Rising interest in carbon markets has increased the number of intermediaries and stakeholders involved
Photo: iStock Amid calls for decarbonising industries, the voluntary carbon market has seen a boom in recent years, noting a substantial increase in volume and value. However, its transactions are complex. Decoding how it works is essential so they can be worthwhile contributors to the fight against climate change.
Carbon markets trade in emissions reductions, also known as carbon credits.
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The rising interest in carbon markets has also increased the number of intermediaries and stakeholders involved in the complex web of transactions. Some of the stakeholders of voluntary carbon markets are:
Interactions in the voluntary carbon market
Source: CSE
There are a host of other intermediaries coming up in the market, including in India. This has led to concerns such as fraud allegations levelled against players occasionally and other issues plaguing the market.
These allegations mean there’s a new set of participants in the market, such as the Integrity Council for Voluntary Carbon Markets. Their purpose is to launch standards for quality assurance beyond the checks and balances established by standard setters like Verra or the Gold Standard to facilitate fair and transparent trade.
But to understand all this, we must understand how the market functions.
In principle, a carbon credit gets created when an activity removes a tonne of carbon dioxide (CO2) equivalent from the atmosphere or prevents an existing setup from releasing an equivalent amount of CO2 through a dedicated effort.
In the market arrangement, ‘carbon project developers’ develop activities that can do this. This could be a renewable wind project in Rajasthan, an energy efficiency project of New Delhi’s transportation system or a plantation project in Kerala.
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In a few cases, project developers are also the project owners, but that is not always the case. While the project owner owns, operates and maintains a project, a developer expands it to meet standards and bring it into the market.
South Pole Holdings, a Swiss company and EKI Energy Services Ltd, an Indian company, are examples of project developers.
Before bringing a project into the carbon market, the developer evaluates its worthiness. The worthiness can be in terms of the standard setting body-prescribed ‘methodology’ under which the project fits in, the actual GHG offset by the project and how the project complies with fundamental requirements to become eligible for receiving carbon credit.
The developer also engages a third-party verifier and validator accredited by the standard-setting body to validate and verify the project. German company TÜV Nord Cert GmbH and India-based KBS Certification Services Pvt Ltd are examples of verifiers.
Developers earn revenue through the sale of carbon credits obtained against offsets. The financial models for the projects vary. If there is a separate project owner, a developer may charge a commission, a fee or keep a certain percentage of credits with itself.
There can be other financial models as well. It depends upon the agreement between the owner and developers. Developers often act as brokers to offer a more comprehensive service, selling and purchasing credits on behalf of their clients.
In estimating the extent of carbon that can be offset, developers project ‘baseline emissions’ – the emissions that would have occurred without the planned intervention or the project. However, accurately estimating these baseline emissions can be challenging and subject to technical uncertainties.
Some of these roles make project developers a powerful entity in the carbon market. They are instrumental in the conception of the offsetting project, but there is an existing information asymmetry in the market as well.
Developers have a fully informed participation, while owners (often communities) may have little to no idea of how these markets work. Thus, owners often settle for less than what should ideally be their fair share of remuneration.
Settlements are often in favour of intermediaries rather than the project owners, an investigation by non-profit Greenpeace’s journalism project Unearthed and climate change news website SourceMaterial found. The settlements were a result of multiple transactions taking place between the intermediaries together with low transparency, the report found.
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This also shows how bigger beneficiaries are market functionaries whose interest and expertise lie in trade and investment — which is consistent with what a market is meant to do. However, it contradicts the idea that bigger markets mean more climate action or environmental protection.
Further, project developers may have an incentive to misrepresent project details. For instance, choosing a baseline depends on the project developer, who can present projections and arguments that show a high offset achievement.
There is also room for misconduct in how developers engage verifiers. Some market watchers highlight the perverse incentives that the verifiers may have to certify the projects.
While the standards bodies declare that accreditation can be suspended if the verifiers indulge in malpractice, verification bodies may prioritise maintaining good relationships with project developers over rigorous evaluation.
There is a strong oversight regime on paper set by standard-setting bodies, but in practice, this needs more discussion and scrutiny from market watchers.
Developers maintain ‘accounts’ with carbon credit ‘registries’. Registries are either operated by the standards bodies themselves, such as Verra Registry and the Gold Standard Registry, or they may be independent, like the Markit Environmental Registry.
Developers approach a ‘registry’ with documentation and reports of validation and verification. These are used to demonstrate the project’s compliance with standards. Registries finally issue carbon credits to the projects that become eligible to receive it.
Every level of interaction involves a financial transaction in terms of service charges and fees. These fees are met from a proportion of the sale of credits, further decreasing the money that reaches the offset project owner — which in many cases are communities and indigenous people.
Many issues about the voluntary carbon market have been highlighted, such as concerns about the environmental integrity of credits, double counting and transaction costs. Critics have also questioned the effectiveness of offsetting in actually reducing emissions.
Read more: Climate Emergency CoP 25: What exactly are carbon markets?
There are also concerns about the impact of carbon offsetting on local communities, including the potential for land conflict, displacement and violation of rights. Additionally, questions of fairness have been raised, as established industries are allowed to offset emissions at the expense of continuing impact on vulnerable communities.
Thus, there is merit in calling for more scrutiny into the working of voluntary carbon markets if they are to contribute to climate action, coupled with robust governance mechanisms that prohibit and penalise complicated processes.
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