Why carbon exchanges keep failing – and how to fix them

By Marc Roston, Senior Research Scholar, Stanford University and Sharad Somani, Partner and Head of Infrastructure Advisory and ESG Consulting, KPMG in Singapore 

As countries and companies prepare for a net-zero future, Singapore as a financial hub has an opportunity to further deepen its carbon markets proposition.

Carbon exchanges and trading desks have been set up regionally, amid expectations of increased demand for carbon credits – both abatement and removal – from firms looking to offset emissions.

Increasingly, carbon dioxide removal (CDR) credits will play an important and credible role to help support technologies such as carbon capture, utilisation and storage (CCUS) and direct air capture (DAC), to remove carbon from the atmosphere.

To make CDR credits mainstream will require structural, infrastructural and policy changes. A transition to “Carbon Exchanges 2.0” would entail strong, standardised and trustworthy mechanisms that allow the effective trading of credits.

Singapore has an opportunity to be a leader in this space and fulfil its ambitions to be a carbon services and trading hub.

First, the country must address the lack of standardisation in carbon markets that impairs liquidity. Carbon credits differ significantly in quality and durability from other commodities such as financial contracts, natural resources and agricultural products. Addressing this requires examining three factors: retirement, fungibility and custody.

In voluntary markets, buyers “retire” carbon credits upon purchase. There is no future price signal, no accountability and no resale. If the carbon is re-emitted – by fire, decay or fraud, for example – no party can possibly protect against that risk indefinitely. To be credible, all credits must come with a commitment to ensure the carbon remains trapped for the duration. 

Additionally, carbon credits are not fungible, given their source, technology, duration and reversal risks. A tonne stored for 10 years in trees, for example, is not equivalent to a tonne mineralised in basalt for 1,000 years. In conventional markets, such differences are priced through maturities, storage fees and delivery grades. In today’s carbon markets, time is ignored. 

Benchmarks across carbon assets are thus crucial. Once the differences between types of credits are established, mechanisms can be developed using variable price signals based on the quality of credits. 

Third, credits face a unique custody problem. Once credited, buyers are locked into the original storage project in the same jurisdiction, and a removal cannot be reassigned or substituted. Market structure is required to monitor and manage this complex risk. 

What, then, should Carbon Exchanges 2.0 look like? A well-functioning, trustworthy carbon market needs assets that can trade like other liquid markets. This means carbon removal credits must be standardised, monitored, auditable and accountable. 

Additionally, contracts should trade in defined tenures, say, five, 10 and 50 years, allowing prices to reflect storage and counterparty risk over time. Legal enforceability is also key – what trades is not carbon, but the right to hold a storage provider accountable for a defined term.

This mirrors how commodity and financial markets work: Trust comes not from inspecting every asset but from institutional mechanisms that ensure deliverability, remedy failure and anchor price.

Finally, instead of selling and retiring credits, carbon projects could lease time-bound storage rights. The buyer acquires an enforceable claim – say, “one tonne stored for 10 years”. If the carbon is reversed, the provider is in breach. This brings legal continuity, preserves asset integrity and embeds duration into the contract.

The result is a system where pricing is comparable across technologies, expanding the types of assets businesses can trade and giving them a leg up in a low-carbon economy.

In such a world, a 100-year lease from a Direct Air Capture (DAC) project extracting carbon dioxide from the atmosphere and mineralising it in basalt becomes the benchmark, for example. Forestry leases are priced at a discount, reflecting their greater storage risk (fire, disease) and measurement uncertainty and cost. In time, this creates a carbon yield curve – the first real pricing infrastructure for climate performance.

Leasing therefore transforms the asset and market structure. Bilateral contracts have standardised terms; registries record lease duration, not just project attributes; and verification is ongoing. Transparent, trusted and regulated intermediaries – carbon delivery companies – pool assets, manage risk and issue exchange-tradable claims. Like grain elevators or bond dealers, they do not create the underlying good; they create trust.

The result: A real market, with liquidity, price spreads and risk-adjusted returns. More importantly, it links emissions to accountable storage over time – the necessary condition for net zero to mean anything.

Carbon credits are an effective, important and valuable tool to drive Singapore and the region’s transition towards a net-zero future. By creating common standards for qualifying and quantifying credits, including standardised durations and enforceable claims, and building in robust institutional mechanisms, Singapore will be able to create a sustainable carbon market.