A Double Auction Mechanism for Token-based Carbon Credit Trading in Blockchain-based Carbon Market

Abstract

The voluntary carbon market (VCM) is crucial to enabling businesses and individuals to achieve net-zero climate goals and support global climate efforts. Driven by net-zero commitments and goals, the VCM was worth $ 2 billion in 2022 and is predicted to expand to $ 250 billion in 2050. However, current VCMs face many challenges such as inefficient trading, credibility issues, and double counting. This paper presents a novel double auction mechanism for token-based carbon credit trading using blockchain technology, addressing the need for efficient, credible, and decentralized governance in voluntary carbon market. First, smart contract is used to execute the trades when bids from carbon credit buyers match asks from sellers at a market clearing price. Second, tokenization allows carbon credits to be represented as digital assets, facilitating seamless trade while adhering to standardized carbon certification processes. Finally, we simulate optimal token pricing strategies under various market conditions, providing insights into the economic dynamics of the carbon credit market. Our findings demonstrate that this approach can effectively support the global shift toward more sustainable and credible carbon markets.