Dilemma: The Standards Problem in Carbon Markets

The basic theory behind carbon markets is that companies wishing to reduce their carbon footprint can fund other companies’ emission removal and reduction efforts by purchasing carbon offsets, each of which represents one tonne of removed or reduced CO2, or other greenhouse gas (GHG). However, this system can only achieve its purpose if offsets are properly vetted to ensure the claimed emissions removal or reductions are real, a process known as validation. Unfortunately, the current system of validation suffers two major issues in terms of standards:

1. Outdated standards for projects

2. Lack of professional standards

Together these factors prevent carbon markets from being a fully effective means of reducing and removing carbon emissions.

Outdated standards lead to the certification of environmental projects that do not actually reduce emissions or provide environmental benefits. For example, Verra still accepts projects under the Clean Development Mechanism (CDM) standards, despite the collapse of the CDM market a decade ago following years of doubts and allegations of fraud, including the use of CDM offsets to fund coal power plants. The use of such outdated standards creates a surplus of worthless credits and undermines the credibility of the carbon credit system. Poor, outdated standards make it difficult for companies to make informed decisions about purchasing carbon credits, as they cannot be certain of the real environmental impact of their investments.

A lack of professional standards results in a higher risk of fraudulent activities, such as false claims about emissions reductions or even money laundering or tax fraud. Registries do not perform sufficient due diligence, such as background checks, or KYC/AML processes standard in the securities industry. This missing piece denies the developer and carbon credit buyer the transparency of the carbon credits issuing process. The lack of basic professional or regulatory standards undermines the integrity of the carbon credit market and reduces public trust in the system. Furthermore, it diverts resources away from genuine efforts to combat climate change, as companies unknowingly purchase worthless credits.

Furthermore, professional engineering firms should play a more central role than NGOs in providing the technical expertise required to accurately assess and verify the environmental impact of projects. These firms, which often have experience assessing resources in ways that meet strict regulatory standards, can ensure that projects are designed, implemented, and monitored in a scientifically robust and credible manner, which will further enhance the credibility of carbon markets.

The current system of carbon credit validation is inadequate and cannot continue in its current form. That’s why Capturiant is launching the first global, regulated exchange, with stricter scrutiny of project types and securities-industry style due diligence of persons involved, to ensure only safe and credible credits are issued. Combined with the high standards brought by its professional engineering firm partners, Capturiant aims to make the carbon credit system as effective in reducing greenhouse gas emissions as it can be.

Capturiant is a global environmental asset validator, registry, and exchange committed to speed, quality, and regulatory standardization. The Capturiant team consists of financially regulated and highly experienced staff, fluent in securities, banking, custody, valuation, commodities, and digitalization. With this skillset, we are bringing standardized methodologies, rapid processing, and lower-cost validation to an inefficient and outdated industry. Credits are digitized and custodied on the Capturiant platform, enabling global transactions. Capturiant’s business model leverages distributed ledger technology and warranty coverage to greatly enhance the trust, transparency, quality, tracking, distribution, retirement, and risk management of credits and ESG instruments. Our process and compliance expertise provides exactly the level of trust and transparency issuers, investors, buyers, and sellers need throughout the entire ESG sector and asset class. Capturiant is headquartered in Houston with branch offices to be established in Zurich, Abu Dhabi, and Nassau.

This article was written by James C. Row, CFA