Digitally Transforming Carbon Markets to Restore Trust, Drive Investment and Grow GDP

Carbon markets are essential for achieving climate goals by incentivising emission reductions. However, ensuring the credibility and transparency of transactions is crucial for their success. The fragmented nature of existing voluntary carbon markets and the lack of standardised approaches pose significant challenges. This not only hinders effective clearing and settlement, but also acts as a constraint to prevent capital being deployed where it is really needed. According to the World Economic Forum, there is a $4-5 trillion dollar climate financing gap hindering a climate-resilient future, yet financial capacity building is also being hindered by fragmented, siloed and analogue approaches.

There are three major problems in the voluntary carbon credits market (all of them related) which need to be solved:

1. Fragmentation: the key players all operate in silos. Many competing registries, brokers and exchanges have incompatible protocols and standards, opaque processes, and wide price differentials. There is no common market infrastructure to cohesively coordinate all players as well as carbon related services and digital payments. Solutions are desperately required to organise the market by acting as the ‘connective tissue.’ Such a platform driven approach needs interoperability across multiple application programme interfaces (APIs) and blockchains to ensure transparency, efficiency, and trust in carbon markets.

2. Integrity: siloed processes lack uniformity and trust. Many registries are paper-based and inefficient, with in some cases questionable project measurement and verification processes, and no peer-to-peer interface with other participants. This results in double counting, fraudulent credits and greenwashing. 

Automated AI enabled digital measurement & reporting (dMRV)  and validation prevents fraud and green washing by proving provenance of supplied carbon credits, while immutable recording on blockchain ensures no double counting. Seamless and transparent peer-to-peer communication between key participants can be enabled by the right sort of distributed platform technology to build integrity and trust in the system. Data generated from source by digital measurement, its reporting for analytics, with independent verification are crucial components to foster integrity. Regenerative AI can optimise this process and create more certainty.

3. Supply: rapidly growing demand is going unmet due to the lack of High Integrity Carbon Credits (HICCs) as issues #1 and #2 above are hindering the right supply to meet demand. This is a systemic market problem requiring an urgent solution to build integrity in the system.

As trust grows in the market via reliable and trusted digital measurement, verification, transacting and effective settlement approaches, so does the number of viable projects, which in turn increases the level of investment, which has the resultant effect to increase supply, therefore creating a virtuous circle, especially if the lifecycle of a carbon credit ‘from source to transaction’ is digitally transparent.

Investment into community and large-scale projects is vital, but the climate technology and climate financial technology companies enabling innovation also require significant support. We need to take a combined approach to inspire trust, involving not only public and private markets but also the technology infrastructure and non-financial tools at our disposal. By fostering digitally interconnected collaboration and commitment across the climate value chain, we can create a positive climate impact that resonates across borders, ensuring a harmonious balance between environmental responsibility, community well-being, corporate sustainability, and global progress towards a circular economy with appropriate investment returns. This must be underpinned by trusted multi-blockchain based digital carbon market infrastructure to prove provenance, with its connectivity into mainstream systems such as banking using APIs.

A distributed hub and spoke approach is instrumental in accelerating progress towards Net Zero. This addresses the fact that projects may be in the ‘Global South’ such as Kenya and the means to finance them may be in a financial centre such as Singapore, whilst the demand for the carbon credits which result, e.g. from a renewable energy project may be in the Middle East due to fossil fuel production needing to be carbon offset as well as the need to go green as part of energy transition plans. Carbon market and associated carbon registry silos along with related services on the supply and demand side need to interconnect to create a positive multiplier effect by being a ‘network of networks’.

By removing inefficiencies and enhancing transparency, this type of AI-enabled and blockchain-driven platform driven approach enables more effective carbon market participation. Participants benefit from increased trust, streamlined workflows, and transparent pricing leaving room for good intermediaries, but eradicating ‘bad middlemen’ who make a big margin at the expense of community driven project developers, without adding any real value. This under-pricing is making projects which would otherwise be financially viable uneconomic, which a transparent approach addresses. If projects are more viable, more projects go ahead, more jobs are created and incomes go up, leading to an increase in national GDP across the developing nations that embrace this model.

Central to this is the increasing need which needs to be met for digital climate and sustainability market infrastructure as it is as essential as the physical infrastructure that many emerging governments try to focus on. Through seamless digital processes, it enables the issuance, recording, verification, and monitoring of carbon credits. Transparency extends to provenanced supply into registries, pricing, trading, exchange matching, and real-time settlement. Moreover, it facilitates the transition to a circular economy by aggregating global carbon markets and promoting sustainability in not just these but also other related assets such as water credits. This can help address the growing needs for water, energy and food security across the globe. Transformative digital solutions leveraging AI and blockchain to foster cross border interoperability can lay the technology enabled foundations which make this a reality.

We need to collectively come together to synergise the four Cs: Climate, Communities, Companies and Countries enabled by the other four Cs: Code of conduct (policy and regulatory framework), Computing (to technologically enable), Coaching (to educate, learn and develop) and Capital (for investment).

It is time to do the right thing!