Introduction to Carbon Markets

Carbon Market explained

The carbon market is a collection of actors and exchanges facilitating the purchase and sale of carbon credits. A carbon credit represents the reduction or removal of one unit (typically a metric tonne) of carbon dioxide or other greenhouse gas CO2 equivalent from the atmosphere.

Today there exists two distinct carbon markets.

• The compliance market developed as a result of the Kyoto Protocol in 1997. These markets are governed by a regulating entity and are legally binding and enforced. Entities are only allowed to emit so much and if they emit more than their allowance they must buy additional credits or face fines and punishments. An example of this market would be the European Union Emission Trading System (ETS).

• The voluntary market developed in the mid-to-late 2000's as organizations began to set emissions reductions targets on their own. This market is not legally binding; there is no punishment or fine for entities that do not hit their target. It is driven solely by organizations' own desire to reduce emissions.

Why a Carbon Market is needed

Carbon markets originated as a tool to hold corporations and countries accountable for their emissions. Cap-and-trade schemes were some of the first mechanisms in the market to develop. These schemes worked by allocating a certain amount of emissions to the entities in the market and then allowing the entities to trade the emission allowance between them. Say company A is allocated 1,000 metric tonnes per year, but they only admit 800 metric tonnes. Company A could sell this excess capacity to another company that has emitted more than their allowance.

As the market has evolved and the voluntary side has grown, it has emerged as an effective tool to direct investment into carbon reduction technologies. Without carbon markets, project developers would find it difficult to secure funding. However, with a well-established carbon market, investors feel confident supporting the development of projects because there is sufficient demand for the credits. This attracts more investors and more project developers and creates a flywheel accelerating the removal and reduction of carbon.

Current state

The voluntary carbon market (VCM) is growing rapidly, passing the $1 billion mark for the first time in 2021. Issuance of carbon credits nearly doubled to 0.35 billion tCO2e in 2021, while retirements, which are seen as a proxy for demand, were at 0.159 billion tCO2e in 2021, also doubling compared to 2020. Putting that into perspective, with global CO2 emissions at 36.7 billion tCO2e, the VCM covers barely 1% of global CO2 emissions.

This is just the start, and demand is expected to increase by a factor between 15 and 100 by 2050. The VCM is complex. It has a multitude of stakeholders, methodologies, and project types and operates outside of regulated or mandatory carbon markets. These factors lead to issues like lack of transparency and double-counting of credits.

Carbon Standards

Carbon standards govern the methodologies which define how climate impact is created and verified. Every carbon project needs to follow these methodologies to show it meets minimum quality criteria. Once a project’s impact has been verified, standards bodies issue carbon credits to the project. Carbon standards play a key role in ensuring carbon credit quality, and buyers and offsetters value the stamp of approval that standards bodies give to carbon credits.

Currently, Verra and Gold Standard are the two most trusted entities setting carbon standards. Smaller standards bodies issue less than a quarter of the voluntary market carbon credits each year.

Methodologies

To get carbon credits issued, each project needs to follow high-level requirements and processes, and use certain accounting methodologies that describe which data should be monitored. These methodologies vary depending on the carbon credit-generating activity. A project that is protecting forests from deforestation, for example, needs to collect different data than a wetland restoration project. The same applies to technology-based methodologies: projects that focus on capturing methane emitted from coal beds have different data requirements than ones that provide charging infrastructure for electric vehicles. Independent third parties — a list of auditors authorized by each standard — assess projects according to set rules and requirements.

Once it’s been verified, a project can be issued carbon credits by the standards body.

Carbon Registries

Standard bodies maintain their own carbon registries. These hold a list of all the projects that have been issued carbon credits. When a carbon credit is retired, this is shown in the registry.

What are carbon credit retirements?

After a project has proven that it removed or reduced GHG emissions, it receives carbon credits. These credits are issued in an active state.

Most projects don't have connections to companies that want to buy carbon credits to be more sustainable. So they often sell their active credits to intermediaries — brokers, resellers, and retailers. Active carbon credits can pass from one hand to another without changing their status. But when a buyer wants to use a credit to compensate (or offset) GHG emissions for carbon accounting purposes, their credits need to be retired. After being retired, the carbon credit has fulfilled its duty - no one else will be able to claim a carbon removal or reduction for this credit.

Important to know: you need to have a registry account to trade active carbon credits off-chain. These accounts can cost ~ $1000 a year.

The registries that standards bodies maintain typically run on centralized databases. These systems track carbon credit ownership and record which credits have been retired. Different registries have different functionalities available to users and project developers.

This is where the Buckmint Meta-Registry comes in! We’ve designed our carbon registry infrastructure to support carbon credits from a broad range of standards bodies. It serves the public as well as developers. Anyone can check the status of a specific carbon credit, regardless of which registry issued it. And our system offers strong tools for builders and developers, like APIs to both read data and update records (i.e. transfer and retire tokens). We’re actively working on building more developer tools.

Even more potential for carbon credits

Our infrastructure isn’t just about improving carbon registries. It also creates a brand-new use case for carbon credits! On open blockchains, they can plug into the world of decentralized finance, or DeFi, as well as into gaming experience, and the metaverse.

You could deposit carbon credits to earn interest, use them as green gaming assets, or to power virtual experiences.