How We Are Fixing the Carbon Credit Market

Yarik Popov

Yarik is a Software Development intern at Hygge Energy. He is an undergraduate student at the University of Waterloo where he is currently studying Computer Science, with a specialization in Artificial Intelligence and Software Engineering. Yarik has a passion for technology and its potential to dramatically improve the environment by effectively harnessing the power of AI. He is excited to be a part of Team Hygge as he works towards digitalizing carbon credit calculations.

What is a Carbon Credit Market?

One carbon credit (CC) is equal to one tonne of CO₂ emissions. CCs are issued to projects that remove, reduce or avoid emissions. These credits can then be sold to cover the costs of the project. Two types of CC markets exist: compulsory and voluntary. Compulsory markets are regulated by governments or international organizations such as the United Nations Framework Convention on Climate Change (UNFCCC). Voluntary markets are run by independent organizations such as Verra or the Gold Carbon Standard. For credits calculated based on reduced or avoided emissions, the CC quantity is the baseline (business-as-usual) emissions minus the project emissions.

What About the Carbon Credit Market Needs Fixing?

The two largest areas of improvement for the carbon credit market are that CCs are calculated based on vague estimates, and there exists a serious lack of transparency.

Vague estimates for reductions and baseline estimates can lead to credits being issued in inflated quantity or for projects that shouldn’t have deserved them. As these projects didn’t lead to any emissions reduction such as in the case of Verra rainforest projects that account for 94% credits from this sector. The emissions reductions were overstated by about 400% which includes several Madagascar projects that did well. If you were to remove these Madagascar projects, the CC inflation rate would be about 950%. Verra strongly disputes these claims (Greenfield, 2023).

CCs are calculated based on vague estimates, and there exists a serious lack of transparency. […] the CC inflation rate [can] be about 950%.

The figure shown below is one of Verra’s rainforest projects and its reference (baseline) area. Very small amounts of deforestation occurred in the project area and the surrounding forests. On the other hand, the reference area includes a city, roads and rivers where widespread deforestation can be seen (Greenfield, 2023). The reference area shouldn’t have been used for the project as these two regions are quite distinct.

Guardian graphic. Source: High-Resolution Global Maps of 21ˢᵗ-Century Forest Cover Change by MC Hansen, PV Potapov, R Moore, M Hancher, SA Turubanova, A Tyukavina, D Thau, SV Stehman, SJ Goetz, TR Loveland, A Kommareddy, A Egorov, L Chini, CO Justice, and JRG Townshend. 2013. Referenced area sourced from project documents

The other problem plaguing the CC market is a lack of transparency in the process such as during the ‘Track 1’ period of the Joint Implementation (JI), an initiative of the UNFCCC aimed at reducing emissions. According to Kollmuss, Schneider and Zhezherin from the Stockholm Environment Institute, the JI could have increased emissions by 600 million tonnes during its ‘Track 1’ period due to the discovery that approx. 80% of projects had poor or dubious environmental standards with some experts questioning the existence of various projects. The system lacked oversight from the UNFCCC and relied solely on verification by member states who, due to their vested interests, had a substantial incentive for non-compliance (2015).

[The UNFCCC’s Joint Implementation initiative] could have increased emissions by 600 million tonnes during its ‘Track 1’ period. 

The Solution.

On a high level, the solution for these deficiencies in the carbon credit market is two-fold. The first aspect is increasing the level of transparency and accountability in the calculation and issuance processes. The second is the necessity to use strong baseline and reduction emissions standards that are internationally recognized.

A robust system must be used to implement these solutions such as the following. The renewable electricity production to consumption should be tracked using blockchain. Each block will house the CC calculation and monitoring data collected in real-time from authorized on-site devices. The blocks in the blockchain are immutable, which means they are unchangeable, this allows for transparency and accountability. Another integral part of the system is that the blockchain is made publicly available. The baseline and reduction calculation methods used in this system must be internationally recognized.