Carbon Credits: Transparency and Double Accounting Problems

In the global effort to combat climate change, carbon certificates have emerged as a key tool for incentivizing emissions reductions. However, concerns regarding transparency and double accounting have surfaced, raising questions about the integrity and effectiveness of these mechanisms. This article delves into the challenges surrounding carbon certificates, examining issues of transparency and potential double counting, and highlighting the importance of addressing these problems to ensure the credibility of carbon markets and the success of emission reduction initiatives. By understanding the complexities and seeking solutions, we can strive for a more transparent and accountable approach to carbon trading.

What are carbon credits?

Carbon credits are certifications or allowances given to countries and businesses that allow them to emit a certain amount of carbon dioxide or a related greenhouse gas. The Paris Agreement in 2015, preceded by the Kyoto Protocol of 1997 passed by the United Nations, aimed to solve the greenhouse gas emissions problem by commodifying carbon emissions. One carbon credit is equal to one tonne of carbon dioxide. The goal of carbon credits is to reduce greenhouse gas emissions and promote sustainable impact in the fight against climate change.

This is accomplished by creating a market for trading carbon credits so that countries or corporations that are unable to reduce emissions immediately can purchase carbon credits while working to effectively reduce their carbon footprint.

Governments or regulatory organisations set a cap on greenhouse gas emissions so that countries that do not exhaust the assigned emissions cap can sell carbon credits to countries that have exhausted and are projected to surpass their capped carbon footprints. However, this technique introduces a paradox: the challenge of double counting.

Understanding carbon credit double accounting

As the name implies, double accounting refers to accounting for the same item more than once. Double accounting is one of the many risks associated with the current carbon credit system, where carbon credits are issued to a nation or business and are inadvertently issued to a second buyer (which could be a corporation or nation), and both parties lay claim to the same emission reduction or carbon offset.

How does this happen? A brief example would involve two parties: corporation A and country B. Corporation A builds a solar farm as an alternative to gasoline, reducing its emissions and falling short of the greenhouse emissions cap. Corporation A then claims its credits before a regulatory body under the jurisdiction it is under and proceeds to sell its carbon credits to country B, which is also struggling to not exceed its emissions cap. Country B claims the same credits under a different jurisdiction.

At the end of the day, the same carbon credits are counted twice, and the entire goal of effectively reducing greenhouse gas emissions is defeated. This can also occur between different entities or countries and is not confined to this particular circumstance.

Carbon credits should be backed by real effort and uncompromised data; however, there is no single organisation regulating the trade of carbon credits. As a result, most carbon credit markets are run in ways that cause a great deal of confusion between carbon offset developers and carbon credit purchasers. This also takes into account the fact that carbon credits are easily miscalculated by governments, organisations, or entities claiming to have fulfilled promised emission targets..

Why do carbon markets have transparency issues?

The carbon credits market is complicated and thus opaque for a variety of reasons, with lots and lots of projects generating carbon credits and hundreds of market participants trading credits through exchange markets or over-the-counter (OTC). This disparity in projects registering credits and retirements under multiple jurisdictions, as well as the absence of data consistency, produces a lack of transparency. Because there is no centralised regulatory structure or authority, there will inevitably be gaps in transparency. This eventually leads to a “one step forward, two steps backward” situation.

Due to the fact that there is currently no requirement for the disclosure of the price paid for carbon credits, organisations may claim to be offsetting emissions when, in reality, they are either purposefully miscalculating their carbon footprint or purchasing cheaper carbon credits that may not pass standardised scrutiny. As a result, you will inevitably have organisations that engage in “greenwashing.”

Another significant issue confronting today’s carbon credit markets is the lack of standardized follow-up of projects that apply for carbon credits. Because most projects are unable to meet their carbon mitigation commitments, the carbon credits are sold to a third party, effectively failing to achieve the goal of net-zero emissions.

There have been efforts to increase the transparency of carbon credit prices through the compilation of trading data from market players and registries, such as credits certified by The Gold Standard, Climate Action Reserve, Verified Carbon Standard, American Carbon Registry, and others. However, with OTC trades and a slew of other variables to consider, the transparency required remains far from ideal, leaving the possibility of fraud or dubious activity in the emissions trading markets.

Blockchain Technology may hold a much-needed solution to this problem.

Companies, nations, and various agencies all across the world are desperately looking for methods to help reduce the global climate change catastrophe. This search has led them to the conclusion that blockchain technology may be the answer they’ve been looking for. The blockchain technology, which is the foundation of cryptocurrencies, is now being hailed as the long-awaited solution to the plethora of challenges plaguing the carbon emissions trading market and as a means of expediting carbon credit transactions.

Blockchain is simply defined as a decentralised, digital, distributed ledger of transactions that is distributed across vast networks of computer systems and is openly accessible to the public at any time. This unique system allows for transactions to happen without the need for a middleman (peer-to-peer transactions); the ledger is constantly updated with new “blocks” that are unique and cannot be changed; and the blockchain is popular due to its simplicity and transparency. International organisations such as the United Nations Framework Convention on Climate Change have hailed blockchain as a potential upgrade to the carbon credit system that can improve carbon emission trading, improve financing flows, and boost transparency of claimed emission reductions.

Incorporating the non-fungible token into its consensus system prevents a token from being counted twice, even when transferred across regions. Utilizing blockchain eliminates problems like double accounting. Each token is non-fungible and thus unique and contains information about its origin project, ensuring that each token has a traceable, verifiable quality that cannot be transferred or tampered with. The existence of these tokens on a public ledger, the blockchain, allows for its origin, mitigating strategy, and implementation to be seen by anyone, accounting for wholesome transparency in carbon credit markets as well as accounting for administrative costs through automated processes, resulting in a smooth, accountable, and transparent process.

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