KYC or “Know Your Customer” is a well-known acronym for the process of identifying and verifying the client’s identity. But in 2022, KYC might also be construed to mean “Know Your Carbon”– essential identification and verification for companies in light of increasing carbon emission regulations.
As companies strive to reduce their carbon footprint and comply with mandatory carbon reduction schemes, carbon markets have emerged under both mandatory (compliance) schemes and voluntary programs. Both markets offer companies useful instruments to offset their emissions and monetize their emission reductions but the complexity of the various emissions programs and trading schemes makes them difficult to navigate. There are some concerns around the validity of certain carbon credits. KYC in this context can be seen as an imperative to “know your carbon/ know your credits.”
Both voluntary and compliance markets have become increasingly complex. The voluntary carbon market for example is three decades old and was developed in 1989 to enable companies in many industries – such as air travel, banking or energy, to offset their CO2 emissions. It’s been promoted by figures like Mark Carney, the former Governor of the Banks of Canada and England as a means to encourage emissions reduction.
The problem with both voluntary and compliance markets is that they are still somewhat inconsistent between voluntary registries and compliance jurisdictions, with irregularities surrounding the criteria for inclusion and verification processes. These irregularities mean that the production and value of one carbon credit vary drastically from another, depending on the system it was generated for. There are currently four major voluntary registries, with many more minor ones, each with its own credit production protocols. Across Canada alone, there are currently eleven active unique carbon pricing compliance systems. Tech companies are rising to the challenges of these complex systems and developing tools to “Know your carbon & credits.”
Sales of carbon credits across most markets are currently booming as credits are becoming a new tradeable instrument. Purchasing compliance credits to meet their regulatory obligations is a liability for a lot of operators, and with the Canadian federal government mandating that all of Canada’s pricing systems ramp up towards a $170/ tonne price environment, the price of carbon and the cost of emissions will start to take a toll on producers across all regulated industries.
“It’s huge for our producers that the carbon price basically reduces profits from a large facility perspective,” according to Logan Downing, CEO of Carbon Assessors. “The price is at $50/ton now. So if you move that upwards to $170/ton, you start to see that it will impact the bottom line of a lot of businesses across Canada. Effective management of carbon credits is important as a way to be compliant. Voluntary carbon credits are becoming a new tradable instrument for companies embracing the social goal of net zero by 2050.”
Voluntary credits fit into the bucket of social licence to operate as more companies announce they want to be net zero by 2050. By retiring voluntary credits, companies can quickly demonstrate to their shareholders and to the public that they’re on track to be a net-zero company. With the increasing demand for this type of social license, there has been a challenge with verification to ensure that each minted carbon credit or offset has actually achieved new emissions reductions.
“Each registry has its own set of protocols, which are essentially a set of rules that project developers will follow to create offsets,” Downing says. “Now, each of these protocols goes through the registry’s specific methodology for creating new protocols and they monitor these protocols stringently to maintain the integrity of the credits produced.”
The challenge is with verification – for example, if there is a sale of carbon neutral efficiency offsets, and they’re being sold as true carbon negative offsets. Credit users have to be able to discern the difference.
Companies like Carbon Assessors are working on technology to verify all the credits in the voluntary space. By retiring voluntary credits, companies can demonstrate to their shareholders and to the public that they’re on track to be a net-zero company. With the increasing demand for this type of social license, there has been a challenge with verification to ensure that each minted carbon credit or offset has actually achieved new emissions reductions.
Downing points out that there is currently a maturing of the market happening that will continue to develop. He says the markets have become good at putting risk on certain carbon credits and as a result devaluing those from questionable backgrounds, certain protocols, registries, vintages, developers, or other risk factors. He observes that we are seeing the market incorporate some price discounts into those units, and points out that with more information, market mechanisms can work to better regulate the quality of credits.
With this price evolution occurring in the voluntary space, Downing advocates for patience in the maturing of the market systems. He believes it is important for the market to be credibly tied to atmospheric CO2 so that the market mechanisms can work properly, and that such a decentralized approach will encourage more innovation. He notes that an effective carbon market will also be especially important to mitigate the inflationary pressures that could result from $170/tonne pricing on regulated industries.
“We are marching towards having a better understanding-a very granular understanding of atmospheric composition, CO2 levels and attribution of that CO2. Remote sensing can contribute to understanding such a large system,” Downing says.
One of the main challenges around remote sensing is obtaining consistent data sources across multiple geographic regions. Downing says it is probably one of the biggest challenges to be solved. That’s because data quality issues make it difficult to do comparisons – for example, comparisons of natural gas producers in Canada, versus the US.
In this area, the province of Alberta is a leadership role and has made much more data available to the industry. In general, large facilities have an easier time of monitoring and managing their emissions according to Downing as they have more resources- more staff, more engineers right running the plant. But there is a lack of small to medium industry scale monitoring. That’s really where there is kind of a blind spot in the data that’s available.
“There is a lot to be learned from the interplays between a carbon market and the atmosphere, or an industrial emissions footprint and the atmosphere,” says Downing. “As the technology gets better and the modelling gets better, we can ultimately be able to validate nature-based solutions a lot more thoroughly to prevent greenwashing. Remote sensing should be able to help us bridge from an accounting or scientific methodology, to what’s being observed and measured in the atmosphere.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.