Carbon credit system has a trust problem. But it doesn’t have to be this way

Min-Si Wang is a director at AZA, an established provider of traditional and digital currency trading solutions that accelerate global access to frontier markets through an innovative infrastructure. Prior to working in the blockchain industry, She was a management consultant with PwC’s M&A practice and has experiences in financial product development with Temasek (Sovereign Wealth Fund of Singapore) and MicroCred in China.

Carbon credits have been discredited as nothing more than a distraction method for fossil fuel-guzzling industries. This accusation contains shades of truth; public trust in carbon crediting has been eroded by opaque systems, double counting and high-profile scandals.

Yet we shouldn't do away with the system altogether. Carbon credits remain essential for holding industries accountable to their net-zero claims. Instead, we should use the emerging technologies at our disposal to create a more sophisticated carbon credit verification system, as well as a more transparent, unified carbon credit marketplace.

The public is right to be skeptical about carbon credits. When Institutions like BlackRock, Walt Disney and Chevrolet purchased credits from the Nature Conservancy, it was revealed that they weren’t counting carbon dioxide savings from new trees, but existing ones. This instance of issuing ‘empty credits’ was not isolated; the incident triggered a worldwide crackdown into dodgy carbon crediting.

Regardless of the scandal, companies still need a way to offset their emissions. According to the World Resource Institute, over 30% of the largest 2,000 publicly traded companies, including major players like Apple, Unilever, and Bosch, have committed to being emission-free by the mid 21st century. This means that the demand for voluntary carbon credit would grow by 5 to 10 times over the next 10 years.

However, the carbon credit market is sabotaged by its own complexity. For example, voluntary carbon credits are audited by international institutions and registered in a global registry. Before carbon credits can be purchased, the removal projects are audited by certified auditors who verify the projects that produce the requisite carbon credit-based on set standards. However, despite the existence of global standards, the voluntary carbon credit market remains woefully fragmented.

Part of the accounting problem stems from reversibility. This is because any carbon that is taken out of the atmosphere could be “reversed” and released back into the air. For example, if a tree burns or decomposes, then that carbon is simply released at a later date.

Voluntary carbon credits are a recognized system that allows individuals and companies to invest in environmental projects that could contribute to the reduction of CO2 in the air. Despite its prevalence and high demand, the voluntary carbon market is non-mature and its standards can vary.

Reversibility is a major issue. Registries establish “buffers” or guarantee funds that act as insurance against the reversibility of carbon capture, meaning that carbon credits from the voluntary markets do not expire. The result is that even if the carbon they were supposed to remove is released back into the air, the credit remains valid.

Despite these problems, the supply of carbon credits will continue to grow to meet the burgeoning demand. That’s why we should create the infrastructure that allows quality carbon credits to reach buyers today.

Many understand this need; that’s why Carbon credit verification services have emerged to build a more transparent carbon credit market. Sylvera, a carbon monitoring service, has developed a rating service that uses geospatial data to rate the quality of carbon credits for their clients. In addition, users have access to data reports that allow them to validate the quality of the carbon credit they have purchased. The fact that the firm recently raised $32 million indicates the market appetite for a neutral rating service for carbon credits.

In the web3 space, firms like Moss has successfully tokenized carbon credit. The company follows strict standards and allows its tokens to be traded in major crypto exchanges, thus improving the price discovery for carbon credits.

Even more interesting is Cambridge University’s 4C Center. 4C aimed to combine sophisticated modeling and earth observation data to create a decentralized, trusted marketplace for verified carbon credits.

The current system of carbon credits is broken. However, as the number of companies with net-zero pledges has doubled between 2019 and 2020, the need to reform the carbon crediting system is desperately acute.

Without reliable verification systems and mature marketplaces with deep supply of carbon removal projects to support them, carbon credit (and the funding they provide for removal projects)would remain unscalable and limited. With the renewed urgency behind the fight against climate change, both governments and private investors need to throw their political and financial power behind a serious, technologically-enabled carbon crediting standard. That will spell the difference between making a carbon-neutral world a reality, not just another environmental pipe dream.