The international climate negotiations currently underway in Paris at COP21 are focused on commitments by national and subnational governments to gradually reduce emissions, primarily from direct downstream sources — things like power plants, energy-intensive manufacturing and vehicles. Meanwhile, upstream emissions typically are ignored.
Governments tend to stray away from regulations and policy measures aimed at addressing upstream greenhouse gas emissions, such as those from the extraction of raw materials and subsequent transformation into products. That’s because supply chain emissions are indirect and often associated with activities beyond national and subnational borders. Many companies working to manage their emissions face a similar challenge with indirect upstream emissions from supply chains.
But production of commodities contributes a significant portion of global emissions, and presents a particularly tough challenge for policy makers and multinational companies working to address emissions within the global supply chain. Although CDP provides a global system for companies and cities to measure, disclose, manage and share vital environmental risk information, the majority of companies report only their direct emissions and those from the generation of purchased electricity, with a much smaller percentage reporting indirect emissions that occur in the supply chain.
A New Way to Measure Upstream GHGs
To help commodity producers benefit financially from taking action to reduce emissions, while also enabling market participants to demand carbon-efficient commodities at the base of the supply chain, a group of experts has designed a system that leverages technology to integrate standards, audits and financial flows to enable the existing global market infrastructure to differentiate and value low-impact commodities.
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Outlined in a new paper, The Carbon Impact Factor (CIF) is a family of quantified, serialized, cryptographic, blockchain-enabled financial instruments designed to quantify and value the carbon efficiency associated with the sourcing and production of various commodities. It combines components of RECs, carbon offsets, carbon insets and sustainability certificates to create a new form of efficiency currency that can be quantitatively valued in commodity sourcing decisions.
CIFs can be purchased by companies to demonstrate and communicate their efforts to reduce carbon intensity within their supply chain, the paper says. CIF isn't exactly a carbon offset, or even a carbon inset — it is a measure of carbon efficiency. The unit incentivizes the production of each commodity with carbon efficiency as a consideration, as well as the selection of commodities with higher carbon efficiency.
Depending on sector and application, the CIF can represent carbon efficiency in relation to an accepted point of reference for carbon intensity within a given sector, or represent carbon intensity by input source, enabling direct comparison between specific inputs.
Interestingly, because CIF is a dynamic measure of carbon intensity in relation to an accepted point of reference or a direct comparison within a given sector, it can drive compounding benefits over time as carbon efficiency increases — from lower carbon to carbon neutral and, in some cases, negative.
How the System Works
First, individual producers receive certification for raw materials they generate and send to market. The raw material producer undergoes certification to determine the specific GHG impacts of its materials in relation to the accepted reference point. The certification is time bound.
Second, materials are produced and metrics are decoupled. The raw material producer generates and ships materials to the primary processing point. Logistics data (origin, destination, volume) and impact score are applied against an algorithm prescribed by accepted standard to generate metrics. Metrics are decoupled and translated into unitized, serialized data sets.
Third, metrics are transferred to the finished goods seller. The CIF is transferred to the finished goods seller’s crypto wallet.
Fourth, the market values metrics and ecosystem are paid. The commodity trader receives payment for CIF. Payments from commodity trader can be made in cryptocurrency and instantly transferred to ecosystem participants’ crypto wallets, in accordance with pre-existing contracts, while all remaining value is transferred to the producer’s account. Ecosystem participants include standards body, verification providers, methodology developers, supporting NGOs and reporting frameworks.
Fifth, the finished goods seller retires the metrics, and makes a claim. The finished goods seller retires CIF units such that they can’t be transferred to any other crypto account and reports to GHG reporting body and/or other stakeholders. Retired units can be visible to ensure integrity.
The Way Forward
In a world with a scientifically-defined carbon budget, carbon inefficiency will not be tolerated, the paper concludes. Recent developments in the capital markets reflect this trend, but it's still early.
Carbon efficiency will increasingly become an economic and strategic imperative, and only the most carbon-efficient resources will be consumed, forcing the differentiation of raw material inputs — oil, natural gas, steel, palm oil, cement and refrigerants, among others — including the variable aspects of carbon intensity related to production and sourcing.
While it will be difficult to differentiate previously undifferentiated materials in global markets, this also provides an opportunity, the paper says. Even in a scenario with a binding international agreement on climate change, the paper says, CIF provides a "foundational" financial instrument to store and value carbon efficiency within the infrastructure of global commodity markets.