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Leveraging Technology for Transparency and Integrity in Voluntary Carbon Markets

Nobayeni Mabaso

Manager - Business Consulting , Synechron

Parul Vyas

Manager - Sustainability , Synechron

In the complicated world of voluntary carbon markets, a paradigm shift has begun. A 2023 study conducted on Verra, the predominant carbon standard in the rapidly expanding $2 billion voluntary offsets market, reveals that, after analyzing a substantial portion of projects, it is highly likely that over 90% of their rainforest offset credits – widely favored by companies – are, in fact, "phantom credits" that do not genuinely reflect carbon reductions.

This revelation has triggered a number of existential questions that strike at the heart of our eco-consciousness. Firstly, how genuine is the claim of "carbon neutrality" that many companies wear with pride? Has the voluntary carbon market, once hailed as the harbinger of environmental redemption, now broken beyond repair? Are we now on a cliff edge in terms of seeking alternative solutions? Can technology and innovation work together to reveal the honest and real facts within the complex world of voluntary carbon markets?

Today, the voluntary carbon market is facing questions about its authenticity as global companies race towards sustainability. As the world leans heavily on carbon credits, doubts have surfaced about their true impact and transparency. While complete emission elimination remains distant, the market serves as an essential bridge, guiding us towards a sustainable future, supported by private finance.

The voluntary carbon market has emerged as a critical tool for incentivizing and supporting emission reduction initiatives. They provide a “last mile” solution to reducing greenhouse gas emissions while also providing financial incentives for project developers.

 

Private finance supports carbon reduction aspirations

It’s often said that to gauge the state of global climate initiatives, you have to track the flow of funds. Research indicates the potential for the carbon credits market to surpass $50 billion in value by 2030.Voluntary carbon markets offer a highly adaptable funding approach, with the financial streams within these markets applicable to areas such as carbon reduction and supporting the transition to sustainable energy. Without private capital, many of these projects would remain unrealized or face significant delays, hindering progress toward emission reduction targets and ultimately achieving net zero targets.

However, the effectiveness of carbon credit markets has faced a series of complex challenges that require innovative solutions to attract more funding from private markets. In a recent report from Trove Research, it’s stated that, between 2012 and 2022, a total of $36 billion was invested in carbon credit projects, with over $18 billion raised in the last two-and-a-half years. However, global efforts are still short of $90 billion required to meet the 2030 carbon reduction targets, thus creating a massive funding gap in the market.

 

Carbon credit reluctance

Private investors and funders have become increasingly hesitant about diving into carbon credit projects. Their reluctance stems from several concerns. At the forefront, is a perceived lack of integrity, credibility, and quality, especially concerning third-party verifications. Coupled with this, is the evident exclusion of local communities, women, and other vulnerable groups – casting a shadow over the inclusivity and ethical standpoints of such projects.

To ensure that claimed emissions reductions are genuine, strict standards and verification processes are essential. Yet, these processes can be burdensome, costly, and, at times, susceptible to fraudulent activities. Additionally, the inherent volatility of carbon credit prices adds another layer of complexity, making it harder for both project developers and financiers to assess risks accurately. Furthermore, the absence of standardized methodologies and fluctuating regulations, across regions, introduces uncertainties, complicating the evaluation of carbon credit projects by investors and affecting their value and viability.

In the early stages of emission reduction projects, traditional funding is often scarce. Private finance bridges this gap, catalyzing ventures into viable investments. Driven by competition and profit, the private sector uses modern tools to enhance transparency and innovation in carbon markets. And, as challenges arise, emerging technologies promise to amplify the scope and trustworthiness of voluntary carbon markets.

 

Innovation and technology improve monitoring and verification

The voluntary carbon market mirrors quantum mechanics, attempting to measure the intangible, such as greenhouse gas reductions from reforestation. Like the intricacies of observing quantum particles, verifying carbon reductions demands rigorous monitoring and verification to ensure authenticity. Innovation and technology can improve this process, making it easier for companies to enhance the credibility of the purchased carbon credits.

  • Automated Verification: Digital tools enable automated verification of emissions reductions, reducing the time and costs associated with manual verification processes that are prone to error and manipulation.
  • Predictive Analytics: Private sector companies use predictive analytics to optimize emissions’ reduction strategies. These data-driven insights help businesses identify the most cost-effective measures for reducing emissions, ultimately benefiting carbon markets.
  • Blockchain Technology: Can assist in establishing a transparent register for carbon credit transactions and project data, ensuring accessibility, and preventing alterations, thereby enhancing clarity and trustworthiness. In terms of addressing inequity and accessibility issues for local communities and vulnerable groups, blockchain can be used to automate, document, and monitor equitable distributions of project-related carbon credit revenues and also as an engagement tool.
  • Smart Contracts: Private sector entities can develop and utilize smart contracts which automate the issuance and trading of carbon credits, based on predefined criteria. This eliminates intermediaries, reduces transaction costs, and increases market liquidity.
  • Distributed Ledger: Blockchain based ledger enables swift data capturing, analysis, and auditing. This technology allows carbon credits to be represented as universally unique data entities in a digital end-to-end environment, making it possible to verify credits and track subsequent sales, without the need for intermediaries

Stakeholders need accurate and prompt data to maintain the credibility of emission reduction measures. Supported by the private sector, digital advances promise a transformation in voluntary carbon markets. Specifically, blockchain technology, pioneered by the private sector, guarantees the genuineness of carbon credits, instilling confidence in the market. These advanced tools not only enable precise emission data collection and reporting, improving transparency, but also empower businesses to monitor emissions throughout their supply chain. This ensures a uniform, focused strategy for emission reductions across all players.

 

Time is at a premium

Our current policies are steering us towards a perilous 2.7°C global temperature rise, far beyond the Paris Agreement's limits. With Earth already 1.1°C warmer than pre-industrial times, forecasts for 2040 show 2.8 billion people potentially grappling with water scarcity and, by 2050, a billion people could be climate refugees. Immediate action is crucial, as we need a 45% reduction in emissions, making an even stronger case for scaling up investment in the carbon credits market.

The Venture Capital Mechanism (VCM), which invested $1.3 billion into carbon reduction last year, has the potential to allocate up to $50 billion by 2030. With the integration of emerging technologies, the VCM not only promises effective carbon management but also innovative CO2 removal techniques and robust community support

So, with time of the essence, the integration of the private sector, technology, and voluntary carbon markets can emerge as a beacon, leading us towards carbon neutrality, stimulating pivotal ecological projects, bolstering market credibility, and driving businesses to genuine, transformative action.

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