The Inefficiencies in Today’s Carbon Markets

The Problem with Current Carbon Markets

As we discussed in yesterday’s article, the concentration of CO2 in the atmosphere is a critical issue that will shape the future of our planet. While various initiatives and markets exist to address carbon emissions, the current state of carbon markets is riddled with inefficiencies that hinder their effectiveness.

The Current State of Carbon Markets

Presently, most (if not all) carbon markets operate with non-fungible carbon units. The voluntary carbon markets (VCM’s) are fragmented, lacking the uniformity needed to create scalable and impactful solutions. Non-fungible carbon units make it difficult to establish clear, real-time price signals, which are essential for driving large-scale investment and effective climate action. This inefficiency results in limited market liquidity and increased transaction costs, making carbon mitigation appear more as a cost than a profitable opportunity.

The Emissions Trading System (ETS) carbon markets, one of the key regulatory mechanisms for reducing greenhouse gas emissions, operate more like a form of taxation rather than a truly fungible market. These markets cap the total level of emissions and allow industries with low emissions to sell their extra allowances to larger emitters. ETS markets are non-fungible because each allowance is specific to its regulatory framework, time, and place, leading to variability and complexity in trading. This lack of standardisation restricts the market's efficiency and scalability, limiting its potential impact.

The Need for Fungibility

Successful markets are built on the foundation of fungible, standardised units. In carbon markets, fungibility means that one tonne of carbon abatement is equivalent to another, regardless of where or when it is achieved. This standardisation is crucial for creating a market where carbon abatement can be traded, insured, and used as a basis for financial instruments like futures, options, and bonds.

The Empati Carbon Abatement Standard addresses this need by defining a fungible unit of carbon abatement, known as CO2a tokens. These tokens are:

·   Tokenised: Representing a measurable unit of carbon abatement.

·   Tradeable: Can be bought, sold, and exchanged on a market.

·   Divisible: Can be broken down into smaller units.

·   Uniform: Consistent over time and space, ensuring reliability and trust.

Non-Fungible Markets: A Comparison

The limitations of non-fungible markets are stark when compared to fungible markets. For instance:

·   Currency Markets: $2.3 quadrillion in market volume.

·   Stock Markets: $380 trillion in market volume.

·   Bonds Markets: $340 trillion in market volume.

·   Carbon Markets: $1 trillion in market volume.

In contrast, non-fungible markets like NFTs, art, and diamonds, despite their visibility, are much smaller in scale and impact. The voluntary carbon market, being non-fungible, falls into this less efficient category.

The Empati Carbon Abatement Standard

The Empati Carbon Abatement Standard, integrated into Carbon Alpha's framework, transforms carbon abatement into a fungible, flow-based unit. This standard is built on rigorous principles, including:

·   Fungibility: Ensuring all units of carbon abatement are equivalent and tradeable.

·   Impartiality: Maintaining neutrality in the issuance and trading of CO2a tokens.

·   Data-Driven Approach: Utilizing high-frequency sensing and historical data to establish accurate carbon baselines and counterfactuals.

·   Probabilistic Certainty: Ensuring that each CO2a token has a P90 accuracy of carbon abatement.

·   Traceability: Providing complete transparency and traceability of each CO2a token through the CausalTrace platform.

Transforming Carbon Markets

By adopting the Empati Carbon Abatement Standard, Carbon Alpha aims to create a robust and efficient carbon market. This transformation will facilitate the deployment of carbon abatement solutions on a global scale, making climate change mitigation not just a necessity but a profitable opportunity. The standardized CO2a tokens will serve as the foundation for new financial instruments, driving investment and innovation in carbon abatement.

Conclusion

The current inefficiencies in carbon markets present a significant barrier to effective climate action. However, by transforming carbon abatement into a fungible, standardised unit through the Empati Carbon Abatement Standard, we can unlock the true potential of carbon markets. This will enable capital markets to play a crucial role in addressing climate change, turning what was once seen as a cost into a profitable endeavour.

Call to Action: Stay tuned for our next article where we delve into the innovative solutions Carbon Alpha is implementing to transform carbon abatement into a fungible commodity. Follow us to stay updated and join the conversation on how we can fix climate change with capitalism.

Contact Information:

Stewart Dodd (Chief Executive Officer): sdodd@empati.ai

Mark Eastwood (Chief Commercial Officer): meastwood@empati.ai

Website: www.empati.ai