Green finance needs voluntary carbon markets that work

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The United Nations Climate Change Convention, known as COP26, catalyzes a commitment to carbon neutrality in Glasgow, Scotland, to achieve net-zero carbon emissions, with the need to reduce emissions as much as possible, and balances the remaining emissions with the purchase of carbon credits.

Carbon credits reduce, avoid or eliminate carbon emissions in one place to offset unavoidable emissions elsewhere through certified green-energy projects. The carbon credit represents one tonne in carbon emissions reduction. They are 1) avoidance or reduction projects – eg, renewable energy (wind, solar, hydro, biogas) – and 2) removal or seizure – eg, reforestation and direct carbon capture, which are aimed at the voluntary carbon market (VCM) . Carbon credits can be resold multiple times until it is retired by the end user who wishes to claim the effect of the offset. Carbon credits can also have co-benefits, such as job creation, water conservation, flood prevention and biodiversity conservation.

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Carbon registries store carbon credits issued by independent third-party and internationally certified auditors or verifiers to independent standards. Serial-numbered credits are issued by the verifier, and the offset deduction claim is converted into carbon credits that can be traded or retired. Carbon markets convert CO2 emissions into a commodity or tradable environmental asset by assigning a value.

related: UN’s COP26 climate change goals include emerging technology and carbon taxes

In the compliance market, carbon allowances are traded. There are currently 64 compliance markets in the world, and pricing is determined by emitters and polluters. The European Union carbon market, or Emissions Trading System (ETS), is the largest carbon market with a 90% share in global trade. Entry into the EU ETS is limited only to large polluters and their brokers who are controlled by the program’s operators. The supply of credit is also controlled to manage the pricing. Carbon prices traded only in the EU ETS reflect the true cost of polluting carbon, but market access is not the same.

Small companies and individuals can only access the voluntary carbon market, where they purchase credits at their discretion to offset emissions from a specific activity. Voluntary credit generally cannot be traded under a compliant market system. Voluntary carbon markets are expected to grow 15-fold by 2030, to respond to the growing private sector demand for climate solutions, according to the “Taskforce to Scale the Voluntary Carbon Market Final Report January 2021”. A significant problem with VCM is that the prices of carbon credits have been low. The low cost of voluntary credit at $2-$3 per credit neither motivates nor encourages project developers and does little to capture the true cost of climate pollution compared to compliance markets.

related: Epidemic ends the year with a promising carbon cap-and-trade solution

An excellent article for understanding VCM is “The Good Is Never Perfect: Why the Current Drawbacks of Voluntary Carbon Markets Are Services, Not Barriers to Successful Climate Change Action.” In this article, Oliver Miltenberger, Christophe Jospe and James Pittman highlight the key issues surrounding the design, function and scale-up of VCMs.

Green Washing. This is when companies with false energy efficiencies claim to be more environmentally friendly than they actually are, and thus use higher rates of ineffective credits to offset corporate emissions.

carbon accounting. The number of claims to offset emissions is unrealistic given the ecosystem constraints. Net-zero ambitions must have disclosure requirements and must be accounted for. Double-counting can be intentional, but is also caused by a lack of complete accounting protocols and a lack of alignment between market jurisdictions or operators.

Market failures and inefficiencies. A key criticism emphasizes the risk of unfairly burdening product and service markets with compliance costs, and few incentives for businesses to voluntarily take action to reduce environmental impact.

Monitoring, reporting and verification. The cost of these activities may constitute the majority of the market value of carbon credits, reducing the incentive for implementation.

Redundancy and baseline. Carbon removal projects use an inherently subjective baseline.

Durability. It refers to the assurance that the carbon will remain in stock for an extended period, typically 30-100 years. However, there is an opportunity to protect and expand the carbon sink, encourage low carbon production and increase the flow of carbon from the atmosphere to short-term and sustainable stocks, even in cases with short-term sustainability.

Stakeholder inclusion and inequality. Projects can deprive local livelihoods. In some early REDD+ projects, financial carbon benefits resulted in local communities having limited access to their traditional land and livelihoods.

These may help: standardized accounting protocols for interoperability across accounting standards and systems; greater transparency from VCM operators and credit buyers; Standalone certification on rights and ownership of credit; Better traceability. Traceability, liquidity and smart contracts allow carbon credits to be used in innovative ways, creating additional demand for the overall VCM.

related: How blockchain technology is changing climate action

When combined with remotely sensed data via satellite imagery, drones, laser-detecting devices, and Internet-of-Things devices with machine learning and artificial intelligence, analytics can reduce development costs and rigor in measurements. can increase. Southpole reported:

“Blockchain technology has enormous potential for climate action. However, this is only if the right safeguards are in place to ensure environmental integrity. Web3 applications can be part of the climate solution, but they must be designed and implemented properly. should be done.”

While the potential exists, we need action to address the problems in VCM, including:

  • Strengthening incentives for decarbonization
  • Pricing carbon with better price transparency is urgently needed
  • reducing the cost of manufacturing carbon credits
  • Lowering transaction costs and providing additional liquidity
  • Making prices higher and more reliable in the spot and futures markets
  • Making carbon credits a viable asset class by providing predictable return on investment and including value protection for buyers and sellers
  • Creating safeguards to protect reputation and legal procedures for settlement of disputes
  • Clarity on taxation exemptions of carbon credits, moving from “polluter payments” to “polluter investing” and full price discovery leads green owners to take direct climate action on their behalf.

Kishor Butani of Universal Carbon Registry in India explained, “Merely taking carbon credits on-chain does nothing for value discovery. It gets worse when brokers and intermediaries cheaply buy and create tokens as we are currently seeing, cutting the project owner off the ground completely. What is needed is not NFTs [nonfungible token] From the buy-side of the carbon market, but directly integrated with the carbon repository that helps rural developers and green project owners build Carbon NFTs. He also added:

“Can we learn from bitcoin and price all mining years equally and enter VCM for the rural poor in developing countries and stop turning carbon finance into projects in Annex 1 countries? These countries are bound to be green, my India is not.”

VCM is an essential tool for catalysing action but to fulfill that role requires major reform.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.

The views, opinions and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

jane thomson He is the chairman of KC Holdings, an investment company specializing in the digital asset ecosystem. He holds a Ph.D. holds. from the University of Queensland and in several roles with the British Blockchain and Frontier Technologies Association, Kerala Blockchain Academy, Africa Blockchain Centre, UCL Center for Blockchain Technologies, Frontiers in Blockchain, and Fintech Diversity Radar. He has written several books and articles on blockchain technology. She has been featured in CryptoCurry Club’s 101 Women in Blockchain, The Decade of Women Collaboration’s Top 10 Digital Frontier Women, Lattice80’s Top 100 Fintech for SDG Influencers, and Thinkers360’s Top 50 Global Thought Leaders and Influencers on Blockchain.