Achieving transparency in the VCM through blockchain technology
By Ela Khodai from Toucan Protocol
A more transparent VCM helps build trust
The Voluntary Carbon Market (VCM) can be a valuable tool in financing climate solutions, and it is projected to grow rapidly, from $2 billion in 2021 to $50 billion in 2030. However, to ensure that there is a positive climate impact of carbon credits traded in the VCM, the integrity of carbon credits must be ensured. And to encourage participation in the VCM companies and the public must trust that carbon mitigation efforts are effective.
In its current form, the VCM has several flaws and barriers to scale in almost all stages of the value chain. It is not yet set up to scale to the levels needed to make a meaningful climate impact, and to aid companies and governments in achieving a global net-zero status. Furthermore, there is little accountability: For example, it is currently close to impossible to scrutinize the climate investing portfolio of a Fortune 500 company, if they choose not to reveal it.
Three big transparency bottlenecks in the conventional VCM
In its current form, the VCM has numerous pain points, such as a lack of standardization, double-counting of carbon credits, and no clear price signals. These bottlenecks make it challenging to actively and consciously build climate impact via the VCM into an organization’s sustainability strategy.
Lack of standardization
There are many different carbon credit standards, and it’s difficult to evaluate the quality of credits across standards. Credit developers also may use divergent methodologies to calculate emissions reductions, which, again, makes it challenging for buyers to identify the projects that provide the most significant climate impact.
Double-counting of carbon credits
This refers to the same carbon credit being sold to multiple buyers, or to credits being resold while they are simultaneously claimed as retired. Double-counting of environmental impact claims leads to a pronounced lack of trust in the market, and also results in an overestimation of the actual reduction of carbon in the atmosphere because one credit is counted multiple times by different entities.
No clear price signals
The prices of carbon credits vary widely. Credits can be sold for as little as 1 dollar and as much as 900 dollars per tonne. This is partially due to different credit attributes and methodologies. But it can also be ascribed to over-the-counter trades done in private, and the resulting lack of publicly accessible pricing data.
Without ways to compare the cost of similar credits, it’s challenging for buyers to evaluate if they’re paying a fair price for their credits. It can also be difficult to make informed decisions about which carbon credits to purchase, which in turn results in an overall hesitation to participate in the market. And credit developers struggle to identify at which price point they should be selling their inventory, which, again creates hesitation towards participating in the VCM.
How can a digital carbon market improve transparency?
Carbon markets built on blockchain technology offer a level of transparency that previously didn’t exist. To make this more understandable, let’s compare the conventional voluntary carbon market with a more digital version: In a conventional market, trading activity takes place behind closed doors or in an over-the-counter fashion. Prices are set by brokers, and they are not publicly available. It’s challenging to browse credits and all their attributes across different standards. By contrast, in a digital voluntary carbon market, individuals and market watch organizations can easily and autonomously gain insight into the origin, attributes, and trading history of any carbon credit. They can query and verify retirement data and evaluate price trends.
How can we leverage blockchain technology for the VCM?
Blockchain technology is essentially a global and public ledger system, which makes it perfectly suited to power an accessible and transparent carbon market. Carbon registries can be built on blockchains, and issue carbon credits as carbon tokens, or they can leverage “bridging infrastructure” to tokenize or allow tokenization of credits stored in their database. Users can then easily discover, track, and purchase credits across standard. And market participants can view market activity and credit prices, and verify retirements that back net-zero claims.
Blockchain technology also enables anyone to check if carbon credits are legitimate, because everyone can track and verify the ownership and trading history of each credit. And they provide information about which carbon credits have been retired, because, again, all records are publicly visible. These aspects boost confidence among buyers and sellers and increase trust in the effectiveness of the carbon market to finance climate solutions.
In conclusion, transparency is key to an efficient and functioning carbon market. Credit developers, consumers, and regulators benefit from increased transparency. By using blockchain technology, we can create an accessible and transparent carbon market, which can increase trust and build confidence in carbon mitigation efforts. This will help ensure that carbon credits have real climate impact and aid companies and governments in achieving a global net-zero status.