Insight In Using The Carbon Credit Markets: Risks, Solutions And Understanding Blockchain

In the context of the current climate crisis, a feeling (or rather, a duty) of sustainability has sprung up among companies and some are already working to make their business more sustainable. Although redirecting the way of producing things is the only way to effectively mitigate climate change, this process is costly for many sectors and therefore, slow. Very slow.

For this reason, many companies have pursued complementary strategies to make their business more sustainable like working to reduce the carbon footprint of their business by revising the carbon footprint of their suppliers and other stakeholders, or buying carbon credits to compensate or balance their emissions. If you are thinking of buying carbon credits for the sake of the planet, in this article you will find the basic considerations that will ensure the worth of your investment. Your customers will appreciate it.   

In brief, carbon markets are those markets where some companies pollute and others sequester (or reduce its emissions of) carbon to compensate for the emission, while providing the former with a credit. 

The trade of credits aiming at companies’ carbon neutrality is found in private (voluntary) carbon markets. Also, some governments have voluntary initiatives such as the Carbon Footprint Registry created by the Agriculture, Food and Environment Ministry of Spain, which is aimed at reforestation. Since they are decentralized and not regulated, they enable infinite possibilities of innovation, although it also means that some caution needs to be taken. Some of the problems found within these markets are the lack of uniformity, the quality of the credit, the risk of double counting and the lack of transparency.

The lack of uniformity in the global voluntary markets is related to the different mechanisms of principles and standards and carbon removal initiatives–it is not the same to plant some trees as to capture the C02 directly from the air. 

There are many different standards such as Climate Action Reserve (CAR), Verified Carbon Standard (VCS), American Carbon Registry (ACR) and Gold Standard (GS)--these being among the most recognized. Since the field of biochar-based removal technology is still in its semi-infancy, the only of those certifications that has been extended to biochar so far is the VCS (since 16 August 2022). Other certificates are the International Biochar Initiative certificate, the European Biochar Certificate, or the Puro certificate, which are more focused on biochar technology. The most important thing here is to choose a project approved by independent third parties under a trustable standard.

In relation to quality, the nature of the project and the “additionality” of the credits are some indicators. A project like biochar production is known for its permanence since it is able to retain and sink CO2 from the plant for up to 1000 years. Moreover, credits can be considered additional if the GHG reductions would not have occurred in absence of the decarbonization project. This requirement is often a requirement of the buyer and ensures that the credit has a real impact on climate change.

Having access to reliable and verifiable information about the project is good and knowing about the social impacts and risks are helpful too. Collateral benefits as you see in Amata Green’s case for example, are creating more sustainability in the olive oil industry, bringing jobs to economically depressed areas and the multiple environmental benefits of biochar in agricultural soils.

Double counting is related to the lack of transparency and happens when one credit is purchased by more than one company. Even though in most marketplaces, participants must agree not to engage in double selling, solutions to this problem include and stress publicizing, the allocation of a unique serial number to each credit (1 ton of CO2), and the removal of the credit from the market where it was offered. Publicizing allows auditing of companies. There are also some databases that gather information from different registries, such as the Voluntary Registry Offsets Database from Berkeley University. Furthermore, some marketplaces and companies have started using Blockchain technology to strengthen publicity and transparency.

Publicity and certification remind us of the role of a notary in Europe. Even if an external technical audit to assess the suitability of the Biochar under a standard is needed, we could discuss the possibility of a public deed certifying the existence of facts (such as the effective removal of the CO2 seen in the production of certified biochar, and the issuance of the compensation credit to the buyer) before the public, and Courts. After all, what is the double issuance or the non-removal of CO2 if not a contract breach?

In practice, such notaries are not used in carbon trade, and one can think of several reasons why, such as the bureaucracy, the lack of a public registry for carbon transferences, or the difficulty of recognition and enforcement of public deeds abroad for these internationally oriented carbon markets, which may need other certifications, such as a stamp or apostille. However, Spanish notaries already have an essential role in certifying the property of extensions of forests, whenever linked to national decarbonization initiatives.

Certifications or standards for carbon removal are issued by independent organizations and companies. Private companies which work as a voluntary marketplace for buyers and sellers of credits are open to the public and other clients of the platform, performing a better role and providing (private) regulation to the carbon markets, potentially increasing trust. Marketplace companies may approve third parties certifications that fulfill certain conditions, or employ their own certifications to assess the projects offered in their platform. Once the carbon credit has been sold it is retired from the Registry of the platform.  

Still, Registries and marketplaces are not totally free from being modified or hacked, which is what brings Blockchain in the scope of some companies, adding an extra layer of security to the platform. Blockchain consists of a digital ledger which is open to the public, with blocks and hashes. Each block contains information, such as the terms of a contract. The hash verifies that the values of the blocks created over time are not modified by comparing it with the previous one. For that reason, it is almost impossible to alter the content of a contract signed through blockchain, even for third parties or the marketplace holder. That is why blockchain is considered a “trustless technology” (no trust is needed). Blockchain opens up, not only a possibility to document and for signature verification, but also smart contracts that can be programmed, that is, contracts that are executables by themselves.

The quality of the project is assessed by the marketplace companies and potential clients, and the Blockchain does the rest. Carbon removal projects and their transactions are listed in the Blockchain and given an identification number. Information such as location, certifications from independent rating companies, process, previous buyers, local impact, and removal permanence is accessible to everyone and permanent. It reminds of the role of a European civil law notary (at least some functions) and some people even talk about the substitution of these notaries by Blockchain applications. However, that seems more likely to be true in the future for “common law” notaries like in the US, whose competences are much more concrete and reduced, compared to the ones that are in Spain and other European countries.   

This technology has already been implemented in the real estate property registry in some countries, and the UN Environmental Programme has praised Blockchain as a useful tool for clean energy management and to calculate carbon emission of companies and their changes over time.

In conclusion, if you want your company to neutralize or balance its carbon emissions, you could consider buying carbon credits or offsets from companies that remove the CO2 from the environment for you, and be aware of the quality of the credit. The easiest way to avoid unnecessary risks when ordering your carbon credits is to register in platforms (marketplaces) run by companies such as CarbonFuture, Mycorr or Covalent Climate Solutions, and others which use Blockchain technology. Amata Green has already listed its projects for carbon removal on the blockchain and can be found here.  

About the Author: Mr. Jesús Parra (Amata Green Law Intern) was born and raised in Ciudad Real, Spain and recently graduated in International Public Law at Stockholm University, where he delved into the study of international norms, human rights protection, legal research, and International Economic Law. He has also focused on Contract Law and Administrative Law during his studies. Mr. Parra did an internship with the Europe Direct office of the EU in Ciudad Real, an institution whose goal is to explain current problems and initiatives in the EU to the citizens. He also volunteered with the Red Cross before moving abroad to study in Finland and Sweden. Mr. Parra is certain that legal mechanisms should be used for promoting, not hindering, the green transition and the path to sustainability, and thus has become part of the solution by joining the Amata Green team as a 2022 Legal intern. Mr. Parra can be found on LinkedIn at: https://www.linkedin.com/in/jesus-parra-leon/