblood of markets. Ignoring liquidity considerations can lead to economic inefficiency and a lack of reliable carbon price signals. Liquidity is influenced by various factors:

  • Price transparency: Good liquidity requires readily available market price information for participants.
  • Market depth: Abundant volume should be available for buying and selling in order to maintain good liquidity.
  • Bid/offer spreads: Close pricing of buy and sell offers contributes to good liquidity.
  • Transaction costs: Low costs of market access relative to market prices enhance liquidity.
  • Barriers to market entry: Easy market access and minimal regulatory hurdles encourage good liquidity.

Market Maker

Carbon markets are typically implemented rather than arising spontaneously from natural supply and demand. Therefore, experience in directly participating in these markets is often a missing ingredient. The Redshaw Advisors team, led by founder Louis Redshaw, has extensive experience in carbon trading. They played a crucial role in establishing liquidity by standardizing EUA trading contracts and kick-starting the secondary CER markets. The team has been involved in trading more than 8 billion tonnes of carbon across various Emissions Trading Schemes (ETS) worldwide, including the California cap and trade system and RGGI.

Redshaw Advisors offers expertise and advice on designing and implementing successful carbon markets. They provide guidance to governments, supra-nationals, exchanges, trade associations, and companies. Their deep knowledge and experience can help ensure the effectiveness and success of carbon markets in achieving emissions reduction goals.