Can the carbon credit markets institutionalise and tokenise at the same time?

Key Insights From This Webinar

The value of the voluntary carbon credit markets is projected to grow to as much as US$250 billion by 2050, but the pace of growth is currently constrained by structural issues.
The structural issues include greenwashing, unscrupulous behaviour by issuers and investors and shortcomings in the certification and validation of projects and post-trade processing.
New entrants to the voluntary carbon credit markets are addressing the structural problems by improving project and data quality and enhancing trade and post-trade efficiency.
The carbon credits market that is now emerging is less driven by the supply-side and more focused on auditable, non-nature, scientific projects that give the demand side confidence.
One effect of carbon credit markets is to encourage innovators to invest in carbon-reducing projects and technologies, though the carbon price is presently too low to be fully effective.
Another effect of the voluntary carbon credits markets is to channel capital into projects that protect and preserve nature in developing economies and help indigenous populations.
The standards required to facilitate inter-operability between the trading platforms that are developing in the voluntary carbon credits markets will emerge spontaneously.
Local political pressures, such as insisting funds are invested locally, will make it harder to develop a global marketplace in which standardised carbon credit contracts are traded.
In terms of regulation in the United States, carbon credits are treated as a commodity and will be regulated as such, though direct investment and funds that invest will be securities.
The voluntary carbon credit markets are a viable use-case for tokenisation technologies in terms of both project transparency and transaction processing.
Tokenised carbon credits, which incorporate data, are already encouraging issuers and investors to perform to higher standards in terms of project security and longevity.
Large corporations are starting to issue on to token platforms trustworthy carbon assets they have created as well as purchase carbon credits to offset their own carbon emissions.
The value of issuing carbon credits in tokenised form lies primarily in provenance, transparency, transferability and elimination of the risk of retired credits being sold again.
Tokenisation can improve tradability but cannot transform the quality or the transparency of underlying projects or add liquidity to the voluntary carbon credit markets unaided.
Artificial intelligence (AI) and machine learning (ML) have potential to improve the quality of information about carbon projects, particularly nature-based ones where existing data is poor.
Improved data generated by AI and ML is already improving the validation, authentication and certification of science-based carbon offset projects.
AI and ML have the potential to reduce the degree of heterogeneity in the market in terms of issuers, intermediaries and projects, and so help to set a single global price for carbon.
The main obstacles to a single global price for carbon based on international trading remain the lack of sufficient transparency, trust and integrity in the carbon market.
The ideal future for the voluntary carbon credit markets is to offset the emissions that cannot be solved by emitters themselves changing inputs and altering or re-purposing outputs.
Carbon offset project developers are becoming more selective about buyers of credits because they want to reward buyers that are trying to reduce emissions.
Voluntary carbon credits are regulated as commodities already, and in terms of fraud prevention and market manipulation, so lack of regulation is not an obstacle to growth.
The voluntary carbon credit markets are the creation of environmental enthusiasts, but they are now attracting professional experts which will attract institutional investors.

The voluntary carbon credit markets are seen as a market-based solution to climate change whose value lies in attracting investment into carbon-reducing technologies and projects. Early efforts to develop the market have led to allegations of greenwashing, inadequate monitoring of projects, re-sales of retired credits – unlike other financial assets, carbon credits are ultimately consumed – and rickety post-trade processes. However, the markets are now attracting institutional money and know-how which are beginning to transform the issuance, trading and clearing infrastructure, not least through the application of blockchain and tokenisation technologies, and to enhance transparency into carbon offset projects, partly by applying artificial intelligence. Future of Finance Co-founder Dominic Hobson chaired a discussion of the issues with panellists Jim Row of Capturiant, Deanna Reitman of DLA Piper, Sean Mullins of Northern Trust and Gbemi Oluleye of Imperial College, London.

A full recording of the webinar is available on this page. A transcript of the webinar, which follows the questions below, is also available if you click on “Read the Transcript.” If you click on any question you will be taken to the exact point in the recording where the question is asked and answered.