How blockchain tech and dMRV can help carbon trading markets

Combining blockchain with digital monitoring, reporting and verification protocols may not only improve VCMs but even rescue them.

There is a global consensus that greenhouse gas (GHG) emissions are warming the planet, but efforts to accurately measure, report and verify these emissions continue to challenge researchers, nonprofits, corporations and governments. 

This is especially the case with “nature-based” projects to reduce carbon dioxide levels, like planting trees or restoring mangrove forests.

This has inhibited the development of a voluntary carbon market (VCM) on which carbon offset credits are traded. These “offsets” are sometimes viewed as licenses to pollute, but VCMs overall are thought to be beneficial to the planet because they help quantify the environmental impact of industrial and consumer activities and, at least indirectly, motivate companies to curb emissions.

However, VCMs have recently come under intense criticism. A nine-month investigation by the United Kingdom’s Guardian newspaper and several other organizations found that more than 90% of “rainforest offset credits” approved by the leading certification firm Verra “are likely to be ‘phantom credits’ and do not represent genuine carbon reductions.”

This finding shook the carbon trading sector, but it has also spurred some new thinking about ways to measure, report or verify the efficacy of carbon-reduction projects. Digital monitoring, reporting and verification (dMRV), for example, largely automates this process, making use of new technologies like remote sensing, satellite imagery and machine learning. DMRV also uses blockchain technology for traceability, security, transparency and other purposes.

All this is still new, but many believe dMRV can reinvigorate carbon markets following the Verra scandal. It can also compensate for a shortfall of human auditors and inspectors available globally to assess GHG projects, especially the more problematic “nature-based” projects. In addition, it can gather a broader range of data and potentially make it available in real time. Importantly, it will allow a global comparison of projects for the first time.

“A huge difference”

“DMRV will make a huge difference here, since it moves the quantitative comparison of various nature-based interventions onto a global field where they can be comparable with each other — something that is not possible in the current systems as projects self-report against their own baselines,” Anil Madhavapeddy, a professor at the University of Cambridge and director of the Cambridge Centre for Carbon Credits, told Cointelegraph.

Some go even further. “Digital Measurement, Reporting, and Verification (dMRV) technology has the potential to revolutionize the way the voluntary carbon market (VCM) operates,” declared dClimate, a decentralized infrastructure network for climate data, in a March blog post.

Still, questions remain: Maybe this is all too little, too late for averting climate change? And if not too late, won’t progress stall if better methodologies aren’t developed, like quantifying how much a Brazilian rainforest reduces global carbon? Are blockchains necessary for the process, and if so, why? And can dMRV really “revolutionize” voluntary carbon markets, or is this just excessive hyperbole?

“It is not too late,” Miles Austin, CEO of climate tech firm Hyphen Global AG, told Cointelegraph. “We find ourselves at a pivotal moment.” The Verra scandal and continued allegations of “greenwashing” on the part of corporations have made more companies leery of supporting carbon-reduction projects.

“The perceptions of trust and feasibility associated with nature-based assets, both within the public and private sectors, have been adversely affected,” Austin noted. But he added that at this critical juncture:

“DMRV can have a significant impact to not only improve these markets but save them.”

It might be helpful to compare dMRV with traditional MRV, which aims to help prove that an activity — like planting trees or scrubbing smokestack emissions — has actually occurred. It is a prerequisite before a monetary value can be attached to the activity, and a necessity for carbon trading markets to work. 

MRV has been “underpinning” sustainability reporting for years, Anna Lerner Nesbitt, CEO of the Climate Collective, told Cointelegraph. However, “it has a lot of weaknesses,” including a high reliance on subjective data, steep costs, lengthy timelines and a dependence on “international experts” — i.e., consultants.

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According to Cambridge Centre’s Madhavapeddy, the inherent difficulty with quantifying nature-based projects “is that the conventional mechanisms for doing so — over the past decades — have been very manual and hard to compare across projects.”

Quantification mechanisms used for these assessments are far from being standardized. They include assessing “additionality” (i.e., what’s the net difference climatewise of a project?), permanence (how long will its effects last?), and leakage (did a negative externality, like cutting down a forest, just move somewhere else?).

DMRV, said Nesbitt, relies on emerging technologies and more granular data for “a fully digitized MRV protocol that not only collects digital data via Internet of Things, sensors and digital technologies but also processes and stores data on a fully digital and decentralized blockchain ledger.”

DMRV can also potentially reduce the workload of auditors and inspectors called upon to validate emissions-reduction projects, according to Daniel Voyce, chief technology officer of sustainability-focused solutions provider Tymlez, who wrote:

“With manual MRV recording each auditor or inspector might only be able to verify 150 projects each year due to chasing down the data they need and having to collate it all.” 

