Red Sycamore Pte. Ltd. is the holding company of two related startups. Carbonyx Worldwide Pte. Ltd. is a startup that is creating an offshore compliance carbon credit exchange, distinct from the existing exchanges, in that the intent is to make the markets cross tradable. Carbonyx BLUE Pte. Ltd. is a startup that establishes carbon sinks in different parts of the world in order to create investment-grade blue carbon credits. These are meant to be initially traded exclusively on our exchange.
Climate change is a reality. We strongly believe that it is the collective interest of humanity to address it, in order to maintain the quality of life, protect the most vulnerable among us, and secure our future. We believe it is in the interest of companies to aggressively pursue any and all viable efforts to minimise our global carbon footprint, within our companies, and across our collective value chains. Addressing climate change is expensive. Not addressing climate change is unfathomably more expensive.
Carbon credits and the cap and trade system is a means to that end. However, there is a danger, through the voluntary market, that carbon credits have been used by some to forestall active efforts to address climate change, or subvert the entire intent of the system. The carbon markets play an extremely important role to complement efforts to transition to a low carbon economy, or even achieve the holy grail of it all, net neutrality of carbon emissions. Additionally, at Red Sycamore, we believe that carbon exchange that trades investment-grade carbon credits as a commodity and financial instrument in its own right, will encourage the creation of carbon sinks, and spawn a viable secondary market. We do this right, we not only grow efforts to address climate change exponentially, but we create the means to fund it through the system.
We need to consider enabling some flexibility in the overall system for the reduction and removal of net emissions. Policy-wise, we need to address this with a scalpel, not a sledgehammer. We must be cognisant that any pivot towards reducing net emissions is expensive. This is particularly so for companies that are in sectors of the economy where carbon footprint is difficult to mitigate, where technology has not become commercially viable, or where the nature of the industry is simply inimical to reducing net emissions. In these cases, purchasing carbon credits is the only viable option, because these purchases fund the deployment of climate solutions in other sectors. This carbon tax is a cost upon society as whole, which theoretically encourages the entire society to incentivise investments in carbon reduction solutions elsewhere. In effect, we are harnessing market forces to facilitate further investment in viable solutions at other points of the economy. The intent is to reduce overall cost by taking advantage of economies of scale in sectors where the technology is economically viable and can be deployed widely.
Policy wise, it is in our collective interest to drive capital toward existing technologies and already scalable solutions, that can deliver immediate or near-term reduction of carbon footprints. In order to do so, businesses must be encouraged to innovate from the startup scene upwards. We need to put money into incubators and startups exploring new solutions. We need to carbon reduction and removal projects to gain access to a wider pool of capital, because amounts invested versus possible gain make financial sense. An increasingly established carbon market can then facilitate the rapid deployment of viable solutions in order to drive down emissions.
Taking stock of the industry since the setting up of the UNFCC, there is greater emphasis on green carbon credits in the voluntary market, particularly from forests. As demand for carbon credits continues to grow, people with access to land are encouraged by financial as well as environmental concerns to plant paulownia and other plans in order to earn from more than just harvesting timber. The issue is the impact on diversity by simply planting paulownia trees. Another contention is that the voluntary market lacks the rigorous verification and validation to prevent what is essentially greenwashing. On one hand, it is a step towards reforestation. On the other hand, the lack of oversight means the system is subverted.
It is sound policy to create a system that generates economic value for reducing or removing emissions, in order to incentivise innovation with the potential to accelerate decarbonisation. Startups and initiatives within the carbon market that can demonstrate the potential for future revenue, encourage investment. We are looking for an internationalised and resilient market for the removal of carbon credits. When that total addressable market is there, and the grey market is deemed feasible, we will have more startups developing carbon capture technologies with some certainty that they can be funded. This creates a positive loop that attracts more investment capital. This will create competition for those investment funds, increasing supply, and generating demand.
Red Sycamore believes that the future is found in blue carbon, specifically seagrass. 0.2% of ocean floor is covered by seagrass, but 10% of the ocean’s carbon is absorbed by seagrass. One hectare of seagrass can store twice the carbon of a terrestrial forest. Seagrass sequesters carbon 35 times faster than a terrestrial forest. This is an example of developing technologies that creates a range of potential environmental, social and economic benefits.
Companies and funds investing in startup and projects can ensure their access of carbon credits, while increasing market supply. This is also an opportunity for these investors to support objectives beyond mere abatement, such as increasing biodiversity, job creation, economic development, community development, and mitigation of pollution. Both green and blue carbon projects on a larger scale influence land use and coastal use, which enhances sequestration and, to an extent, preserves the ecosystem. For example, Singapore has increasing incentives for family offices to invest in ESG projects, including carbon sequestration initiatives with tax breaks. Or, for example, carbon sinks in coastal communities elevate the local gross domestic product because it allows these communities, many of them indigenous, to move up the value chain. This facilitates the transition of employment from pollution intensive industries with high carbon footprints to a green economy. This is a process that takes time. That means it is imperative that this impetus begins now. These secondary benefits are relevant to stakeholders.
