A brand-new social impact offset token has come out of a 25-year history of creating sustainable solutions for corporations, explains Todd Lemons (pictured), chairman of the Veridium Foundation.
Veridium is a collaborative initiative between a coalition of industry leaders including IBM, Stellar, Brian Kelly Capital Management, EnVision Corporation, and IDEAcarbon (a division of IDEAglobal),
Some 10 years ago, InfiniteEARTH (also part of the EnVision group of companies), authored the first forest carbon accounting methodology, now known as REDD+ (reducing emissions from avoided deforestation and degradation), which is now embodied in the Paris agreement.
The company developed the first internationally recognised REDD+ project known as Rimba Raya, which consists of 65,000 hectares of tropical forest on the island of Borneo in Indonesia. Rimba Raya was the first REDD+ project to be validated under the VCS standard and the first to receive a Triple Gold rating under the CCBA standard. Today, InfiniteEARTH’s Rimba Raya project is still one of the largest carbon credit suppliers, as well as the largest privately funded orangutan reserve in the world.
The firm sells those carbon credits to a dozen Fortune 500 companies. These companies face huge challenges in accurately and efficiently accounting for their carbon footprint. No two manufacturing processes are alike, and measuring the carbon emissions liabilities on hundreds of inputs in the complex global supply chain for a single product, is a resource intensive process.
“To compound the problem, that level of granularity doesn’t necessarily lead to accuracy,” Lemons says.
Pressure is coming from governments and NGOs, but is primarily being driven by institutional investors who want to understand their exposure to the emissions liabilities of their portfolio companies.
Consequently, risk managers at institutional funds are pressuring firms to measure and mitigate (offset) their carbon footprints. The motivations are not just altruistic, but also because the market has become aware that failing to recognise these liabilities will increasingly have a financial impact on the bottom line. There is mounting evidence that there is a strong correlation between high ESG (Environmental & Social Governance) ratings and financial performance.
Challenging as it may be, companies are attempting to map their carbon footprint throughout the entire supply chain and then understand the arcane word of carbon markets. Company CFOs must then buy carbon offset credits at the corporate level in order to offset their carbon liabilities, but then turn around and allocate those expenses back up stream to specific operational units.
The stakes are higher and the problem is even more complex when trying to hedge against future carbon liabilities, Lemons explains. “Companies lack the necessary tools to mitigate future carbon liabilities risks.”
There are two classes of carbon credits: one that trades on the European Carbon Exchanges, which are liquid and can be held as assets, but typically expire within one or two years so don’t offer a long-term hedge solution. The second type, such as those offered by REDD+, have long expiration dates and have even broader environmental offset capacity, including biodiversity and water conservation and positive social impact value. But, these credits are traded OTC, so cannot be listed as assets since they have no public price indicator.
“We have struggled with our clients to help find solutions to simplify and automate the whole process,” Lemons says. “As blockchain emerged as a viable technology and companies began to explore using it for supply chain management platforms, such as IBM’s Hyperledger Fabric, we found that the technology could facilitate solutions to these carbon accounting and offsetting challenges.
“First, we can tokenise the higher quality environmental assets such as REDD+ credits, making them liquid, making them liquid and therefore able to be classified on the balance sheet as an asset. This makes them the ideal long-term hedge vehicle for mitigating future carbon liabilities.
“Secondly, we have developed a completely unique accounting approach that looks at the problem differently through the creation of a library of carbon density per dollar coefficients based on a fixed set of industry sectors. By assigning a carbon footprint per dollar of transaction value in a given industry sector, we are able to provide an accounting tool that is more efficient, by several orders of magnitude, than the current process.
“We know from credible sources that certain sectors are responsible for X per cent of total global emissions and we know what the total revenues for those sectors are. This unique tool, known as the EcoSmart-Protocol, allows us, with a fairly high degree of certainty, to calculate the carbon liabilities for each dollar of transaction value at very precise points along the value chain.”
Increasingly companies are using blockchain for supply chain management, which provides a platform to execute these calculations in an open and immutable accounting ledger, which then simplifies auditing.
“In the old world, databases didn’t speak to each other very well, even in same organisations or among trading partners. Although we live in a global connected world, there is still a tremendous amount of manual reconciliation.”
Blockchain links everything together and, as the chain builds, it preserves that history in an immutable, open record.
The ‘consensus’ model of blockchain technology also reduces disputes. In the past, when the records of the same transaction on two different databases disagreed, it required manual arbitration and reconciliation. With blockchain, the record is preserved in an open and immutable ledger on a thousand different servers or nodes. This means that conflicting data on one is treated as an anomaly and disregarded because there is ‘consensus’ among the other 999.
“This consensus model is also what makes blockchain so secure,” Lemons days. “A hacker accomplishes nothing by hacking and modifying the record on a single server or node. They would have to hack all of them, which is virtually impossible.”
To deliver its solution to market, Veridium has tokenised the underlying carbon credits as the CARBON token and tokenised the utility token as VERDE. The VERDE token grants access to the EcoSmart-Protocol, the accounting software that calculates carbon liability, and then automatically instructs the purchase of CARBON tokens. The tokens are then ‘burned’ (taken out of circulation) and the underlying carbon credits are ‘retired’ (also removed from circulation).
“With regard to offsetting, the distinction most people don’t understand is that you are not just letting polluters pollute,” Lemons says. Carbon taxes and ‘allowances’ issued by governments are ‘permissions to pollute’, with little assurance that the revenues are ever contributed to actual emissions reductions.
“Offsets, on the other hand, pay for direct emissions reduction in arrears. It takes a carbon offset project like Rimba Raya a year to complete its annual audit. So, we are currently selling 2016 carbon credits, which are independently verified emissions reductions that occurred in 2016. So, emissions reduction is guaranteed since it already occurred, versus a promise to produce an unquantified emissions reduction in the future.
“We have prevented 130 million tonnes of emissions from ever happening by preventing the conversion of the Rimba Raya forest to palm oil. That’s the equivalent of removing four million cars from the roads every year for 30 years”, Lemons says.
“In the case of Rimba Raya, carbon credits are a crucial funding mechanism for forest conservation. Veridium and blockchain technology make that product more digestible for corporate users, which means we can now effect real environmental change at scale.”