Thanks to some long-overdue digital transformations, carbon offsets can now be verified and issued on a near-real-time basis, software solutions handle costs and complexity, and accuracy is significantly enhanced. This is a win-win-win for project developers, carbon-offset buyers and the planet.
31 years after the first offset project was initiated by a US electric power company in Guatemala, the voluntary carbon market is in the dawn of a new era. We see three converging factors that are expected to drive significant growth and institutionalisation of the market: namely, the momentum behind corporate net-zero commitments; the publication of a blueprint to scale the market by a taskforce of leading experts; and the emergence of new technologies that will disrupt the production and trading of offsets.
High complexity and uncertain rewards have impeded the growth of the market — in 2019, carbon offsets issued totalled 137m t Co2e or less than 0.5 percent of global emissions.
In its simplest form, a carbon offset represents a reduction of 1 tonne of Co2e in greenhouse gas emissions that would not have happened otherwise. In practice, this definition is highly complex to implement. Sophisticated methodologies were developed over the years to ensure that each offset is real, has not led to any unintended negative consequence, is not double counted, and is independently verified. The multiplication of standards and methodologies, coupled with the controversies around specific activity types, have turned offsetting into a highly specialised domain with many hidden risks for buyers and sellers.
Demand for offsets is driven by voluntary commitments to take responsibility for one’s greenhouse gas emissions by financing emissions reductions elsewhere. These voluntary commitments hinge on the expectation that civil society and consumers will recognise the purchase of offsets — either by publicly supporting those who do so or by factoring it into their purchase decisions. The lack of clear signals from these stakeholders has historically undermined the business case for voluntary offsetting, limiting it to a group of leading corporates.
The voluntary carbon market’s recipe for scale: demand-side momentum, scalable and institutional market infrastructure, emerging technologies.
Climate change awareness has experienced an unprecedented rise since the Paris Agreement in 2015. Thousands of companies have signed-up to science-based targets or net-zero commitments, civil society and youth groups have led climate marches across the globe; and governments are slowly increasing their climate targets, with a few already committed to achieving net-zero emissions by mid-century.
With the rise in climate awareness, the business case for offsetting is strengthening. Recognition that offsetting is a credible lever to drive down emissions that cannot otherwise be avoided is growing among stakeholders. The recently published Corporate Climate Mitigation Blueprint by environmental non-profit WWF specifically refers to carbon credits and calls for investments in climate actions. We expect to see more of these recommendations in the future and the convergence towards a broad-base acceptance of offsetting as a credible tool in the climate-mitigation toolbox.
Demand alone, however, is not sufficient to secure the long-term growth of the market. Structural challenges associated with price discovery, offset quality evaluation, upfront costs financing and efficient trading are to be overcome for the market to fulfil its potential. The good news is, that’s exactly what the Taskforce on Scaling the Voluntary Carbon Market has set out to do. The Taskforce released its final report — a blueprint to overcome these challenges and institutionalise the voluntary carbon market — last week. Whilst the implementation timeline remains uncertain, the recent growth in demand provides the necessary incentives for market players to coordinate the delivery of the blueprint. We expect to see the rapid emergence of a centralised governance structure, a commonly accepted taxonomy and standardised carbon contracts.
The last major hindrance to growth in our view lies in the complexity and costs associated with the production of high-quality offsets. The annual verification process underpinning the issuance of offsets relies on manual checks, email communications, pdf files and excel spreadsheets. The voluntary carbon market is one of the few sectors left untouched by the digital revolution of the last decade. This is going to change as market players — including SustainCERT — step up to provide digital verification solutions, enabling real-time verification of data and near-real-time issuance of carbon credits.
Digital transformation is on its way and will profoundly transform the voluntary carbon market.
Downstream digital innovations have recently emerged to transform the way offsets are purchased and retired. Technology startups such as Pachama or Wren claim to simplify the process of calculating and offsetting one’s footprint. Fortune Global 500 companies including SAP and BNP Paribas are investing in technology-based offsetting solutions to capture their share of a market expected to boom in the next decade. We expect to see an acceleration in these downstream innovations with the purchase of offsets becoming integrated into all purchase decisions.
The digitisation of the upstream segment has seen much less activity, and we consider this to be an exciting area of growth for a company such as SustainCERT. Upstream activities include all processes involved in producing an offset: data collection, greenhouse gas calculation and third-party verification. Emerging technologies such as IoT and satellite imageries will simplify the data-collection process and significantly increase its accuracy. Algorithm and machine learning can replace excel spreadsheets in the GHG calculation process to produce consistent, comparable outputs in tonnes-of-Co2e terms. Finally, the verification process itself is going to be radically different. Currently performed as a one-time action repeated before every annual issuance of offsets, it is set to become an ongoing process where data is verified as it feeds GHG calculation algorithms.
As a result of these profound digital transformations, carbon offsets will be verified and issued on a near-real-time basis going forward, costs and complexity will be handled by software solutions and accuracy will be significantly enhanced. This is a win-win-win for project developers, carbon-offset buyers and the planet.