Avoiding Corporate Greenwashing: Why Standardization in the Voluntary Carbon Market Is a Must

Key Insights:

• Private sector climate strategies are developing at a fast pace as more and more companies are committing to net-zero business models
• The VCM is in its infancy and yet to overcome some serious shortcomings
• goodcarbon counteracts these issues through blockchain technology, a strict selection criterion, and robust verification process.

“For finance to flow to the right projects, a well-functioning voluntary carbon market with high integrity quality standards and robust governance is needed”

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM, 2021)

In recent years, the number of corporate climate commitments has grown continuously. As of September 2022, 3745 companies representing $38 trillion of the global economy – across 70 countries and 15 industries – have committed to emission reduction targets approved by the Science Based Targets initiative (SBTi) (SBTi, 2022). Companies are now focused on improving their ESG scores by committing to climate targets. This surge in ESG promises opens complex challenges for the Voluntary Carbon Market (VCM) which is still in its infancy and therefore has several shortcomings. For instance, opportunities for greenwashing, usage of low-quality carbon credits, and errors in measurements.

The link between carbon offsetting and greenwashing is becoming particularly visible as the media uncovers new cases of misleading corporate commitments. Such incidents tend to feature scenarios where companies fail to establish credible emission reduction programs (Christian, 2018), but claim carbon neutrality often through questionable investments in carbon projects with no additionality (Song & Temple, 2021) or overestimated amounts of carbon credits.

To make a significant impact in the market and provide necessary change for the environment, the VCM requires enhanced standardization, increased credibility, and transparency. Private sector platforms such as goodcarbon play an essential role in addressing these issues and elevating the integrity of the market. By adopting extensive verification processes and prioritizing transparency through blockchain technology collectively we can spearhead a transition to a low-carbon economy.

Current non-compliance market efforts are unable to reach their full potential due to inconsistencies in credit quality and pricing, emission measurements, and reporting. If we are to successfully elevate the benefits of carbon trading for the future of our planet, the following challenges should be addressed:

• • Varying project quality across registries
  •  Lack of credible private sector involvement
  • Inadequate standardization and transparency in the VCM

In this article, we discuss the main drivers behind these challenges and how we tackle them through blockchain technology, a strict selection criterion, and robust verification process.

The Differences in Project Quality

Due to decades of parallel uncoordinated efforts by various public and private actors, the carbon market landscape remains highly fragmented and lacks quality control and transparency, which undermines its trust and credibility. Specifically, it means that there is limited capacity to effectively trace carbon credits and quality, plus there remains the risk of double-counting and leakage.

Existing standards in the VCM do not rate or compare the projects regarding impact or risk dimensions. This makes it hard to select the projects with high impact and high integrity. These standards set the “baseline”/ minimum quality label, but there is a significant variety of project quality within these registries. It is not necessarily the purpose of the standards to judge or rate projects on impact (with the exception of some specific standards that give some indication on that, e.g., Verra’s biodiversity standard CCB, which gives bronze, silver and gold ratings to projects in their registry).

There are emerging rating agencies which aim to rate NbS projects on impact and integrity, however there is no standard method among them and they only rate projects that have already sold at least a first batch of credits. It therefore remains difficult for companies and investors looking to invest and/or purchase credits to understand the quality due to a lack of data, lack of knowledge, and no direct access to projects when purchasing through brokers. This poses a risk for companies looking to make a real impact and wishing to disclose their offsetting actions as claims can come under scrutiny due to investment in low quality projects.

To counteract the lack of clarity around project quality and integrity, goodcarbon offers the following in-depth approach:

goodcarbon has developed an assessment framework that enables the comparison of projects across three dimensions: impact, risk (including permanence), and integrity. The impact assessment ensures that all participating projects on the platform have a powerful and positive impact for our planet. This framework evaluates five internally developed impact dimensions (see below). By utilizing this framework alongside existing external verification standards, such as the Verified Carbon Standard (VCS), we choose project partners that can deliver the most trustworthy and genuine impact.

