The Cost Problem in Carbon Markets

Carbon markets have the potential to be a powerful tool in promoting environmental improvement and serve as a key funding mechanism for efforts to reduce and remove harmful greenhouse gas (GHG) emissions.

Unfortunately, there are three key areas of problems, where there are costs due to:

1. Lack of transparency

2. OTC vs Exchange

3. Validation

The lack of agreed upon standardization, limited transparency, and complexity (vintages, size, frequency, etc.) in fee structures faced by environmental developers seeking validation for their projects are major hurdles to the growth and success of the carbon credit system and its risk management potential. These factors increase the cost and risk of participating in the carbon credit market, making it difficult for GHG-reducing programs to get launched and marketed.

Transparency — Because of the opaque nature of today’s carbon credit issuers, the market has been fraught with add-ons, change orders and non-stop new fees. These unexpected fees are costly themselves, and impose additional uncertainty costs on project developers unsure if by starting the issuance process with one group they will be setting themselves up for unexpected — and not agreed to — charges down the road.

OTC Markets — Given the OTC (over-the-counter) nature of the majority of the environmental credit issuance market, fee structures can differ greatly between similar carbon credit products and be extremely complex. This overly complicated process makes it difficult for developers and private companies with environmental projects to accurately assess the costs associated with issuing carbon credits. In addition to making it more costly to bring carbon-reduction products to market, this costly complexity makes it more difficult to secure funding for projects in the first place, meaning many efforts to reduce or remove emissions never even get off the ground.

Validation — The lack of common vocabulary and standardization of services in validation bodies’ pricing exacerbates the problem of inefficient markets. Carbon credit validators have negotiated fees for each reviewed client and do not publicly post their fee structures. The activity of a validator is similar to an auditor, an actuary or a valuation expert, as they are analyzing and reviewing a set of engineering/technical standards in which to measure and base a project against. The lack of competition and transparency can also lead to concerns about the validity of carbon credits, as it is unclear what fees are being charged and how they are being used. Varying validator costs and review methodologies make it difficult for developers to compare the costs and quality of validators.

In order to resolve these issues and support the growth of the carbon credit market, better methodologies and known standards will assist the market in pricing structures. With commonly accepted standards of validation would allow developers to accurately budget and plan the costs associated with issuing and validating carbon credits, and to better compare the prices and quality of services across registries (kiosks) and validators. In addition, a transparent pricing structure would increase the credibility of the carbon credit system and provide greater assurance to project developers that their money is being appropriately allocated.

Capturiant Solution — To solve these problems, Capturiant has developed a straightforward and transparent fee structure: to give environmental developers the certainty they need to follow through on their plans, and make the carbon credit market a more powerful tool for reducing and removing GHG emissions. Fresh market entrants with experience delivering value to the private sector are critical to modernizing a system currently run by bureaucratic, unresponsive non-profits. The carbon credit system will not be effective in meeting its goals until environmental developers can easily and confidently assess their costs and execute their projects. Capturiant’s simple, standardized pricing structures are crucial to support the growth of the market and to increase the credibility and efficiency of the system.

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 Will Baird