Danny ChenVoluntary carbon credits are one of the powerful ways for people to regenerate our nature with carbon reduction/removal benefits. However, when it comes to public communication with legal recognition, do you know what the common concerns that climate stakeholders are aware of?
The Problem of Legal Recognition
For most stakeholders, the legal recognition is one of the top concerns. Currently, the global carbon credit ecosystem is complex and fragmented. From United Nations Article 6.2 and 6.4 mechanism, government compliance carbon credit market(ex: EU ETS emission allowance), government climate regulatory credits(ex: electric vehicles), government voluntary carbon credit market(ex: T-VER, J credits, ACCUS), regional voluntary carbon credit standards(ex: Climate Action Reserve, American Carbon Registry), to global voluntary carbon credit market(ex: Verra, Gold Standard, Puro, Riverse), it is hard for climate stakeholders to navigate the regulation dynamics.
When climate stakeholders prepare to engage in the voluntary carbon credit ecosystem, they often face confusion. For instance, climate stakeholders who would love to develop carbon credit projects will face the jurisdiction methodology compliance problem. Climate stakeholders who would love to transfer carbon credits will face the jurisdiction ownership problem. Climate stakeholders who would love to take corrective action to offset their greenhouse gas emissions will face the recognition problem.
A clear, solid global legal structure will positively contribute to the development of the voluntary carbon credit industry. If global private law is applied, it is recommended that each jurisdiction should focus on the carbon credit quality floor guidance rather than the methodology details. The over-regulation of the creation, verification, ownership, transaction, and offset of the voluntary carbon credit in each jurisdiction will hinder climate progress. The private agreement, determined by involved transaction bodies, will maximize the benefits of the capital market to make the required transformative net-zero transition.
The Problem of Impact Quality
Apart from the problem of legal recognition, the quality of carbon credit is another topic climate stakeholders are concerned about. When we have incomplete data about our Earth's ecosystem but need to take business-viable climate action right now, carbon credit project quality is often closer to a subjective judgment.
Nonetheless, due to public awareness, various global voluntary standard bodies have updated various requirements(ex, financial additionality, unrealistic baselines, leakage potential, social harm, etc.) from the outdated methodologies to strengthen the credibility of the voluntary carbon credits. Despite the criticism of greenwashing, the voluntary carbon credit market is evolving in a better direction. As climate stakeholders, we should not consider the impact of quality problems that will never be solved. Instead, actively engaging with public consultation to improve the validation and verification process to ensure the project registered withholds high standards is a more active and positive movement.
For climate stakeholders who would love to support the climate movement, having an independent judgment is critical when the term “greenwashing” may be overused as a weapon for irrational blacklash due to an implicit conflict of interests.
The Problem of Scalability
If the legal recognition and the impact quality problems are properly solved, the next problem is: Can we solve the climate problem within the timeframe at the scale we need?
Speaking of scalability, voluntary carbon credits may be considered an intangible asset under the IFRS 38 standards. Currently, the appropriateness of the classification has been discussed and considered. If the global consensus is reached, it will help businesses make effective decisions with the financial information from the voluntary carbon credits.
Apart from the accounting perspective, the weak voluntary carbon credit registration system is another barrier to scalability. For the registration infrastructure, the major problems are as follows:
1. Lack of Consensus: Global carbon credit markets are complex, as are UN Article 6, Regional Voluntary Carbon Credit Standards, and Global Voluntary Carbon Credit Standards.
2. Lack of Stability: If the jurisdiction holds the right to establish a national voluntary carbon credit market, the least developed countries may have difficulties implementing it.
3. Lack of Standardization: Each Standard Registry has its own terms and conditions of transactions.
4. Lack of Interoperability: Each Standard Registry within similar categories cannot be exchanged and recognized.(Verra and Gold Standard Can).
5. Lack of Traceability: The solution to solve the double counting problem is challenging.(Climate Action Data Trust).
If the legal recognition problem is temporarily ignored, the standardization, interoperability, and traceability problems are partially addressable with global carbon credit quality principles(ex: ICVCM, VCMI, etc), global registry recognition(ex: Verra and Gold Standard acknowledge some of the other registries’ carbon credits), and blockchain infrastructure adoption(ex: Climate Action Data Trust, Toucan, etc).
Industry Stability and Security
So far, we have discussed the major problems that climate stakeholders are concerned about. These problems if we are able to clarify and address with consensus, we may be able to solve the climate problem at scale with the voluntary carbon credit industry.
The potential to scale is exciting. Nonetheless, it will only be realized if the industry is stable with data security. To ensure the voluntary carbon credits can support the climate movement in the long term, we need a robust legal foundation for the industry lifecycle(ex, UNIDROIT digital assets and private law, etc) and advanced technologies with process flows to protect the documented information.
Voluntary carbon credits are digital assets that are stored on computer servers. If the custodian or financial intermediary organizations go insolvent or bankrupt, it will hugely affect the stability of the industry as all the digital records on the servers may be deleted as the businesses close. Accordingly, we can see a trending discussion surrounding depositary insolvency, blockchain infrastructure, and smart contract execution with artificial intelligence.
Being optimistic or pessimistic will not change the current status; as a climate stakeholder who supports the climate movement, we need to actively engagement with public consultation on various topics that we have discussed in this article to regenerate our future together.
