A Roadmap for Scalable Carbon Trading — Part 1

Embracing existing monitoring technologies for a smarter supply of nature-based offsets

Climate change is a massive problem and challenge. The current approach to tracking and validating carbon offset initiatives is outdated. For countries to meet mandatory state-sponsored goals, and for companies to offset their carbon footprint voluntarily, the global carbon markets need to quickly scale and adapt.

The scattered small-scale markets of today will not be enough for tomorrow — experts predict the current volumes will need to increase by a factor of 15 by 2030.

Our recent Whitepaper “Prerequisites for Scalable Carbon Trading” advocates the increased use of AI and satellite-based technology to support the required scaling of carbon initiatives, especially in forestry projects. Our proposition is that better monitoring technology is at the heart of the change.

To address the future needs, the carbon markets not only need scale but also a supply of high quality offsets. Currently, forestry carbon projects vary significantly in the quality of their methods and level of transparency. This is frequently pointed out by the critics. In a review of some major carbon projects, the Guardian called into question the underlying measurement methods used. The article argues that the accounting system is not reliable and accurate enough to produce quality offsets.

To contribute to these discussions on scaling and quality assurance, we are publishing a series of articles. The focus in the upcoming two posts is the use of monitoring technologies in forestry offset markets through two angles:

Part 1 — Adding quantity: the untapped potential in forest sinks

Part 2 —Adding quality: monitoring strategies for more credible offsets

Adding quantity: the untapped potential in forest sinks

1. What is preventing scale?

Carbon trading with nature-based offsets, including forestry offsets, is a key part in the efforts to lower global pollution levels. This is true especially for the near future, where an urgent change in the pollution trajectory is required. In our whitepaper, however, we explained some of the current obstacles holding the trading volumes down:

• High costs of project implementation
• Complicated and slow verification
• Uncertainty and the need for credits being held as “buffers”

All of these problems can be traced back to the extensive manual labor involved in the process of calculating the carbon sinks. The laborious phases typically include measurement, validation and verification, conducted multiple times throughout the process. When a carbon project is accredited with a carbon verifying standard (such as the Gold Standard, Verra and Plan Vivo), sometimes monitoring technology, including satellite imaging, is used as a supplement. Yet, this is not enough to scale the carbon markets. The role of technology needs to change to save time and resources.

We consider the following points requiring most urgent change to quickly increase the pool of available carbon credits:

1. Baseline value is highly important as the number of credits produced is always compared against this. Moreover, there is debate as to how to credibly measure adequate baseline values. With no existing uniform guidelines, it is understandable that projects vary hugely in their baseline calculations. However, monitoring technology can be used to compare the forest area against neighboring forest areas in different times before the project start. This creates a fair and fact-based starting point, with no room for exaggerated harvest figures. It is always better to rely on actual data than quoted figures. Additionally, the need for costly field visits is reduced, cutting the costs and time.
2. Initial verification is another costly step where at present spot visits of small areas are used together with calculations to create an approximation of the whole area. As with baseline value, remote sensing can make initial verification more affordable and smoother, leaving no gaps or room for chance.
3. Continued verification is vital to ensure the project is progressing as planned. Especially with projects relying on natural resources, there are significant risks involved, such as illegal logging, fires, insects, pests or wind damage. Currently, projects are usually monitored every 5 years, through different, manual operations. Inaccuracies of this process lead to large credit “buffers”, which are credits retained until the very end of the project period to compensate errors. Project certifiers often take a significant share of the credits into this safety pool, highlighting the need for better risk models and monitoring.

These safeguard steps, while important, under the current regime, cut the profits of carbon credit production significantly and discourage forest owners from engaging in carbon trading. However, to effectively track the progression of the carbon project, a smart combination of different data sets, such as weather information, satellite and Lidar, creates a better picture than field visits and requires a smaller buffer pool.

2. First steps towards scaling the markets

Going into the future, with the world slowly recovering from the pandemic, the interest and need for carbon credits is bound to increase. Exciting new developments — including work of the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) supported by McKinsey and recent updates to the major carbon credit certifying programs to suit the changing landscape of the carbon markets — support the need for a larger supply of high-quality carbon credits to meet the increased demand.

The so called “Core Carbon Principles” by the Taskforce map the areas most in need for new initiatives. These principles address the issues we identified above, such as difficulties establishing reliable baseline values and inconsistent monitoring. In addition, the carbon principles bring up ways to combat the low transparency throughout the fragmented carbon markets.

Lack of sufficient investment in the carbon markets is another key obstacle to tackle before carbon trading can become mainstream. The leading carbon certifier, Verra, brought up in a recent post the need to protect the voluntary markets and channel additional financing. The updated version of the Verra standard reflects that the voluntary efforts by many companies should not be hindered by new national targets, such as those imposed by the Paris Agreement. Instead, the corporate offsets could be registered by the country as these do not cancel each other out.

3. We have a Blueprint but what happens next?

It is time to upgrade the markets to be more uniform, reliable and cost effective. Making projects like wildlife conservation and improved forest management easier to implement is therefore a priority and a starting point.

According to the TSVCM report, up to 85% of future carbon credits could depend on forestry and other nature-related offsets.

However, there is not enough time to wait for the markets to change or a global agreement to take over the trade of nature-originated offsets — especially because other removal methods are predicted to take a much longer time to be ready for implementation at scale. Instead, the global emissions need to reduce faster by implementing the technology we already have. This will allow us to better support our current decarbonization efforts and to improve as we go.

Major industry players, including Microsoft that has taken major steps in building its carbon offset portfolio, state credibility and availability of offsets as some of the biggest concerns in carbon trading. The main shortcomings that fuel these concerns include ambiguous baseline value measurements and inconclusive project verification. Remote sensing and big data-based solutions show great promise in streamlining these processes.

Our Linda Forest solution, already covering 15 million hectare of forest in the Nordics and Baltics, and used by 6 of the largest forestry players in the region, is reforming forest management. Verifiably more accurate than field visits, the solution creates high-resolution forest models, using a smart combination of remote sensing, big data and AI.

Chart 1: Illustration of Linda Forest

These models are ready to be adapted for carbon monitoring from baseline measurements to the verification steps to reduce the need for spot visits and complicated project calculations by the offset project developer. As a result, the costs and time required to produce carbon credits can be reduced significantly. Shorter lead times, in turn, allow the markets to become more responsive to demand, a prerequisite for the scale required by 2030.

Our next article will explore the advantages of monitoring technology to the credibility and quality of carbon credits.

Glossary of terms

• Baseline values — A baseline value reflects the situation without the project. For example, in a forest conservation project, the baseline value shows the carbon sequestration if no conservation plan had not been implemented. The additionality of the project is the added carbon sequestration that the conservation brings.
• Carbon credit — A carbon credit is the equivalent of one metric tonne of carbon dioxide that was either removed from the atmosphere or avoided from being emitted. A carbon project produces carbon credits that can be traded.
• Carbon project — A carbon project is a project that aims to produce carbon credits. The project can, for example, be nature-related, such as afforestation, reforestation or improved forest management. It is important that the project provides additional benefits compared to the business-as-usual scenario and that it does not create harm elsewhere.
• Carbon standard — A carbon standard is an organization that helps with the project plan and sets out requirements for monitoring and verification of the project. Most carbon credits that are transacted are certified through a standard.