Web3 for tackling VCM pain points Pt. 4: Lack of credit integrity 🧮

This is part 4 of a 4 part series exploring how web3 technology can address VCM pain points. You can find all previous posts on the Toucan blog and Medium.

📍 The pain point

Alongside issues of transparency in the VCM, there’s an associated lack of quality assurance around carbon credits themselves. This has to be addressed if this growing market is going to make a credible contribution to climate action.

A carbon credit should mitigate one tonne of carbon from the atmosphere. To maintain integrity it should have the following characteristics:

• Additionality
  A tonne of CO2 is considered additional if the avoidance or removal would not have occurred without money from the sale of carbon credits. This is hugely important, as if a credit is non-additional it has no real impact, making any carbon reduction claims false.
  
  The methodologies and definitions around additionality are likely to change over time. For example large scale renewables projects have not been accepted by Verra since 2020, as the lowering cost of wind and solar technologies means that they no longer need carbon market revenues to be viable.
  
• Permanence
  Carbon avoided or removed should stay out of the atmosphere for 100,000s of years into the future. This means that credits linked to a forestry project may not meet this idea of permanence, as some of the trees may burn down or be deforested after just 10 years. To account for this kind of potential loss, projects are expected to produce a certain amount of ‘buffer’ credits beyond those sold .
  
• Accuracy of impact
  Project developers may overestimate potential CO2 reduction by miscalculating baseline emissions or failing to account for emissions leakage. This occurs when a forest preservation project for example, may trigger the deforestation of a different area.

There are also other characteristics that can give a more subjective measure of the quality of credits:

• CO2 avoidance vs removal
  At present, the majority of carbon credits are based on avoiding CO2 entering the atmosphere as opposed to directly removing it. As more innovative removal solutions emerge, some organizations are now willing to pay $100’s and even $1000’s a tonne for removals-linked credits in light of their additional integrity. While there’s some debate around the value of removal over avoidance, there’s a clear need for both and an expected shift towards removals after 2030.
  
• Sustainability co-benefits
  There’s a growing interest in the co-benefits of carbon credit projects. Many organizations are interested in credits that not only offset their carbon footprint but show their commitment to environmental, social and governance (ESG) targets. A recent survey by the Forest Foundation found that 29% of respondents evaluated projects based on their co-benefits.

Issues of integrity
These types of credit characteristics are deceptively hard for projects to demonstrate, both in the initial design and in ongoing measurement, reporting and verification (MRV) across many projects.

At present, there is an oversupply in the market of what are now considered to be lower quality credits. This is due to many being many being of older vintages, which may be calculated using methodologies that are no longer being considered additional, have flaws in the way baselines were calculated or not including adequate amounts of ‘buffer’ credits.

Nearly 40% of carbon credits purchased by companies are more than five years old, with concerns that this might depress overall prices.

Conducting effective MRV is resource intensive and can create significant costs to the project developer. Monitoring requirements f are complex and inconsistent across project types which work to different standards and goals. Managing these requirements can drain much of the market value of the carbon credits produced.

Carbon credit projects may also bring about negative impacts on local communities, especially if they are not engaged during project design. There have been several high-profile cases associated with a lack of equity and inclusion and land rights, particularly in large scale forestry projects. MRV approaches should therefore also assess and transparently report these effects to maintain credit integrity.

This lack of standardised assurance around carbon credit quality can lead to negative publicity of offset projects and accusations of greenwashing, with large corporates needing to invest in independent checks on projects to ensure quality.

These issues contribute to a mistrust from the wider climate community, who view the VCM as a substitute for corporates in particular for reducing their emissions, with no clear, regulatory link to the achievement of the Paris Agreement and SDGs.

✨ How web3 can help

Web3 can support the scaling of high-integrity carbon credits by:

• Enabling digital MRV technologies
• Engaging and empowering communities

Bringing in  these solutions alongside the tokenization of carbon credits (see previous post) is key to making the market more transparent. Let’s look at some technologies and projects that are building on the advantages of tokenized, on-chain carbon credits and connecting these directly with people on the ground to strengthen and guarantee integrity.

📡 Enabling digital MRV
There’s been a recent surge in the use of digital MRV technologies like internet sensors, satellite tracking and remote sensing. These can more quickly and efficiently collect data on project features such as forest cover and air quality, bringing more rigor and conformity to reporting processes.

Web3 allows this data to be efficiently, accurately and transparently recorded on the blockchain and directly linked to tokenized carbon credits, strengthening credit integrity. These advances require accompanying standards and practices to ensure that they enhance robustness and do not undermine the integrity they seek to create.

Open Forest Protocol (OFP) aims to make forest data MRV more accessible, affordable, and transparent by bringing digital MRV providers onto the same blockchain powered platform as project developers and investors. Earthbanc also uses satellite data, AI and web3 technologies to bring high integrity, verified credits to end users.

Wood Tracking Protocol is using blockchain technology to bring transparency and traceability to the wood industry, helping to prevent illegal logging in South America. Data recorded on the blockchain by local community members is then verified using satellite data to ensure wood is being harvested from protected areas.

✊ Engaging and empowering communities
Web3 creates a decentralized way for local communities to more directly support and benefit from carbon market revenues.

OFP and the Regen Network create marketplaces for sustainable land management practices so that local project developers can connect directly with credit purchasers. This helps end users find projects that fit with their motivations and creates more direct connections with authentic projects without the need for middlemen.

Through web3, communities can receive direct payments for project implementation, which can be remotely monitored by digital MRV technologies and paid automatically. Organizations like Celo can allow people to receive payment from anywhere in the world without fees, using a mobile-based wallet.

In the future web3 could also assist with the upholding rights around property and community engagement standards- we’re just at the beginning!

We hope that you have found this series exploring how web3 can tackle VCM pain points useful ✨ You can find and share the full series on the Toucan blog and Medium.