The United Nations Climate Change Conference (COP26) in Glasgow, Scotland, catalyzed a commitment towards carbon neutrality. This means achieving net zero carbon emissions. It requires reducing emissions as much possible and balancing remaining emissions through the purchase of carbon credits.
Carbon credits are used to reduce, prevent or eliminate carbon emissions from one location. They can also be used to offset unavoidable carbon emissions from other places through green-energy projects that have been certified. One ton of carbon emissions reduction is represented by carbon credits. They can be used to offset or avoid carbon emission reduction projects, such as renewable energy (wind and solar), biogas, and 2) removal or sequestration, such as reforestation or direct carbon capture. These are both aimed at voluntary carbon markets (VCM). You can resell carbon credits multiple times until the end-user has claimed the offset’s effect. Co-benefits of carbon credits include job creation, flood prevention, and preservation or biodiversity.
Carbon registries are independent, independent, and internationally certified verifiers that store carbon credits. They adhere to independent standards. Verifiers issue serial-numbered credits. The offset reduction claim is converted into carbon credits that can then be traded or retired. Carbon markets give CO2 emissions a price, making them a commodity or tradable environmental asset.
Related: UN’s COP26 Climate Change Goals include Emerging Tech and Carbon Taxes
Carbon allowances can be traded in the compliance market. There are 64 compliance markets around the globe, with pricing determined by polluters and emitters. The largest carbon market is the European Union Emissions Trading System (ETS), which has a 90% share of global trade. Only large polluters and brokers can enter the EU ETS. They are also regulated by program operators. To manage the price, credit supply is also controlled. The EU ETS carbon prices only reflect the true cost of polluting carbon. However, access to the market for carbon is not fair.
Individuals and small businesses cannot access the voluntary carbon marketplace. They can buy credits at their discretion to offset a specific activity. Voluntary credits cannot usually be traded in compliance markets. According to the “Taskforce to Scale the Voluntary Carbon market Final Report January 2021,” Voluntary carbon markets will grow 15 fold by 2030 to meet increased private sector demand. However, carbon credit prices remain low. Low costs for voluntary credits, $2-$3 per credit, do not motivate or incentivize project developers. They also don’t capture the true cost to climate pollution when compared to compliance markets.
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VCMs are best understood by “The Good is Never Perfect: Why Voluntary Carbon Markets Are Not Barriers to Success in Climate Change Action” Oliver Miltenberger and Christophe Jospe highlight key issues related to the design, function, and scaling-up of VCMs.
Greenwashing. This is when companies that claim to have higher energy efficiency than they actually are are use high rates of ineffective credit to offset their corporate emissions.
Carbon accounting. Given ecosystem constraints, the number of claims to offset emissions is unlikely to be high. Given the ecosystem constraints, net-zero ambitions need to be disclosed and audited. Double-counting can occur inadvertently, but it also happens due to a lack or alignment between market jurisdictions and operators.
Inefficiencies and market failures. There is a risk of unfairly burdening product and service markets by imposing compliance costs. Businesses are not encouraged to take voluntary steps to reduce their environmental impact.
Monitoring, reporting, and verification. These costs can make up the bulk of a carbon credit’s market value, which reduces the incentive to implement it.
Baselines and additionality. Projects to remove carbon from the atmosphere use inherently subjective baselines.
Permanence. This is the guarantee that carbon will stay in a stock for a prolonged period of time, typically 30-100 years. There are ways to expand and protect carbon sinks and incentivize low-carbon production. This will increase carbon’s flow from the atmosphere to a short-term, durable stock.
Inequity and inclusion of stakeholders. Local livelihoods may be disenfranchised by projects. Some early REDD + projects resulted in communities being denied access to traditional land and livelihoods due to financialized carbon benefits.
These protocols can be used to: standardize accounting protocols for interoperability between accounting scales or systems; greater transparency by VCM operators and credit buyers; standalone certifications of rights and ownership of credits; and improved traceability. Smart contracts, liquidity, and traceability allow carbon credits to also be used in new ways, increasing demand for the overall VCM.
Related: How blockchain technology transforms climate action
Analytics can reduce development costs and improve precision by combining remote-sensing data from satellite imagery, drones and laser-detecting devices, as well as Internet-of-Things devices that use machine learning and artificial Intelligence. Southpole noted:
“Blockchain technology offers enormous potential for climate action. However, this is only possible if the appropriate safeguards are in place for environmental integrity. Web3 applications are a part of the climate solution. However, they must be properly designed and implemented.
The potential exists but we must take action to fix the problems in VCM.
Strengthening the incentives for decarbonizationPricing carbon is urgently needed with improved price transparencyReducing the cost of carbon credit creationReducing transaction costs and providing additional liquidityMaking the prices in the spot and futures market higher and more reliableBuilding carbon credits as a viable asset class by providing predictable returns on investment and including value protection for buyers and sellersCreating safeguards to protect reputation and legal processes for disputes settlementClarity on taxation exemption of carbon credits, moving from “polluter pays” to “polluter invests” and full price discovery goes to the green owners on the ground taking direct climate action on their behalf.
Kishore Butani, from the Universal Carbon Registry in India, pointed out that “Merely taking on-chain carbon credits does not make it possible to price discovery.” It gets worse when middlemen and brokers buy tokens at a bargain price and cut off project owners. “What’s required is not an NFT [nonfungible token] from the buy side of the carbon market but integration directly into carbon repositories that helps rural developers and green owners create carbon NFTs.” He also said:
“Can we learn from Bitcoin? Can we price all mining years equally, make VCM entry affordable for the rural poor of developing countries, and stop diverting carbon finance towards projects in Annex 1 countries?” My India is not obligated to go eco-friendly.
VCM is an important tool to stimulate action, but they need to be improved.
This article is not intended to provide investment advice. Every trade and investment involves risk. Readers should do their research before making any decision.
These views, thoughts, and opinions are solely the author’s and do not necessarily reflect the views or opinions of Cointelegraph.
Jane Thomason is chairperson of Kasei Holdings. This investment company specializes in digital asset ecosystems. She is a graduate of the University of Queensland with a Ph.D. and has held multiple roles in the British Blockchain & Frontier Technologies Association and the Kerala Blockchain Academy. She is the author of numerous articles and books on blockchain technology. She was featured in Crypto Curry Club’s 101 Women in Blockchain, Decade of Women Collaboratory’s Top 10 Digital Frontier Women, Lattice80’s Top 100 Fintech Influencers for SDG, and Thinkers360’s Top 50 Global Thought Leaderships and Influencers in Blockchain.