Carbon Offset Standards:
A standard for creating high-quality emission reductions projects in the Clean Development Mechanism and Voluntary Carbon Market. It was designed to ensure that carbon credits are not only real and verifiable but they make measurable contributions to Sustainable Development Goals worldwide.
Voluntary Carbon Standards (VCS):
This is a standard for voluntary carbon offset market. Based on the Kyoto Protocol’s Clean Development Mechanism guidelines, VCS establishes criteria for validating, measuring, and monitoring carbon offset projects.
Clean Development Mechanism
: This is one of the Market Based Instruments defined in the Kyoto Protocol that provides for emissions reduction projects which generate Certified Emission Reduction units (CERs) which may be traded in emissions trading schemes.
What is CCER?
CCER refers to emissions reduction activities conducted by companies on a voluntary basis that are certified by the Chinese government. Such activities include renewable power generation and waste-to-energy projects, as well as forestry projects.
For firms taking part in the national ETS, CCER credits can be used to offset their China Emissions Allowances (CEAs) deficits, or credits that they can buy or trade under the scheme. This way, carbon emitters must pay CCER owners, such as renewable power generators, for the credits. The offset rate of CCER credits is capped at 5 per cent of emissions that exceed targets for the national ETS.
In an emissions trading scheme (ETS), a regulator defines an upper limit (cap) of greenhouse gas (GHG) emissions that may be emitted in clearly defined sectors of an economy (scope and coverage). Emission permits or allowances are given out or sold (allocated) to the entities that are included in the ETS. By the end of a defined time period, each covered entity must surrender a number of allowances corresponding to their emissions during that period. Installations that have emitted less than the number of allowances they hold can sell any excess to other participants in the scheme. Entities with low abatement costs thus have an incentive to reduce their emissions, while those facing higher costs can choose to comply by purchasing allowances from the market.
Blockchain allows for an open, transparent, and liquid asset that reduces friction, and ultimately decentralizes the system to provide a truly distributed and borderless solution for commodities trading and asset value creation. Blockchain technology can provide the right foundation to create an efficient and 100% digital platform that enables trading and settlement of commodities globally and instantly.
Blockchain allows we ddd transparency into supply chain of carbon credit to make sure high-quality carbon credit are provided. Traced at each step of the supply chain from certification to verification and all the way to the end-buyers
The VCM is understood to have several shortcomings, particularly within the market’s supply chain where credits are traded between brokers, organizations, and consumers, inhibiting the market’s ability to scale. According to a 2021 McKinsey report, VCMs in their current form are “fragmented and complex with questionable credit sale practices and limited pricing data that “make it challenging for buyers to know whether they are paying a fair price, and for suppliers to manage the risk they take on….” Over-the-counter exchanges have been criticized by the US Securities and Exchange Commission (SEC) for their lack of transparency. For the market to scale, the progress made on the supply side needs to be integrated with a more efficient and transparent marketplace that can further increase trust and enable scalability.
It is here where blockchain technology (and more specifically Ethereum, and Ethereum compatible blockchains) can help address market failures. With public and transparent distributed ledger systems and smart-contract enabled marketplace innovations introduced by decentralized finance (DeFi) protocols such as UniSwap and SushiSwap.
In traditional finance, large hedge funds and banks can serve as ‘market makers,’ essentially providing billions of dollars in capital to serve as the liquidity to create a market and help it operate efficiently – reflecting orders from buyers and sellers alike. The blockchain solution of AMMs instead allows anyone to provide liquidity or interact with the market. AMMs incentivize liquidity providers when they offer up a pair of frequently traded tokens to a ‘pool’, which can then be used by traders to complete their orders at any time, at the market equilibrium. As these liquid pools of assets are hosted on the blockchain, all market activities past and present are transparent and traceable.
Given the oft-cited issues of the VCM with respect to poor transparency, fragmentation, and illiquidity on the demand side, the DeFi-enabled liquidity pools can bring much-needed clarity and accessibility to carbon credits by integrating carbon credits within them.
Demand in this market is driven by different stakeholders:
1. Investment demand in carbon credits as an asset class is expected to grow. Globally, market interest in VCMs has grown significantly, driven by the threat of an EU carbon tax on imported goods, corporate social responsibility, and the surge in the number of companies and countries setting carbon neutrality goals. Thousands of companies have committed to The Climate Pledge as of March 2022, which involves implementing decarbonization strategies and neutralizing any remaining emissions with carbon credits.
2. HKEX’s Net-Zero Guide and enhanced ESG reporting requirements are also expected to drive HKEX-listed companies, including A/H share companies, to decarbonize. These will likely boost demand for carbon credits to neutralize unabated emissions.
3. Corporate Social Responsibility
Environmentally conscious companies for their CSR projects and sustainable developments.
Industries&Environmentally Aware Individuals
Both players seeking carbon neutrality can compensate their emissions or provide an additional contribution to mitigating climate change.
Sustainable investments and green finance are raising more interest year after year and are becoming more profitable.
Emissions Trading Worldwide
Growth of voluntary carbon markets from 1990-2020 Image