Carbon credit markets must urgently deliver the transparency and scalability that will dispel doubts about their viability as a genuine counterweight to climate change. These features will be key to any offset marketplace aiming to attract buy-in from both users and investors.
With such potential as a high impact and commercially viable solution to fighting the climate crisis, the voluntary carbon trading market has grown significantly in recent years, topping $1bn in 2021.
Nevertheless, concerns about the sourcing and pricing of carbon credits have proven resilient, as have comments alluding to ‘greenwashing.’ To help drive widespread adoption, therefore, new marketplaces must assuage these concerns and equip themselves to take on the surge in demand needed for corporates across the world to achieve their sustainability goals and drive towards decarbonisation.
Introducing transparency
A truly transparent carbon marketplace would alleviate many of the concerns directed at its peers, and erode the resultant hesitancy around offsets, making them a long-term viable means of combating climate change.
Some critics have questioned the integrity of the carbon trading market due to, often unfairly, ambiguous quality of many credits. Accusations of greenwashing are rife, as are calls for more transparency in how credits are sourced and priced. Neither should be dismissed, out of hand. But what the newest, most innovative carbon marketplaces can now do is provide the transparency that can prove the quality of credits.
In Singapore, for instance, a consortium of large corporate investors – including Standard Chartered, DBS, Temasek, and the Singapore Exchange (SGX) – has commissioned a carbon trading marketplace called Climate Impact X (CIX). Developed by NovaFori and launched earlier this year, CIX’s Project Marketplace currently consists of a digital platform on which businesses can buy and sell high-quality credits.
So, how does CIX ensure the quality of the credits that are traded on its platform? Well, it doesn’t. Verification is carried out by the world’s largest standards company, US-based Verra, which runs Verified Carbon Standard (VCS) projects including forest conversation, wetland restoration, and agricultural land management. With just under 1,600 registered projects globally generating more than 450 million credits, Verra is a trusted third-party provider of verified carbon offsets.
Integration with Verra has been crucial for nurturing businesses’ confidence in the offsets available on CIX’s Project Marketplace, including how they are sourced and how they are priced. Once a project, such as a reforestation initiative, is bought and retired, it is digitally fenced off so no one else can purchase it. And in the event of forest fire or other such disaster, insurance is provided by Verra, with the cost of credits refunded.
All of this is completely transparent, so the environmental as well as the monetary value of the credits can be easily assessed. CIX therefore provides a blueprint for carbon marketplaces looking to drive demand for quality offsets, allowing them to fulfil their potential for environmental good.
Ensuring scalability
Augmenting demand for carbon offsets of course gives rise to a secondary issue: how best to ensure that the market maintains the level of liquidity needed to satisfy businesses’ appetites. With dramatic increases in demand forecast to continue over the next decade, new, scalable marketplaces will be vital for sustaining the rapid growth of the market.
Demand for credits will increase as increasing numbers of businesses commit to being environmentally responsible organisations. Rather than focusing solely in the period right before annual reports are published, buying activity will therefore be spread more evenly throughout the financial year, as they shift to a project-based approach. Indeed, projects such as copper mining and aluminium smelting, both necessary for producing renewables, will increasingly start offsetting their emissions as they begin work, rather than waiting until year-end.
As it stands, the market lacks the liquidity to satisfy this exponentially growing volume of trading. It is currently a supply-driven market, as there is a limited amount of verifiable nature out there that you can genuinely claim is offsetting carbon emissions. This makes for a competitive market. Nevertheless, demand from the voluntary carbon market is set to grow. This raises the risk of growing pains, but also an opportunity for scalable marketplaces to thrive.
Delivering sustainability
Scalable platforms such as CIX will be critical for matching buyers of carbon credits to the right products at the right time, especially as increasing numbers of potential buyers flood the market. Moreover, unlocking the potential of this pent-up demand requires transparent, trustworthy marketplaces in which the environmental value of offsets can be verified independently.
There is a real opportunity for carbon markets globally to follow examples such as CIX, and to equip businesses properly for offsetting their emissions. This cannot happen too soon, with deadlines for essential net zero targets getting ever closer, but the good news is that the technology to realise the full potential of carbon trading is now within reach.
Paul MacGregor, head of sales and marketing at NovaFori.
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