Digitizing the process could reduce time and costs by 75%, he estimated. 

Can blockchain help fix a “convoluted” process?

What role, if any, does blockchain play in all this? “I think if we are being honest, voluntary carbon markets — and regulated carbon markets — need blockchain for asset issuance and traceability,” Michael Kelly, co-founder and chief product officer at Open Forest Protocol — an open platform for scaling nature-based solutions — told Cointelegraph.

The current MRV process is “convoluted,” he said, with “no visibility into issuance schedules, no traceability, quite frequent double-spending, etc.” As a result, “people are hesitant to touch carbon credits.”

DMRV combined with blockchain could change things. “Once they can see everything about it [a project] — down to the upload of each tree in a sample plot for a 20-year time period — we will see new participants coming into the arena.”

Some incremental improvements in MRV — like digitizing submission forms — don’t really need blockchain tech, noted Nesbitt, but that might soon change with the addition of “features like smart contracts that allow for more inclusive or just asset pricing, baking in a reasonable compensation for local communities involved in carbon credit projects.”

However, there may be limits on how much blockchain tech alone can fix things. Blockchains can enable “transparency, security, automation and immutable records of data flows in an auditable fashion,” but that might not be enough, suggested Hyphen’s Austin, adding:

“DMRV can only be as good as the data and methodology used. If you take a flawed methodology and digitize it with blockchain, you now have an immutable and transparently flawed dMRV.” 

Improving methodologies is crucial in Austin’s view. “Activity-based approaches work well in the case of combustion engines or industrial processes, which you can accurately measure and multiply by a factor,” he told Cointelegraph. 

But these don’t really work on “nature-based solutions.” A forest in Brazil may sequester more carbon dioxide than an equally sized forest in Indonesia based on many variables, including drought, rainfall and humidity, for example.

“Nature is a breathing and living asset; therefore, methodologies need to measure the actual amount of CO2/CO2e [carbon dioxide/carbon dioxide equivalent] that is a sink or source instead of calculating a best guess,” said Austin.

Work is being done in this area, especially in the wake of the Verra controversy. “Researchers in this field are showing how the quality of ‘avoided deforestation’ carbon credits could be improved,” Julia Jones, professor in conservation science at Bangor University, told Cointelegraph. “However, there is, of course, some lag between new research and it getting into policy and practice.”

The Cambridge Center for Carbon Credits actually built a research prototype last year of what a carbon credits marketplace might look like on the Tezos blockchain. “Our first observation was that the blockchain really wasn’t the bottleneck here — all of that infrastructure works fine and has a solid technical roadmap for scaling,” Madhavapeddy told Cointelegraph. The barrier lay elsewhere.

“The blocker to any meaningful deployment came from the lack of supply of credible projects, since the quantification mechanisms” — i.e., additionality, permanence and leakage — “are only just maturing as satellite infrastructure and the associated algorithms are peer-reviewed and deployed.”

Kelly also cited a shortage of “quality carbon development projects and accessible credits,” especially in the nature-based asset subsector, as a significant obstacle for VCMs.

Projects like reforestation, afforestation, mangrove restoration and biodiversity conservation are now short of funding. This project shortfall leads to a low supply of credits, which becomes a sort of chicken-and-egg problem.

“The result of this system is that carbon credits remain a relatively illiquid, convoluted and difficult-to-scale system that disincentivizes stakeholders from financing, purchasing and trading the assets to participate in the market,” said Kelly.

“The biggest barrier right now is the collective credibility of the voluntary markets, and we hope that our work on the digitization and systematic design and publishing of analyses can help bridge that gap,” said Madhavapeddy.

A “perfect storm”?

What about claims, like those cited above, that dMRV technology has the potential to revolutionize the way the voluntary carbon market operates? Is that going too far?

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“DMRV is at the center of strengthening data integrity, which in turn would improve process integrity,” said Nesbitt. “So yes, I think dMRV is vital to set up the voluntary carbon market for success. But saying it will revolutionize the market might be taking it a bit too far given the many dMRV improvements and applications already in implementation.”

Kelly sees two promising trends in the wake of the Guardian expose. Legacy incumbents like Verra and Gold Standard are now more intent on digitizing their processes and “becoming more transparent and trustworthy,” he said, while “stakeholders are more willing to try new solutions, or service providers, especially if they have higher standards for trust, visibility and quality.”

The result could be a “perfect storm for catalyzing a liquid voluntary carbon market — on-chain,” he added.