Prevent Fraud — Bringing Distributed Ledgers to Carbon Markets

Given the rampant fraud of the carbon markets over the past 10 years, the carbon credit market needs a better way to conduct business — by fully implementing distributed ledger technologies throughout the environmental asset sector. The use of outdated record-keeping methods by carbon credit registries has stifled the growth and development of the carbon credit market and efforts to reduce carbon emissions. Fifteen percent of participants in the Clean Development Mechanism credit market have seen fraud take place, and double selling of credits has been a longstanding concern. These systems leave registries (kiosks) as the only parties able to accurately track and confirm credit ownership, limiting the ability of buyers and sellers to participate in the market. Moreover, the outdated processes used by incumbent registries expose purchasers of carbon credits to double-selling fraud, in which sellers of credits do not report transactions to registries in order to continue claiming ownership and re-selling the same credits repeatedly.

Furthermore, the lack of connection between incumbent carbon credit registries and an ecosystem of buyers and sellers makes it difficult for market participants to transact carbon credits quickly and easily. In turn, limiting the liquidity within the carbon credit market and creating difficulty for buyers and sellers to find each other. To address these problems, the use of distributed ledger technology (DLT) can help to create a more transparent, secure, and efficient carbon credit market.

Why DLT? DLT provides an immutable and tamper-proof record of credit ownership, making it much easier for buyers and sellers to track and confirm credit ownership. By implementing DLT, carbon credit registries can provide a single source of truth for the carbon credit market, improving the efficiency and transparency of the market. Moreover, DLT can also help to prevent the double-sale of carbon credits, as any sale would have to be transacted on the ledger. DLT thus reduces the risk of fraud and mismanagement in the carbon credit market, improving the credibility of the carbon credit system and reducing the risk of costly disputes for buyers of carbon credits.

Multilateral Buy-In — Importantly, major multilaterals have indicated their support for incorporating DLT and blockchain technology into carbon credit markets. For example, the World Bank-affiliated International Finance Corp has launched the Carbon Opportunities Fund, dedicating $10m to the purchase of carbon credits which will be tokenized and tradeable on the Chia blockchain. At the same time, the International Emissions Trading Association has recognized the need to leverage these technologies, and last year issued guidelines for their use in carbon credit markets.

Why Hedera? Capturiant has partnered with Hedera Hashgraph (Hedera) for tracking the issuance and ownership of carbon credits and other environmental assets. Hedera is the most-used enterprise-grade public network by total transaction count, recently surpassing 4 billion transactions. That size serves as a proof of technological capability, and also allows Capturiant seamless integration with other protocols in the ecosystem. Moreover, Hedera has a near-zero carbon footprint, low and predictable fees, and enables fast and scalable operations, all of which are critical to ensuring an efficient and successful market for environmental assets.

Capturiant is the first registry to bring DLT to carbon markets, doing away with outdated and non-secure methods currently in place to bring carbon markets into the twenty-first century. In partnership with Hedera, Capturiant will be able to seamlessly track credit ownership and transactions with a minimal carbon footprint. Moreover, Hedera’s existing ecosystem means that access to carbon markets will be broader than ever before. By investing in DLT and other digital technologies, Capturiant is creating a carbon credit market that is fit for purpose, and which will play an increasingly important role in reducing greenhouse gas emissions and combating climate change.

Capturiant is a global environmental asset validator, registry, and exchange committed to speed, quality, and regulatory standardization. The Capturiant team consists of financially regulated and highly experienced staff, fluent in securities, banking, custody, valuation, commodities, and digitalization. With this skillset, we are bringing standardized methodologies, rapid processing, and lower-cost validation to an inefficient and outdated industry. Credits are digitized and custodied on the Capturiant platform, enabling global transactions. Capturiant’s business model leverages distributed ledger technology and warranty coverage to greatly enhance the trust, transparency, quality, tracking, distribution, retirement, and risk management of credits and ESG instruments. Our process and compliance expertise provides exactly the level of trust and transparency issuers, investors, buyers, and sellers need throughout the entire ESG sector and asset class. Capturiant is headquartered in Houston with branch offices to be established in Zurich, Abu Dhabi, and Nassau.

This article was written by James C. Row, CFA, and Will Baird