Carbon markets have long been held up as efficient mechanisms to affordably achieve a safer climate future. By pricing greenhouse gas (GHG) emissions, allocating finance to climate-aligned activities, and incentivizing investment — to new technologies, key behaviors, and institutions — carbon markets promise to both protect our natural carbon sinks, such as forests, and remove the 10-13 gigatons of carbon per year necessary to stay on track for net zero by 2050.
Yet creating effective carbon markets has proven elusive, even as they have evolved into two broad categories. Compliance markets — those anchored in policy, law, or regulation — do not reach the scope or scale required to address the climate challenge. Voluntary carbon markets (VCMs), meanwhile, are challenged by growing complexity and competing demands.
VCMs operate based on rules set by non-governmental organizations (NGOs) and other public purpose-minded organizations. VCMs allow private parties to buy and sell carbon credits representing the avoidance, reduction, or removal of GHGs from the atmosphere.
Back when wind, solar, and other renewable energy technologies struggled to become cost competitive, VCMs provided an additional, critical source of financing to help them grow and compete with fossil fuels. However, in recent years, voluntary markets have been overburdened with multiple functions they weren’t designed to perform completely or simultaneously. These include: offering a path to net-zero for the world’s largest corporations; providing revenue to countries seeking climate-aligned economic growth; and creating financing mechanisms for early-stage technologies so they can reach the commercialization threshold.
As a result, VCMs are immersed in a complicated transition. While growing rapidly, VCMs must also refine their processes to ensure two priorities. First, all credits must deliver measurable and verifiable emissions impact (i.e., either emissions reduced or avoided). Second, the efficiency, accuracy, and transparency potential of digital technologies must be integrated without introducing new risks or excessive costs. With all this in transition, today’s VCMs can be opaque, fractured, and complicated to navigate.
Amid this transformation, RMI sees an opportunity to help recenter VCMs on their core mission: to expand the supply of quality credits with verified climate and equity co-benefits and to ensure credits are efficiently and accurately valued for their climate performance. To this end, RMI is partnering with Ripple, a leading fintech company, to launch Centigrade, a new listing platform that will focus on untangling the data that is central to all claims about credit quality, facilitate interoperability with a dynamic ecosystem of VCM service providers, and enable radical transparency in these markets.
VCMs’ Challenge and Opportunity
In recent years, VCMs have come to embody both the promise and the complexities of our collective efforts to combat climate change and rapidly decarbonize to reach the Paris Agreement goal limiting temperature rise to 1.5°C by 2050. VCMs have experienced tremendous growth and could be a critical financing mechanism for a wide range of climate solutions, from halting deforestation to scaling direct air capture technologies.
But, this growth is colliding with existing institutions and opaque processes that were not designed to harness such sudden and innovative demand and that have yet to settle internal debates around how best to define, measure, and value a “quality credit” based on its climate performance (i.e., actual emissions, community, and ecosystem benefits).
In the simplest terms, VCMs are currently constrained by a condition called “information asymmetry” in which the underlying data and information about credits (namely their performance and transaction history) remains siloed and disconnected throughout the value chain. Since granular, updated data about credits’ climate performance is difficult for the broader market to access and use for decision-making, most credits are issued and priced based on a pass/fail assessment of subjective claims about their performance, rather than real-world performance verification. The challenge of accessing critical credit information has left VCMs struggling to perform the core functions of an efficient market: facilitating market competition and directing capital toward projects with measurable climate and equity co-benefits.
Challenges within VCMs are spurring innovation and growth, with numerous new companies popping up to tackle unique aspects of the supply, demand, and transaction landscapes. But few solutions are directly and systematically tackling the structural roots of the problem: the core information asymmetry that must be addressed for the market to maintain its public purpose function. While it will take time to build consensus around carbon market regulation, we can and must build the partnerships, data frameworks, and supporting market infrastructure that can bring much needed transparency, reliability, and integrity to VCMs. Climate impacts are intensifying and will continue to do so. Meaning, the time to build what we can is now.
Centigrade: Today and tomorrow
As launched, Centigrade will enable radical transparency in VCMs by focusing on untangling data related to credit quality claims and facilitating interoperability with a dynamic ecosystem of VCM service providers. And as the platform evolves, RMI will work with Ripple to focus on these objectives:
- Accelerate supply development: Centigrade is a platform designed for earlier-stage suppliers to list their pipeline projects, and to make forward claims based on carbon restoration, reduction, and removal potential. This unique approach enables suppliers to efficiently access an ecosystem of pre-issuance services, including upfront project finance, quantification methodology development, or verification and certification services. We hope this will accelerate the speed at which these suppliers develop and issue credits. This is in line with our mission to cultivate innovation by the supplier community.
- Reduce information asymmetry about credit data: Centigrade won’t be a standards setter and won’t establish methodologies for whether credits are certified. Instead, it sets a minimum bar for the data about credit performance for a range of non-traditional credit pathways that must be disclosed to be listed on the platform and to access the verification and certification services required to turn that data into credits. Data transparency will allow market participants to more efficiently surface projects’ differentiating core market metrics and unlock participation from the broader market.
- Enabling interoperability: Once onboarded to Centigrade, all participants will be able to seamlessly exchange information relevant to credit quality, better integrate their efforts, and establish more efficient methods of navigating the market. Currently, the market is fragmented, with a multitude of actors operating independently and using disparate methodologies, protocols, and solution frameworks. By bringing together a variety of service providers from trading platforms, certification entities, ratings agencies, and other partners, we can maximize the efficient and transparent flow of critical information about credit performance over time.
- Collaborative, Coordinated Decision-Making: Centigrade’s governance reflects its commitment to transparency and market unification. As this project continues, RMI will work alongside Centigrade’s founding team to govern transparently and with a humble commitment to ensure that, at all times, Centigrade is advancing the climate impact and public interests that are central to VCMs’ potential to accelerate the rate at which finance flows to the technologies and solutions that advance climate justice and build a decarbonized economy by 2050.
Like any other functional market, VCMs will not be effective without a fully liquid exchange that allows for efficient price discovery, demand signaling, and transactional integrity based on climate performance. So, how do we maintain the primacy of public purpose in VCMs? It can happen through laws and regulations, but we are running out of time and haven’t seen the progress necessary. It can happen through standards and certification, except issues around globally accepted standards and opaque process continue to be a challenge. Or it can happen through unprecedented levels of transparency.
For dynamic markets, transparency is akin to oxygen. It allows market participants to more efficiently discover project quality and prices based on key market and climate metrics. It allows for more scalable and accurate demand-supply matching. And it unlocks much broader participation from the market. Centigrade will bring this radical transparency — and vital oxygen — to VCMs.
