The Built Environment: Transformation Needed for Net Zero Tools in Carbon Markets
This is part two of a series on the potential of the buildings and construction sector to impact the voluntary carbon market. You can find the first article here.
For carbon offset projects, the voluntary carbon credits (VCCs) that their outcomes support and the voluntary carbon markets (VCMs) that their credits activate, there are two fundamental truths — they are necessary tools for financing the reduction and removal of carbon emissions and are in need of an overhaul.
Confidence in the supposedly 500 million tons worth of carbon represented by global VCMs is quickly waning. Mounting controversies continue to intensify skepticism among corporates, investors, regulators, regulatory standard setters and other stakeholders over the quality and efficacy of VCCs. As a result, market demand for cheap, questionably reliable credits is on the decline as the supply of credits tied to more dependably effective offset projects, such as direct air capture, remains scarce and expensive.
A middle market of readily available, affordable but nevertheless high-quality VCCs is clearly necessary. Otherwise, prospective claimants (i.e., those who retire a credit and take it out of circulation) across hard-to-abate industries or those dependent on high-emitting discrete energy applications may punt on their immediate stopgap decarbonization efforts.
As I’ve written in the past, the global buildings and construction sector is capable of filling this void. The sector is not only capable of issuing high-quality carbon credits representing additional, durable, and easily monitored, verified and reported (MRV) carbon offset projects, but well-positioned to be a source of differentiated credits.
But standing-up high-quality carbon offset projects amenable to life cycle MRV, whether from onsite renewables, battery packs and electric vehicle charging stations or deep energy efficiency retrofits, is just the first step. Project developers will need to implement the right technologies to give prospective VCC buyers and claimants the confidence they need in the variety of built environment-based offset projects they produce. And end-users of these built environment-based VCCs will also need to strengthen their operational data collection, governance and analysis capabilities to integrate their VCC holdings and transactions within their broader sustainability performance management efforts.
Tapping New Technologies
For both parties, and for their respective stakeholders, the adoption of enterprise blockchain applications and advanced Environmental, Social, and Governance (ESG) performance measurement, management and reporting software will be essential.
For offset developers, the emissions-related data generated by their projects must be assembled, analyzed and prepared for MRV with a pertinent VCC registry. The benefits of bespoke blockchain applications for these producers, then, are fairly straightforward. In short, blockchain’s distributed ledger technology enables the creation of “smart contracts” which, essentially, are capable of automating the confirmation, or rather, completion of an achieved carbon offset (usually one metric ton of avoided, reduced or removed carbon emissions).
The blockchain application achieves this by tapping into the operational data (i.e., energy consumption, energy stored or energy consumption avoided) generated by a building’s fleet of net zero-enabling technologies and automatically applying conversion metrics to determine the quantity of emissions addressed. And once the registry-determined carbon offset verification criteria for the VCC is satisfied, the smart contract tokenizes the offset by the project.
For those charged with MRV of the offset project, including developers themselves, credit registries and third-party verifiers, the blockchain ensures the integrity and traceability of the project data used to complete the smart contract it enables. Once the offsetting outcomes of the project are verified—typically by a VCC registry—the tokenized offset emissions can be conferred an on-chain credit through the smart contract mechanism and then tendered in the appropriate VCM. By virtue of the immutable distributed ledger, the issuance, sale, trade and, most importantly, retirement of the VCC applied to the tokenized offset can be continuously traced. This enables end-users to trust that their claiming of a tokenized credit will not compromise the integrity of their broader carbon accounting efforts.
Should these systems be adopted at scale and used to undergird carbon offsets and their attendant VCCs over their full life cycles, this can be a model for a more transparent, credibly effective VCM.
Indeed, both offset project developers and VCC end-users will need to ensure that their engagements in this process don’t cause them to embellish their emissions reductions claims, deflate their emissions reductions outcomes or worse, disincentivize their achievement of deeper and more holistic sustainability improvements.
ESG software, which automates the collection of end-users’ environmental and social risk management data to help them monitor their composite ESG “performance,” is the natural supplement to blockchain-enabled offsetting schemes. For offset project developers, these systems enable continuous insight into the effects of producing tokenized, credit-worthy offsets on their carbon balances. And for prospective users and claimants of a tokenized VCC, ESG software facilitates their accounting of offset emissions against their owned and controlled carbon sources.
Importantly, for both parties, the interaction between participation in a blockchain-enabled carbon offsetting scheme and their respective composite ESG performance outcomes can be monitored in real time.
To understand how this works in practice, take the offset project developer. They exercise caution regarding the data that’s fed into their smart contract-supporting blockchain application. Humans, not computers, will need to determine the ultimate utility of a given offset project, and they will need to evaluate how their organizations’ pursuit of tokenizable carbon offsets affects its management of other ESG issues. Relatedly, there must be stringent controls to prevent the blending of avoided, reduced or removed emissions that are counted against their own “E” performance with those that are reserved for tokenization and eventually credit issuance.
Similarly, for prospective users of VCCs, ESG software that automates the collection and analysis of their organizations’ sustainability risk management data will help them to determine whether their need for offsetting, rather than insetting, is merited in the first place.
Whether it’s achieved in part with tokenized carbon credits, the ultimate goal for companies is the achievement of net zero emissions—sooner, rather than later. And by digitizing climate action, employing analytics and embracing experimentation, the climate-laggard buildings and construction sector can lead market transformation and accelerate the collective path to zero.
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