Our impact dimensions are:

1. 1. The Climate Change Mitigation dimension requires projects to implement efficient carbon sequestration, avoidance, or reduction
   2. The Biodiversity Enhancement dimension demands protection or restoration of the ecosystem and an increase in biodiversity intactness
   3. The Benefits for Local Communities dimension implies their involvement in project design and implementation and ensures important aspects such as financial benefits, social and economic development, food and water security, and human health.
   4. The Climate Change Adaptation dimension verifies that NbS projects provide support for building climate resilience in communities and ecosystems. Depending on the project type and location, possible co-benefits include protection against sea level rise, fire, drought, and floods, erosion mitigation, the introduction of species resilient to climate change, and capacity building in local communities.
   5. Pollution Reduction and Better Resource Management dimension evaluates aspects such as science-aligned waste reduction rates, improvement of water and soil quality, pollution avoidance, and water saving approaches.

The risk dimension evaluates how likely it is that the impacts are reached and that they will last. goodcarbon carefully examines national and local landscapes, and considers natural disaster and political instability, risks, crimes, and probability of practice discontinuity. Furthermore, performance risks are reviewed to examine overall project experience, infrastructure, financial viability, and potential scenarios of overestimation, double-counting, and unaccounted leakage. To successfully meet the platform requirements, projects are expected to showcase well-established risk mitigation strategies for each corresponding category.

 Finally, the integrity of each project is reviewed. This dimension ensures that the project does not cause any great damage, for example leakage, and is eligible for offsetting purposes. goodcarbon ensures there is no harm to existing ecosystems or local communities or human rights. The additionality of the project is reviewed as well as the transparency of the project’s outcomes.

If projects achieve a certain score in all the assessments above, then they are considered a fit for the goodcarbon platform and will receive an official goodcarbon seal of approval, which is currently in development. Once launched, this seal can then be utilized by companies, who purchase carbon credits and invest in the project, to showcase the integrity of project investments to their customers and stakeholders.

Lack of Credible Private Sector Involvement

“Our mission is to ensure that VCMs lead to increased ambition on climate change – and that the use of carbon credits never displaces or delays science-based action on decarbonization”, (VCMI, n.d.)

It is now an accepted fact that we cannot reach the targets set by the Paris Agreement if our carbon emissions are not reduced at an accelerated rate. Despite being placed at a forefront of the global climate mitigation responsibility, the private sector is still not contributing enough to address this problem adequately. The VCM cannot be a tool to help companies refrain from reducing their emissions. Yet the VCM is commonly critiqued for enabling greenwashing in climate action, as companies seek to create an overly positive corporate image.

The market lacks a universal standard for claiming climate/carbon neutrality or net-zero. This makes it difficult to navigate or measure whether such claims are legitimate and validated by science backed initiatives. This is exacerbated by a lack of transparency on reporting of offsetting projects from companies. Many companies do not publicly report the projects that they have offset with, and when they do it is often the “lighthouse” projects that are nice to market which are reported. In the US, the SEC has proposed a regulation that would require corporations to report how many offsets they use, what type, and the price they pay, and according to the  EU taxonomy more companies will have to publish sustainability reports. However, no specific guidelines have been developed yet. So far, the market lacks clear monitoring, reporting and verification standards.

At goodcarbon we aim to promote high-impact and scientifically aligned environmental action, through our strict onboarding criteria and process for our potential corporate customers. There is currently no ideal model for increasing the integrity of private sector involvement. However, we are implementing our onboarding process to ensure that our business practices create a positive impact on the market rather than contributing to existing misleading practices and making the problem worse. The aim is that as companies like us and initiatives such as the SBTi approach these issues, we can work together to create credible models that can be applied to the market.

Our current criteria are:

• • Firstly, industry sectors that constitute the major sources of high emissions (Energy & Utilities with Fossil Fuel Generation, Mining, and Oil & Gas) are directly excluded from using the platform. This is to stimulate such companies in these sectors to reduce emissions before investing in carbon offsetting.
  • In addition to thorough ESG considerations, we only work with companies that have set credible reduction targets or have committed to do so (e.g., through SBTi commitment). This includes short-term targets and clear pathways to reduce scope 1, 2, and 3 emissions. The final goal of such a net zero target is that only 5-10% of the corporate’s emissions are compensated through offsetting. On the way towards this goal, companies are encouraged to offset beyond their emissions to support the global effort of climate change mitigation, while still sticking to their ambitious emission reduction plans
  • While we don’t demand companies provide full reports on all credit purchases, we support transparency reporting efforts, and encourage disclosure of the purpose credits will serve when purchased from the goodcarbon platform.

