How data can enable high-quality carbon credits for a sustainable Singapore

A WAVE of green is sweeping through the economy as everywhere businesses of all sizes – from neighbourhood mom-and-pop shops to large corporates like BlackRock – are recognising the significance of sustainability as a core consideration for long-term economic success.

In Singapore, an increasing number of them have also begun implementing measures to make their business operations more sustainable.

Since the global phenomenon that some have termed the “green awakening”, the buzzword on the lips of politicians, business leaders, and climate experts seems to be “decarbonisation” – the reduction of carbon dioxide (CO2) output into the atmosphere.

Typically, methods to carry this out are known as decarbonisation “levers”, some of which include improving efficiencies in energy usage as well as replacing fossil fuels with renewable sources of energy.

Limitations of existing measures

In spite of regulations and companies’ best efforts at decarbonisation, carbon emissions remain inevitable for some businesses, especially those in carbon-intensive industries such as the transportation and logistics sector.

Known as residual emissions, they are a result of limitations in current technology and prohibitive costs that restrict the ability of companies to fully prevent greenhouse gasses (GHGs) from being produced.

If GHGs are still being released into the atmosphere despite our best efforts, the inevitable question becomes whether the quest for carbon neutrality and net zero is merely a pipe dream?

Evidently, that is not the case.

How, then, can we get to net zero? Perhaps non-profit organisation Carbonfund.org’s tagline puts it best: “Reduce what you can, offset what you can’t”.

Stepping stones to net zero

Carbon credits offer businesses the opportunity to offset their carbon emissions while they continue taking steps towards net-zero.

A carbon credit is a tradable instrument that gives an entity the right to emit one metric tonne of carbon dioxide or GHG equivalent, according to PwC.

Currently, there exists both the compliance carbon market, where companies purchase carbon credits to offset their residual emissions in order to meet their mandated GHG emission reduction goals, as well as the voluntary market, where companies purchase them on their own accord to reduce their carbon footprint and communicate their corporate social responsibility.

Companies can purchase these credits from carbon offset projects, which range from reforestation efforts that sequester carbon from the atmosphere and store them in trees, to initiatives that help communities transition to renewable energy sources such as solar or wind power.

Carbon credits that fulfill the five criteria of being real and measurable, permanent, additional, independently verified, and unique and traceable are deemed “quality”.

Projects are assessed by independent third-party verifiers, who base their assessment on standards set by reputable organisations such as Verra and Gold Standard.

Additionally, carbon credits offer businesses in the compliance market for carbon an additional revenue stream.

When these companies emit less carbon than their emissions allowance, they are able to sell these excess credits to other firms that may still be producing above their emissions allowance.

As a result, companies are incentivised to reduce their carbon emissions for greater profit, seemingly a win for both environment and economy.

The issue with carbon credits

Yet, while carbon credits are deemed by some as an indispensable tool in the transition to a net-zero economy, others see them as outright greenwashing – a mere PR stunt businesses pull to quell investors’ call for greater climate action and social responsibility.

A few core issues currently plague the market for carbon credits.

Firstly, there is a lack of digital infrastructure to facilitate the monitoring, reporting, and verification (MRV) process for carbon credit projects, leading to a lack of transparency and doubt over the real impact of carbon trading.

For instance, it is estimated that about 40 per cent of carbon credits sold on the marketplace are over five years old, casting doubt over aspects of their quality and permanence.

Because of the lack of data, investors and other stakeholders are unable to verify certain transactions by businesses, such as whether carbon credits purchased have been duly retired to meet emissions targets, giving rise to issues such as double-counting and greenwashing.

Currently, there is also a long lead time for projects to be assessed, verified, and then approved for the generation of carbon credits.

There is a great opportunity for technology to play a role in streamlining the process of data collection of these projects, easing the MRV process – something that the industry has not tapped on enough yet.

Data fragmentation is another key issue plaguing the carbon market, as there are just too many registries.

Even when companies disclose their climate-related data, they are often stored in a plethora of different registries and sometimes exclusively in hard-copy forms.

Such data fragmentation may lead to cases of double counting and potentially encourage greenwashing, leaving stakeholders, including potential buyers or investors, uninformed about the attributes of the different carbon credits available to them.

All of this ultimately makes it harder for them to make sound investment decisions.

Beneath the surface of all these problems, however, is the issue of high-quality, forward-looking data that is sorely needed yet missing from the market for carbon credits.

What good looks like

In order for countries and businesses to truly harness the full potential of carbon markets for climate change, greater transparency and traceability in the market is required.

One solution that has been developed is the use of blockchain technology to allow for all carbon transaction data to be displayed on a singular registry.

This unlocks various possibilities for different personas along the carbon credit value chain.

Improvements in digital infrastructure for data disclosure would afford greater efficiencies for carbon offset project developers and corporates looking to commodify their carbon credits.

The adoption of advanced monitoring systems such as sensors would not only provide a more robust data acquisition methodology and measure emissions reductions more accurately, but also afford project developers and verifiers greater efficiency as opposed to current methods where data is still collected manually.

The emissions reduction data collected through these means can then be aggregated and streamlined onto a single platform, providing buyers with greater data accessibility.

Better systems for data management benefit corporates by enabling better monitoring of their own emissions data, creating opportunities for improvements in their decarbonisation efforts as well as the potential to generate a secondary source of income through the sale of surplus carbon credits.

While indirect, the issues with data and current inefficiencies in carbon markets present green service providers opportunities, such as that of the World Bank’s Climate Warehouse programme targeted at creating a global common registry.

Such initiatives would prevent double-counting and enhance the transparency of cash flows and emissions disclosures.

Ultimately, what is achieved is greater trust and confidence in carbon markets, encouraging more corporates to participate, leading to greater investments in decarbonisation projects and lower overall net GHGs produced.

A common, standardised digital registry for emissions data would benefit investors the most by overcoming the issues of data inaccessibility and unavailability.

Stakeholders such as asset managers who are looking to invest in carbon credit projects require ongoing, forward-looking, and aggregated data covering various sectors and geographies on which to base their investment decisions.

Yet, current emissions data are either released periodically or only available to privileged institutions.

The provision of such data on a single registry would enhance these asset managers’ ability to make more informed carbon investment decisions, allowing everyone to agree on a definition of “high-quality”.

We would then see more companies and investors able to access more carbon credits to offset their emissions, leading to lower net overall emissions.

Towards an ideal carbon market

The ideal carbon market we envision in the near future is one where not just corporations and big institutions, but also individuals and end consumers, are able to access and afford carbon credits based on their needs.

This lowered entry level to the carbon markets can be made possible at scale with blockchain technology.

On top of allowing traceability and ongoing monitoring, the tokenisation/fractionalisation of carbon credits means that a portion of one (rather than a whole) can be bought at an exact price.

This allows for affordability while at the same time ensuring that complete carbon credits are still auditable and accounted for without the risk of double counting.

Finally, a digital blockchain ledger is also able to provide individuals with transactional transparency by immutably storing every single transaction of fractionalised carbon credits line by line – something existing solutions are missing.

At the same time, this approach offers interoperability in connecting with various industry-recognised global carbon credit registries (ie Verra and Gold Standard) in order to achieve an end-to-end transparent link from origination to retirement.

When fractionalised carbon credits become widely available and adopted – a scenario that is currently more aspirational than a reality – access to holistic data on a common, standardised registry will be ever more important in leveling the playing field for both institutional and individual investment decisions.

As the global climate agenda continues to speed up, what is needed to solve the issues at hand is actually quite simple: better data for a better planet.

The writer is managing director of STACS