Green finance needs voluntary carbon markets that work
The United Nations Climate Change Conference, known as COP26, in Glasgow, Scotland, catalyzed a commitment to carbon neutrality, achieving zero carbon emissions, requiring emissions to be reduced as much as possible, balancing remaining emissions and buying carbon credits.
Carbon credit reduces, avoids or eliminates carbon emissions in one place to offset unavoidable emissions in another through certified green energy projects. Carbon credits represent one ton in reduced carbon emissions. They are 1) avoidance or minimization projects – eg, renewable energy (wind, solar, hydro, biogas) – and 2) removal or sequestration – eg, reforestation and direct carbon capture, which target the voluntary carbon market ( VCM). Carbon credits can be resold multiple times until they are stopped by the end user who wants to claim the compensation effect. Carbon credits can also have co-benefits, such as job creation, water conservation, flood prevention, and biodiversity conservation.
Carbon records store carbon credits issued by independent and internationally accredited third-party auditors or auditors, in accordance with independent standards. Serial-numbered credits are issued by investigators, and the compensation reduction claim is converted into carbon credits that can be traded or withdrawn. Carbon markets turn carbon dioxide emissions into a tradable environmental commodity or asset by giving them a price.
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In the compliance market, carbon provisions are traded. There are currently 64 compliance markets in the world, and prices are set by emitters and polluters. The EU carbon market or Emissions Trading System (ETS) is the largest carbon market, with a share of 90% of global trade. Entry to the EU ETS is restricted to major polluters only and intermediaries who are regulated by program operators. The supply of credits is also controlled for pricing management. The carbon prices traded in the EU only reflect the true cost of carbon pollution, but market access is not fair.
Only small businesses and individuals have access to the voluntary carbon market, where they buy credits at their own discretion to offset emissions from a particular activity. Voluntary credits cannot normally be traded under a compliance market regime. Voluntary carbon markets are expected to grow 15-fold by 2030 to respond to increased private sector demand for climate solutions, according to the “Working Group on Scaling Up the Final Voluntary Carbon Market in January 2021.” A big problem with PVC models is that carbon credit prices have been low. The lower costs of voluntary credits at $2-3 per credit do not motivate or motivate project developers and do little to capture the true cost of climate pollution compared to compliance markets.
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An excellent article for understanding the voice factor is “Good is Never Perfect: Why Existing Imperfections in Voluntary Carbon Markets are Services, Not Barriers to Successful Climate Change Action.” In this article, Oliver Miltenberger, Christoph Gosby, and James Pittman highlight key issues related to the design, function, and scaling of VCM models.
Green laundry. This happens when companies with false energy efficiency claim to be more environmentally friendly than they are, and thus high rates of inefficient credits are used to offset the companies’ emissions.
Carbon accounting. The number of claims to offset emissions is unrealistic, given the limitations of the ecosystem. Net zero ambitions must have disclosure requirements and be audited. Double counting can happen on purpose but it also happens due to lack of complete accounting protocols and lack of alignment between market mandates or operators.
Market failure and inefficiency. One of the main criticisms emphasizes the risks of unfairly charging markets for products and services with compliance costs, and there is little incentive for companies to take voluntary action to mitigate environmental impact.
Monitoring, reporting and verification. The costs of these activities can make up the majority of the market value of carbon credit, reducing the incentive to implement.
Addition and baselines. Decarbonization projects use inherently subjective baselines.
Always. This indicates an assertion that the carbon will remain in the stock for an extended period of time, typically 30-100 years. However, there is an opportunity to protect and expand carbon sinks, stimulate low carbon production, and increase the flow of carbon from the atmosphere into a short-term and permanent stock, even in cases where the permanence is short-term.
Stakeholder involvement and inequality. Projects can deprive local livelihoods. In some early REDD+ projects, funded carbon benefits restricted local communities’ access to their traditional lands and livelihoods.
Can help with: standardized accounting protocols for interoperability across accounting tables and systems; More transparency from VCM operators and credit buyers; independent certifications regarding the rights and ownership of credits; Tracking improvement. Traceability, liquidity and smart contracts allow carbon credits to be used in innovative ways, creating additional demand in the total VCM.
Related: How blockchain technology is changing climate action
When combined with remotely sensed data via satellite imagery, drones, laser detectors, and IoT devices with machine learning and artificial intelligence, analytics can reduce development costs and increase measurement accuracy. Southpool noted:
Blockchain technology has huge potential for climate action. This is only the case, however, when the right safeguards are in place to ensure environmental safety. Web3 applications can be part of the climate solution, but they must be designed and implemented in the right way.”
While the capabilities are there, we need to take action to correct problems in the VCM, including:
- Boosting incentives for decarbonization
- Carbon pricing is badly needed while improving price transparency
- Reduce the cost of establishing carbon credit
- Reduce transaction costs and provide additional liquidity
- Make prices in the spot and futures market higher and more reliable
- Building carbon credits as a viable asset class by providing predictable returns on investment including protecting value for buyers and sellers
- Create safeguards to protect reputation and legal dispute resolution processes
- Clarity on tax credits for carbon credits, the transition from “polluter pays” to “polluter investments” and full price discovery goes to the green owners on Earth who take direct climate action on their behalf.
Kishore Bhutani of India’s Global Carbon Registry noted, “Just getting on-chain carbon credits does nothing to detect prices. It is even worse when the broker and broker are buying cheap and creating tokens as we see them today, completely cutting off the project owner from Earth What is needed is not NFT [nonfungible token] On the part of buying into the carbon market, but integrating directly with carbon repositories that help rural developers and green entrepreneurs create unfiltered carbon. He also added:
“Can we learn from Bitcoin and price all years of mining equally and make VCM affordable for the rural poor in developing countries and stop diverting carbon finance to projects in Annex 1 countries? These countries have an obligation to go green, but India is not.”
VCM is an essential means of business motivation but it needs major improvements to fulfill this role.
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Jane Thomason He is the president of Kasei Holdings, an investment firm specializing in the digital asset ecosystem. She holds a Ph.D. He holds a PhD from the University of Queensland and has had several roles with UK Blockchain & Frontier Technologies Association, Kerala Blockchain Academy, Africa Blockchain Centre, UCL Center for Blockchain Technologies, Frontiers in Blockchain and Fintech Diversity Radar. I have written many books and articles about blockchain technology. Featured in Crypto Curry Club’s 101 Women in Blockchain, Decade of Women’s Collaboratory’s Top 10 Digital Frontier Women, Lattice80’s Top 100 Fintech for SDG Influencers, and Thinkers360’s Top 50’s Thought of Global Leaders and Influencers on Blockchain.