Understanding Ratings, Limits, and How We Help.

Carbon credit rating agencies ought to play a crucial role in improving credit quality and transparency. The lack of a clearly defined and universally accepted carbon credit quality is a fundamental issue for the carbon market. Scandals big and smaller are spread across the news with a certain degree of predictability. This sees market actors increasingly treat carbon credits with caution.

Rating agencies aim to address lacking standardization by means of well thought out validation frameworks. However, approaches to rate carbon credits not only differ across the agencies in many ways but, even more significantly, they cannot address some of the severe broader market issues that go beyond their scope. This text aims to summarize key issues at hand and what needs to change.

Carbon Market Watch recently had the Perspectives Climate Group evaluate the performance of four major carbon credit rating agencies including BeZero, Calyx Global, Sylvera, and Renoster – concluding that approaches to rate carbon credit quality are generally well thought out while they in part significantly differ in their frameworks and weighting to evaluate the likelihood that a carbon credit represents a genuine reduction or removal of MtCO2e.

These discrepancies undoubtedly create confusion in the market and make it challenging for buyers to assess the quality of carbon credits consistently. This underscores the importance of understanding the methodologies and frameworks used by rating agencies to make informed decisions. Most prominently, rating agencies’ assessment criteria differ in the areas of additionality, non-permanence, leakage, co-benefits and safeguards. A brief explanation:

1. Additionality: Gauge of whether a project brings additional climate benefits that would not have occurred otherwise.
2. Non-Permanence: Risk of a carbon storage being temporary only or likely to reverse.
3. Leakage: Likelihood of destructive activities shifting elsewhere as a direct or indirect result of a project's implementation.
4. Co-Benefits and Safeguards: Co-benefits are additional positive impacts of a project beyond carbon emissions reduction, while safeguards refer to measures in place to protect local communities and ecosystems.

Ratings across these categories can vary significantly for the same project between agencies.

Buyers should therefore understand how rating agencies operate and what their ratings represent. Instead of relying on a single rating agency, buyers should enjoy the benefit of multiple assessments and understand how agencies assess these criteria and what weightage they assign. This provides for a much more comprehensive picture of the credit's quality.

That said, let's look beyond carbon credit rating agencies as they do not have in scope those activities required to address the complexities of the some of the broader market issues listed below:

1. Market Integrity: The risk of greenwashing, where companies make misleading or exaggerated claims about their environmental credentials. Rating agencies, although they contribute to improving credit quality, cannot independently address all instances of greenwashing or ensure overall market integrity.
2. Supply and Demand Imbalance: An imbalance between the availability of high-quality carbon credits and the demand for them can – and most certainly has – happen. This imbalance leads to challenges in sourcing credible and impactful projects, and it requires broader market interventions beyond the scope of rating agencies.
3. Transparency and Standardization: While rating agencies contribute to transparency, broader efforts are needed to establish consistent methodologies, reporting frameworks, and disclosure requirements across the market.
4. Policy and Regulatory Landscape: Issues related to policy frameworks, regulatory oversight, and alignment with international standards require policy interventions and collaborative efforts beyond the scope of rating agencies.

Addressing these issues requires a multi-stakeholder approach involving governments, market participants, civil society organizations, and rating agencies. It necessitates policy reforms, industry collaboration, standardization efforts, and ongoing dialogue to ensure the voluntary carbon market operates with integrity, transparency, and reliability.

Is this realistic? It is daunting for sure and will not happen swiftly. Hower, it is important to keep the general direction and goalposts in mind: In the short term, buyers should understand how rating agencies operate, what their ratings represent, and rely on not just one agency. Directionally, standardization efforts must become a key focus area to ensure market integrity and re-instill trust; this is where national and international regulation plays a vital role.

In addition, buyers move away from absolute "carbon neutrality" claims and focus on more nuanced claims – assuch, raters will play an even more crucial role in providing information on the trade-offs associated with different projects.

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How can Project Samsø help?

Our solution is a MRV system (measurable, reportable and verifiable), holding everyone on the network accountable driving towards eliminating sub-par (let alone phantom) credits. Our infrastructure will, firstly, improve today’s carbon emission and offset verification and certification processes. Secondly, the resulting reliable and compliant footprints fuel the novel and automated conversion of existing securities into Carbon Neutral Securities (CNS). Think of CNS as a traditional financial instrument with a built-in component offsetting companies’ remaining gap to their carbon net-zero balance, financed by public investors. The CNS solution allows us to convert any security into a clean, carbon-neutral investment for those investors.

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About Strategy Partners LLC

Strategy-Partners LLC is a strategic designer of workflows and solutions for a Carbon Neutral Ecosphere. The firm assists with establishing unified accounting of carbon emissions and offsets with third-party verification and ongoing validation. Strategy-Partners is led by a team of financial securities veterans and data experts based in the U.S.  For more information, visit www.strategy-partners.net

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About KALYP Technologies LTD

KALYP Technologies, a provider of enterprise software in the financial markets with its distributed ledger-based software, establishes smart market infrastructure for institutions and enables more efficient digital processing. The firm is independently financed and led by a group of securities industry veterans and distributed ledger technology experts with an international presence between London and Boston. For more information, visit www.kalyp.com

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Important Information

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for decisions based on such information, and it should not be relied on as such.

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Sources:

Rating the Raters: Assessing the quality of carbon credit rating agencies. Carbon Market Watch and Perspectives
Climate Group. September 11, 2023.

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