Scaling voluntary carbon credit transactions — why exchange-based trading isn’t the answer
Voluntary carbon credits are going mainstream. Now more than ever, the term carbon offsetting is being used to lure individuals and organisations to support nature-based projects and claim carbon neutrality. Voluntary Emission Reductions (VERs) are carbon credits that represent 1 tonne of carbon dioxide or carbon dioxide equivalent that has been sequestered or prevented from entering our atmosphere. These carbon credits are generated by projects ranging from reforestation to implementing efficient cooking stoves and are backed by approved scientific methodologies and verified by trusted third parties.
As the demand for these credits has increased, calls for scaling the voluntary carbon market have increased. The Taskforce on scaling the Voluntary Carbon Market have stated that the market must grow by at least 15 fold by 2030 to meet the necessary corporate demand and contribute to the achievement of Paris Agreement targets. As part of their recommendations, the Taskforce suggested improving transparency in the market and the standardisation of voluntary emission reduction (VER) standards to enable greater homogeneity of credits, thus better enable their trading. You can read their other recommendations here.
As you may have guessed from the title of this article, we don’t believe this is a feasible or responsible solution. Through reading this article you’ll not only find out why, but hear about a far better solution to the challenge.
Before we jump in, we want to make one thing clear. Carbon offsetting is an important tool in the arsenal against climate change, but it is not the only solution. To truly address climate change and achieve sustainable results, we as a society must first reduce our own emissions, only using offsetting when emissions cannot be eliminated.
The nature of voluntary carbon credits
VERs are standardised, but their underlying projects are not. Whilst all credits represent 1 tonne of carbon dioxide or carbon dioxide equivalent (e.g. methane) that has been sequestered or prevented from entering our atmosphere, different credits are not valued the same. Several factors influence the price of a VER, including the maturity of the credit (when it was created – the more recent the better), the carbon standard used and the type of project. Of the various influencing factors, the underlying project has a significant impact; a project that delivers additional benefits above carbon (e.g. preserving biodiversity or supporting local communities), will have its credits valued higher than a project that merely plants pine trees in a field.
Offsetting has experienced much needed scrutiny, forcing many organisations to focus on high-quality projects that deliver broader impact than carbon sequestration. This not only protects their carbon reduction strategy from greater scrutiny, but offers valuable corporate sustainable responsibility (CSR) benefits. It is this reason why VER pricing cannot be standardised – there is so much disparity in the quality of projects, it is not possible to do so without dis-incentivising high quality project development. The projects delivering the greatest impact should be able to sell their VERs at a higher price in the market.
Existing voluntary carbon credit trading solutions make the problem worse.
The last year has seen a significant growth in organisations offering VER trading facilities. You may ask, how do they do that when VER pricing can’t be standardised? Several different approaches have been used… all have the same impact. Many of the trading providers have created blockchain-based trading solutions, creating a standardised VER token on their respective system which is backed by a pool of VERs. The issue is that these solutions further reduce transparency and don’t actually deliver any added value to the market. Yes, each transaction is immutable and traceable, but buyers have no transparency of the underlying project their credit has supported. What’s more, every transaction often needs to be manually updated in the respective VER’s standard registry, significantly diminishing any efficiency and transparency benefits of using Blockchain.
All trading providers, irrespective or whether they are using Blockchain or not, subjectively determine which carbon credits are eligible to be pooled and subsequently traded. One well established provider, without mentioning names, has recently launched a trading instrument that is supposedly backed by CORSIA-compliant carbon credits. However, they are the party responsible for determining which VER is compliant or not, raising concerns around the quality of the pooled asset.
Over-the-counter transactions need to improve.
Given the lack of standardisation across emission reduction projects and the VERs they generate, over-the-counter transactions offer a more appropriate transaction mechanism to manage the variability of VER quality. However, issues exist here too. The inefficient tracking of VER ownership has resulted in many buyers turning to intermediaries such as brokers or resellers to purchase VERS.
In the last few years the market has experienced a surge in new market participants offering offsetting services to individuals and organisations. The majority of these participants act as resellers, purchasing the VERs from project developers and then reselling them to consumers, often with an attractive mark-up in price. The issue with this approach is that the VERs are advertised based on the underlying project. As a consumer, either individual or organisation, you are sold on the project – the impact its had and the people its supported. However, often VERs are purchased by buyers, unaware that the majority of their funds aren’t reaching the underlying project, but lining the pockets of the reseller.
How we can bring necessary change to this market
So how do we change this? At BEF we are launching a peer-to-peer marketplace in the summer enabling VER buyers to purchase directly off project developers without the need for escrow accounts or a trusted intermediary. If you want to pay £10 for a VER, great but let’s make sure that money actually goes directly to the project that needs it, not the middleman making all the dough. We want project developers to receive the market value of their VERs, not a wholesale price – for an intangible asset such as VERs this just doesn’t make sense. What’s more, any transaction on our marketplace will result in the automatic update in our registry, ensuring you can demonstrate the ownership and subsequent retirement of your VERs with complete auditability and transparency.
In a world where carbon offsetting is only going to grow, let’s make sure that individuals doing the hard work to save our rainforests and tackle climate change are better compensated. Only by doing this, using a transparent system, can we hope to scale the voluntary carbon market.