Inadequate Standardization and Transparency in the VCM

The Voluntary Market is still a relatively new entity. The first trading only began in the 1990s and it has only started to develop to a greater level since 2017. For instance, in 2020 it was estimated that buyers retired carbon credits for 95 million tons of carbon-dioxide equivalent, twice as much in 2017 (McKinsey & Co., 2022)

While this continued development is welcomed, it comes as no surprise that like any developing market there are several inadequacies and inconsistencies. Chief among these is a lack of standardization and transparency.

For example, there is currently no regulation in existence for carbon credit brokers, traders, and retailers etc. Anyone can buy and sell carbon credits with no requirements for KYC processes. Unsurprisingly, this leads to a distinct lack of transparency in VCM trading. This is further complicated and increased by new crypto players entering the market and selling carbon credits on crypto exchanges such as Coinbase. Crypto exchanges are, by definition, anonymous, which also limits transparency in the market for the use of carbon credits.

Furthermore, there is no current standard for carbon credit purchase contracts, making them difficult to trade and hence limiting liquidity and therefore limiting growth. New solutions to increase liquidity are emerging, which involve the pooling of credits (i.e., commoditization). However, this leads to credits of questionable quality being “mixed” together in pools or packages, so that project quality is no longer visible for buyers. This again affects transparency and knowledge of what is really being purchased and how positive an impact it really is having.

Finally, there is also the risk of double counting through the creation of new financial instruments. While such instruments can increase liquidity, the ‘real’ carbon credit on the registry and the financial instrument based off the credit can result in double counting.

Despite these issues, there are ways of addressing each of them.

This is the approach goodcarbon takes to tackling the inadequate standardization and transparency issues in the VCM:

• • We tokenize carbon credits, but in a regulated and transparent environment that involves KYC processes. This leads to a higher security for the seller and buyer. Our platform is based on a public blockchain, making every trade fully transparent. The token system allows goodcarbon to facilitate a convenient and compliant exchange of financial assets that are subject to German financial regulations, thereby complying with Anti-Money Laundering and Anti-Corruption mechanisms.
  • We have developed an investment and trading platform for carbon credits with a web3 blockchain based infrastructure but in a web2 environment. We enable any company or investor to invest in and trade carbon credits on our platform without requiring their own crypto wallet. We take care of everything for you.
  • By tokenizing carbon credits, we standardize the terms and conditions for all purchases taking place on our platform. Tokenization increases the tradability of credits and liquidity. Through our public blockchain approach every transaction and retirement of credits traded on our platform can be traced decreasing the risk of double counting. Any token sold and purchased on our platform contains the metadata of the underlying project and carbon credit (in case it’s already verified). Even credits pools will have full transparency on the type of credits that are in the pool. Additionally, our token infrastructure is based on a “live” tokenization of carbon credits. The underlying carbon credits in the registry are securely stored in a dedicated account.
  • The utilization of blockchain for future carbon credits also allows us to store monitoring data increasing the transparency between the date the forward carbon credit is sold and the carbon credit is verified.
  • We support the development of a set of guidelines for blockchain based business models in the VCM by registries such as Verra to increase the transparency on tokenized carbon credit trades.

Today’s level of global climate change action remains insufficient to match the ambitions to tackle the environmental catastrophe we are facing. The Voluntary Carbon Market has many opportunities to address this disparity and deliver a powerful impact that encompasses not just climate change, but also a real biodiversity and social impact. However, this is only possible if approached wisely.

 To capture this potential, the VCM requires increased transparency and standardization to instil trust in the market and prevent greenwashing practices. Following the mission to shift the focus of global capital to restore and protect our precious ecosystems, goodcarbon offers a blockchain-powered platform that safeguards and increases VCM integrity, transparency, and aligns with scientific requirements to provide fully compliant and secure means of changing the world that projects, companies, investors, and everyone involved can be proud of.

Together, we can unlock the critical flow of capital to advance high-impact projects that can support a low-carbon economy and save the future of our precious planet for generations to come.