Environmental assets…a flawed mechanism to tackle climate change, but one that can be fixed
They’ve got potential, there’s issues, here’s some solutions
Since 2005, the carbon markets have given a glimpse of how financial markets can be used to fund projects that tackle deforestation, biodiversity loss and climate change. Whilst showing promise, carbon markets have failed to reach their potential in tackling climate change. A shift is needed, one that drives investment in projects that don’t just absorb carbon, but also tackle biodiversity loss and support local communities. Proposed in our previous blog, an environmental asset generated through projects that value an entire ecosystem using methodologies such as the SEEA Experimental Ecosystem Accounting, would offer an opportunity to us develop sustainable projects that go beyond planting trees, instead valuing the sustainable restoration of key ecosystems globally. Such a market is possible, but systemic challenges need to be addressed to ensure it reaches its full potential. Let’s jump in!
Environmental assets — a history of trial and error (with some success)
The Kyoto protocol dawned a new era for the carbon markets with the implementation of the compliance carbon markets and the Clean Development Mechanism (CDM) — a mechanism designed to promote projects that reduce emissions. These projects would generate Certified Emission Reduction units (CERs) based on the emission reductions achieved, which could be traded in emissions trading schemes and used to offset emissions elsewhere in the world. Certain industries were mandated to participate in the CDM market and offset their emissions, for example Oil Refinery and Aviation. It was a good idea, but had some flaws; it allowed developed countries to reach their emission reductions targets at lower cost and 85% of the projects are unlikely to ever reduce emissions.
Whilst ineffective in reducing emissions, CDM paved the way for the voluntary carbon market; a market outside the remit of CDM, which enabled organisations to voluntarily offset their emissions. New standards (methodologies dictating how projects are designed and implemented) were created, offering a breeding ground for innovation and new emission reduction projects; Reducing Emissions from Deforestation and forest Degradation (REDD+) was developed, providing a new mechanisms to tackle deforestation, whilst engaging local communities to participate in the projects.
REDD+ and new methodologies need to be scaled, and scaled fast
REDD+ projects are one method to protect and restore forests and their biodiversity. To truly make an impact, we need to implement Jurisdictional REDD+ projects that are supported by governments. Governments have the authority to control land-use change and recognise rights to resources. Brazil’s success in dramatically reducing deforestation in the Amazon between 2004 and 2014, provides an illustration of the effectiveness of concerted government action — the rate of deforestation was reduced by 70%. Unfortunately, recent developments in Brazil mean that much of the hard work has been undone, jeopardising the key biodiversity and indigenous communities in the area.
Alongside jurisdictional REDD+, new methodologies are needed that better value biodiversity and are inclusive of local communities. Evidence shows that community-driven projects are more sustainable and successful, due to their vested interest in the project’s success and longevity. An environmental asset, underpinned by an ecosystem’s valuation using the SEEA Experimental Ecosystem Accounting would provide a mechanism to capture and fund the restoration of ecosystems based on their true value, not just the carbon they absorb and communities they support. Whilst several standards do exist to capture components of an ecosystem and its biodiversity, none offer a methodology as complete as the SEEA.
Infrastructure and market dynamics need to change to enable these markets to scale
Before we can truly scale REDD+ and new methodologies such as SEEA-back environmental assets, we need to first address systemic challenges within the carbon markets caused by the current infrastructure and market dynamics.
Let’s start on the market dynamics. To begin with, developing an emissions reductions project (e.g. REDD+) is expensive, costing >$150,000. As result, most of the project developers are either private organisations or governments. NGOs also develop projects, but often rely on grants to cover the cost of doing so. Now, imagine you’ve been able to develop your project and are now ready to sell your environmental assets. Intermediaries, such as brokers, are often relied upon to facilitate transactions. As a result, project developers must pay these brokers commission, further reducing the revenue generated from their project.
Moving onto the infrastructure challenges… Every project and its associated environmental assets must be recorded on a registry. Think of these as public databases to record project information, track its progress, and environmental assets. The issue with registries starts to occur when tracking environmental assets, their status and ownership. Due to reliance on intermediaries, such as brokers, to facilitate carbon credit transactions, tracking environmental assets and their ownership becomes increasingly difficult; they reduce transparency. Alongside this, when environmental assets are sold, at present the vast majority of the time, the seller must then transfer ownership of the environmental assets in the registry once they’ve received the funds from the buyer. This manual process increases risk of human error and increases the risk of double spending — the same environmental assets being sold to more than one buyer at the same time.
The scaling solution needs to be efficient, inexpensive, and decentralised.
Let’s address the registries first. Environmental assets and their ownership need to be more transparent, auditable and efficient. Biodiversity & Ecosystem Futures (BEF) has developed a Blockchain-powered registry to achieve all of these qualities. Blockchain is the technology that underpins cryptocurrency (e.g. Bitcoin) and offers the perfect solution for registries and environmental finance; think of it as a decentralised accounting system made up of computers distributed across the world all working together to record and track asset ownership in real-time. This system ensures that each environmental asset, alongside any subsequent transactions or retirements, are tracked and recorded, providing unparalleled auditability and transparency.
Onto the challenge of market dynamics…firstly, financing of projects need to be more accessible. We need to make it possible for communities and small project developers to access the funds they need to develop their projects. Green bonds offer an attractive method of raising those funds independently, however these project developers often struggle to access such financial instruments, and those that do often encounter poor bond liquidity (it’s hard to buy and sell them). Guess what the solution is…blockchain. Alongside the registry, Biodiversity & Ecosystem Futures (BEF) are also developing a micro-green bond platform. Integrated with the registry, this will enable project developers, no matter their size, to publicly issue micro-green bonds to the general public and businesses to raise funds. Each bond will be tradeable and auditable, with smart contracts automatically distributing the environmental asset (once created) to the various bond holders. Such a system is not possible without the use of Blockchain technology, which when integrated with a registry, provides an efficient mechanism to track asset ownership.
Finally, let’s delve into the process of selling environmental assets. Transacting environmental assets need to be easier, cheaper, and more transparent. A marketplace is needed, one that facilitates the peer-to-peer transacting of assets without the need of brokers. Closing the gap, Biodiversity & Ecosystem Futures (BEF) is also building a marketplace that is integrated with their existing registry. This marketplace will enable project developers around the world to advertise and sell their environmental assets without the need for brokers to enable the transaction. Audited and facilitated by their blockchain, BEF’s solution will facilitate transactions, make it significantly easier and cheaper to sell assets, and make the processes fully auditable.
Climate change and biodiversity loss are threats we cannot ignore. Whilst they’re complex and overwhelming, they can be tackled. Changing how we value and protect our planet’s ecosystems and biodiversity is essential to yield sustainable results. Whilst not the full answer to these two challenges, it will be a significant step in the right direction to get them under control and mitigate their worst impacts. At Biodiversity & Ecosystem Futures (BEF) we hope to support this movement and help organisations worldwide develop projects that deliver real results.
If you want to learn more about Biodiversity & Ecosystem Futures (BEF) visit us @ www.bef.earth. To track our journey, follow us on LinkedIn and Twitter.
