Investors, who are focused on the environment, social and governance (ESG) areas of companies, want to support voluntary carbon credit markets. Without the right tech to track and verify trading and emissions, though, they’re exposing themselves to risk – and even missing opportunities to turn their data into novel revenue streams that might further help the environment.
More than 25 years after the Kyoto Protocol gave rise to carbon credits as a global commodity, the space is lacking uniform standards, verification, and consistent regulation across jurisdictions. As a result, companies and other entities face hurdles when seeking to back up their claims about limiting or offsetting emissions of climate-changing carbon dioxide, methane, and other greenhouse gases. Soccer’s world governing body, for example, billed the 2022 Qatar World Cup as the first carbon-neutral event of its kind. But in FIFA’s home city of Zurich, Switzerland’s advertising regulators disagreed, finding the organisation couldn’t substantiate claims that it had counteracted 3.63 million metric tonnes of carbon dioxide linked to stadium construction and operations, fans’ air travel, and other competition-related carbon emissions. Despite these concerns, carbon markets are growing. As of June 2023, more than 929 publicly listed companies have made net-zero commitments, more than double from two years before, according to the Net Zero Tracker. At the same time, 43 per cent of respondents in a Shopify survey last year said they were more likely to buy from brands that offered carbon-neutral shipping or other environmentally friendly options. As more capital floods into the climate-solutions space – the demand for net-zero offerings could drive US$12 trillion in annual sales by 2030, according to a McKinsey analysis – companies are at a crossroads on ESG scrutiny, especially regarding voluntary carbon markets.
Researchers writing in the Harvard Business Review recently concluded that “carbon-offset markets are, to date, nowhere near as effective as traditional commodity and financial markets.” Proper accounting mechanisms, they argued, were necessary to forestall misrepresentation and fraud in market-based approaches to decarbonisation.
Accuracy in the DNA
Carbon credit quality has two tiers. The high-integrity class is regulated, measurable, proven, and durable, among other benefits. The low-integrity category has few or none of those features and, while its pricing is comparatively cheap and attractive, comes with the risk of greenwashing, or overblown claims about its environmental benefits. Accurate data is the DNA of all high-integrity credits. But companies and investors alike need more than truthful information to buy and sell these credits. They demand that data associated with a credit maintain its security and integrity over time to secure its value and make sure it can be traded repeatedly.
Today, purpose-driven tech can satisfy these demands through the pioneering use of digital vaults. Empowered by high-tech operating systems, the most advanced electronic vaults allow users to package data to describe all relevant information related to carbon credits and emissions in a given marketplace.
Users can control, analyse, share, and transact those packages over private networks without losing ownership or control of the initial datasets, meaning the data associated with a credit remains permanent, including who owns and sells it. Underlying software then categorises information and assigns its values in the same way that consumer FICO scores allow lenders to measure risks and rewards.
This tech can handle the data as an asset, with a value that’s accessible on permissions-based private networks. Owners retain their rights and have no exposure to core information loss. All content in the electronic vaults is the basis for a potential revenue stream, with parts that can be mined, combined, split, sold, repackaged, and otherwise transformed into entirely new products and applications.
These digital assets can create new economies that Deloitte Insights described in a 2023 article on the future of carbon credits that envisioned waves of small daily “carbon transactions” as voluntary carbon markets became more robust. “Popular restaurants may choose to recommend carbon credits that help nearby farmers upgrade to more regenerative practices,” Deloitte wrote. “Cities and regions could also launch campaigns that link ticket sales for popular events such as sports games with biodiversity projects that repair local habitats. Research universities can help execute these projects or verify their benefits to the region.”
Where vaults can go wrong
There is a downside to digital vaults, and it’s a perverse one if the wrong technology is applied.
Computational proof of work is an obvious and powerful mechanism for designing these vaults and the incentives to participate in a blockchain mining network for instance. But there are clear inherent drawbacks, most of which are connected to energy and resource consumption for the generation of artificial scarcity within digital assets.
To make digital vaults work appropriately, transactional proof of work is required as an alternative. Proof of stake can also serve as an alternative to develop applications that are environmentally sustainable and efficient at scale.
Transactional proof of work in particular is a novel means to validate and securely record transactions underlying the generation of digital assets. This method enables confirming transactions that enable the functionalities of data structures without the need for electricity-intensive computational proof of work algorithms such as those used for maintaining global networks that record cryptocurrency transactions.
Trust, but verify
We already have standards that we can apply to credits held in digital vaults. This technology and its related platforms, for instance, have become key to the work of The Integrity Council for the Voluntary Carbon Market, a global independent governing body that is working on promoting the integrity of high-quality credits that observe its core carbon principles and support sustainable development, climate financial flows, and large-scale emissions reductions and removals.
With input from hundreds of organisations throughout the voluntary carbon market, the council created its core carbon principles to set these standards for high-integrity credits. Its second component, called the assessment framework, sets criteria and provides tools for evaluating whether carbon crediting programmes align with the core carbon principles. On a deep level, the principles establish a worldwide benchmark by leveraging the solid science and expertise available. They underscore vital elements of credit quality and integrity, such as emissions impact, effective governance, and sustainable safeguards. Their assessment criteria reflect the full set of questions for evaluating crediting programs today. Together, the principles and the assessment platform are touchstones of market transparency. Indeed, trust in the market should grow. But first comes accountability. Right now, carbon credits are intangibles whose value is further clouded by politics, regulatory conflicts, lawsuits, bookkeeping sloppiness, and even outright fraud at times.
At the same time, almost 70 per cent of Americans favor the US becoming carbon neutral by 2050, according to a 2022 Pew Research Center survey. How is that to happen measurably? From companies or countries that promise to protect the environment to climate solutions and investors to consumers who invoke green values in their spending choices, every stakeholder deserves carbon credit transparency – plus the technology to enhance and derive value from it.
Arka Ray is Co-Founder and Managing Director of DECO, the Data Economics Company. Sean Penrith is CEO of Gordian Knot Strategies.
