Considering markets for other ‘natural capital offsets’ (for the lack of a better term), there are several lessons that can be drawn from the challenges / developments that continue to be seen in the voluntary carbon credit market:
- Lacking structure and transparency: There is no widely accepted structure for VCM or a centralized carbon credits market. Project developers can sell credits directly to buyers, sell credits through a broker or an exchange, or sell to a retailer who then resells the credits to a buyer. Given this OTC nature, asset & transaction information is limited.
- Excess demand: There are a large number of low-quality credits that are contributing to recent growth figures. There is currently a demand / supply imbalance for high-quality credits.
- Complexity of Contract Execution: Transactions are bespoke and negotiated bilaterally; as a result, the legal demands are high.
- Client onboarding: Registries are inefficient in onboarding buyers and sellers. Buyers and sellers also need to onboard each other, which is not scalable.
- Counterparty Risk: Currently transactions rely on the buyer and seller trusting each other to provide delivery of either carbon credits or funding.
- Demonstrating ownership: Credits are held across multiple registries and platforms making the reporting and accounting of VCM inventory complex
These challenges are significant and limit market growth, however initiatives are emerging that are improving price transparency, accessibility, and the matching of buyers and sellers to support market build out.
‘Carbonplace’ is one such example - it’s a new platform (that NatWest is involved with, alongside 6 other banks) that creates a global record of ownership for carbon credits in the VCM, and enables greater access, trust, and transparency. The platform caters to banks and has a wallet built on the blockchain, where the ownership of the credit tokenized, and not the credit itself. A defining feature is how it enables settlement and clearing – implying that banks transact with each other on behalf of their customers, thereby mitigating Anti-Money Laundering (AML) and Know Your Customer (KYC) risks.
Going ahead, ClimateImpactX (CIX) and Carbonplace will be collaborating, marking another important milestone as the VCM scales further. Carbonplace’s unique settlement technology and wallet service to store and trade credits will combine with CIX’s curated marketplace of voluntary carbon credits to give customers scaled access to the VCM.