ClX has a chance to invigorate carbon trading

Carbon markets have failed to deliver. A new initiative in Singapore aims to change this.

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The markets abhor a vacuum. Organizations making promises on carbon neutrality, while still tied to legacy tools, have created one. 

Demand for carbon offsets could soar 333x from 2018 to 2030 (if Mark Carney is correct), catalyzing efforts to scale up carbon markets. 

That’s easier said than done. Questions around the quality of the carbon credits, combined with the risks of greenwashing, have existed since carbon markets began, slowing down progress.

Even Mr. Carney’s own initiative – the Taskforce on Scaling Voluntary Carbon Markets (TSVCM), chaired by Bill Winters of Standard Chartered – is reported to be struggling to determine which offsets should be traded, and by who. 

The taskforce may not hit its target of piloting a carbon-offset market by November, as a result.

A new market, however – also backed by Mr. Winters’ bank – is already underway in Singapore. 

A collaboration between the Singapore Exchange, DBS, Standard Chartered and Temasek has launched a new carbon exchange, Climate Impact X (CIX).  

Relevant Sustainable Development Goals

The road ahead is far from smooth. CIX, born out of the Alliance for Action on Sustainability, needs to create a new kind of marketplace to succeed, learning from the mistakes made by previous exchanges.

Carbon exchanges are operating in over 50 jurisdictions worldwide. Yet, carbon is still considered to be the world’s greatest market failure, attributed to a history of mispricing.  

This led to interventions that forced organizations to take part, with the EU Emissions Trading System growing to represent almost 90% of global carbon markets.  

CIX hopes to improve voluntary participation instead, by addressing the same questions – on how offsets should be traded and who by – that are challenging TSVCM. 

 

Carbon solutions need to improve

Exchanges thrive by improving transparency, liquidity and asset quality. This adds efficiencies to functioning markets and helps balance supply and demand, as the invisible hand works to allocate resources.  

This has not been the case for carbon, where financing has been plentiful for bankable projects in proven alternatives. This risks a glut should projects come online when users have not caught up with the new technologies required for adoption.

This risk of oversupply has been reflected in the price of renewable energy credits, which fell 16% in 2019.  

On the other hand, the price of credits relating to nature-based solutions, such as reforestation and restoring peatlands and mangroves, rose 30% over the same period. 

Nature-based solutions, which offer greater impact but are less understood, are an area of focus for CIX.

Buyers are also influenced by regulations and commitments to neutrality. 

Data provider Refinitiv found that willingness to pay for allowances rose sharply in anticipation of increased scarcity in the near term, as organizations offset to meet their commitments.  

Exchanges like CIX can help increase supply of multi-impact offsets like nature-based solutions to better support all the SDGs.  

 

Bringing more buyers to market

CIX’s plans also create an ambitious opportunity to enable and empower the MSME community, which accounts for 90% of businesses worldwide.  

Mobile data specialist TaroWorks, a Grameen Foundation company, offers an example of how this might be done.

TaroWorks worked with Proyecto Mirador, a Honduran clean cooking enterprise, to digitize data collection for hundreds of thousands of cookstoves. This enables Proyecto Mirador to fund its operations by selling carbon offsets.  

“Digitizing its data collection, record-keeping and operations helped Proyecto Mirador scale by a factor of 10,” Brent Chism, TaroWorks CEO, tells me.

“However, many small enterprises must address other aspects besides technology when digitizing their last-mile operations.”

In Asia meanwhile, People Centered Internet, who strive to make the internet a positive force, is championing digital public goods, such as data resources, to both support fintech firms working with SMEs, and to help bridge this gap. 

People Centered Internet proposes more equitable access to data for financial decision making, to allow lenders to better access and monitor risk, while providing end-SME customers with critical financial literacy and business support.  

This delivers a positive impact across an array of SDGs, going beyond carbon transition and into SME digitization and improved financial and business literacy.

SMEs that can create carbon assets and access revenue are also more likely to undertake their own transition journeys. 

Asia has seen successful applications of this through loyalty schemes that reward environmentally friendly consumer behavior, such as Alipay Ant Forest in China and GForest in the Philippines. 

These ventures nudge end-users towards low-carbon lifestyles, while providers commit to reforestation and conservation in return.

These schemes also support financial inclusion. Alipay Ant Forest created around 400,000 job opportunities in its first three years of operations. 

The initiative aims to increase the digital sophistication of the farmers planting the trees as well as providing them with extra income, by co-developing products and increasing connectivity to Alibaba’s ecommerce platform.

 

Trust must be earned

A critical gap remains, however – that of trust.  

Both CIX and TSVCM see the integrity of carbon-offset products as key. Any project trading certified assets needs robust governance over how these assets are created and maintained.  

CIX aims to address this by standardizing contracts and drawing on technology-led verification. This is no mean feat.  

“Verification methods drawing on IOT principles and satellite imagery have the twin benefits of reducing costs whilst enhancing accuracy of data,” shares Marion Verles, CEO of SustainCert, the certification body for Gold Standard for Global Goals. 

“There are, however, a number of indicators that can’t easily be verified by technology, such as stakeholder engagement or tree species for example,” she adds. “For those, on-site verification will continue to be necessary.”

CIX has the potential to scale supply to meet demand, and ensure product quality. That can improve the allocation of resources to projects addressing multiple sustainable development goals.  

CIX is also attempting to manage a key behavioural challenge, where access to offsets may disincentivize long-term sustainable practices, by limiting access to companies that have evidenced robust transition plans.  

As CIX builds its footprint, it will prove or disprove the concept that TSVCM is pursuing. 

With four months to COP26, CIX needs to build a strong coalition of projects and partners quickly to deliver results.  

No doubt the Tech For Impact community will have much to offer. Interested parties can reach out to Climate Impact X to share projects and find out how to participate.

 

GO DEEPER

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Tamara Singh

Founder, WhoWhatWhere | Advisor, OMFIF

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