Based on this understanding, the carbon market is an important means to advance a green agenda, and fund transition efforts. What began with the voluntary market must now pivot to a compliance market. As long as this remains in the voluntary market, there is a danger of greenwashing and subversion of the system. The compliance market is the foundation of decarbonisation efforts, and the reduction of our collective carbon footprint. The voluntary carbon markets are unlikely to expand quickly enough to incentivise the level of reduction necessary to keep us on track to net-zero emissions by 2050. The value of voluntary carbons is too low to be a financial instrument, let alone support a secondary market.
The general consensus of banks and fund managers is that incremental investments, and gradual engagement can help companies enhance their decarbonisation efforts. The argument is cost of abatement, and caution in investing in new technologies to manage risk. My belief is that this is not the right way. Recent data has decisively demonstrated that global temperatures are rising faster than expected. Events such as the civil war in Tigray and Russian-Ukrainian conflict are not helping. At the rate we are going, we will not only fail to meet any of the 2030 and 2050 targets, but will find ourselves well short, dooming us to a runaway greenhouse effect in the next 100 years. There is no financial risk to manage when we face the catastrophic effects of rising sea levels and adverse weather effects leading to a global loss of production amounting to trillions of US dollars a year.
The voluntary carbon market itself is no substitute for the robust public policies required to address climate change. While we do look to the private sector to provide technology initiatives and raise funds, the public sector is the key driver to create the proper legislative and regulatory framework for these very solutions to thrive. Without government support and political will, we will not achieve the overall progress to meet global emissions goals. The carbon market, whether voluntary or compliance, enables private parties to buy and sell carbon credits. As part of the overall cap and trade system, it is meant to represent the removal of carbon emissions from the atmosphere, the sequestration of carbon dioxide equivalents, or the avoidance of processes that lead to further emissions.
Unlike the voluntary market, the compliance market is regulated by mandatory international, national or regional carbon management regimes. The most prominent, the European Union Emissions Trading System (EU ETS) is a cap-and-trade. Regulated entities are granted allowances for a given share of overall emissions. They can then exchange with others in order to reduce the overall cost of compliance with emissions limits. It is a regional market, specific to the companies under the EU regime. This is the same for all the established compliance markets: Australia, China, New Zealand, South Korea, and Southern California. The voluntary market functions independently of these compliance markets, by enabling companies or individuals to purchase carbon credits to meet their own emissions goals. Compliance credits may be purchased voluntarily by non-regulated entities, but voluntary credits are not allowed to fulfill compliance market requirements because they are created under a less stringent verification and validation process.
While the past two decades have seen growth of the voluntary carbon market, the compliance market has lagged behind. Despite this, the voluntary market has enabled substantial investments into climate solutions. As we get closer to the 2030 pledges, decarbonisation efforts are accelerating across the global economy. It is anticipated that demand for carbon credits will continue to increase, which means the voluntary market alone is insufficient to meet that demand. We will also see more greenwashing come to light, as the spotlight is the voluntary market. The recent Verra controversy is a case in point. There are significant issues that need to be addressed.
Firstly, we need to raise the overall quality of carbon credits. This means pivoting away from the voluntary market towards the compliance market. The lack of quality credit supply is actively hindering further development of comprehensive efforts to support large-scale decarbonisation. Within the voluntary market itself, there is a scarcity of Carbon Dioxide Removal credits, the so-called removal credits. There is an excess of junk-quality carbon credits that need to be bought in massive quantities to meet the carbon tax of individual organisations. This negatively impacts capital investment into carbon credits, since the view is that credits have little to no value.
Secondly, as mentioned above, the voluntary market has a perception problem with the market integrity. On the 18th January 2023, the Guardian published an article accusing Verra of grossly overstating the emissions reductions associated with its “avoided deforestation” credits. Investigative journalists at SourceMaterial partnered with the Guardian, and claimed that only 6% of Verra’s avoided deforestation credits represented real emissions reductions. This led to the invalidation of around US$1 billion worth of carbon credits, and the CEO of Verra stepping down.
On the 21st March 2023, reports came out that Verra suspended the issuance of credits from an award-winning project in Kenya, after serious questions were raised about its validation and methodology. Survival International released a report on the 16th March 2023 saying that the offset, called the Northern Kenya Grassland Carbon Project, could not accurately count its carbon savings. The Northern Rangelands Trust, the Kenya-based conservation group that managed the offset, criticised the Survival International report. The project claimed to increase carbon storage in the soil of northern Kenya’s savannah grasslands by managing the grazing patterns of livestock herds. At COP27, it was awarded the Triple Gold distinction by the Climate, Community & Biodiversity Alliance. Survival International’s investigation found that third-party validators hired to assess the project had raised more than 100 “findings” before Verra ultimately decided to verify the carbon credits it generated. The voluntary market is losing its credibility, as more such cases of greenwashing and malfeasance come to light.
Thirdly, whether compliance or voluntary, there are multiple marketplaces, competing frameworks, thinly veiled protectionism, and other regulatory complexities make it difficult and costly for organisations and companies to navigate the market. The compliance markets are not cross-tradable. There is a need for an offshore compliance market that allows trade of all compliance credits, which will force existing compliance markets to open up, and come together to create a common standard. No carbon credit, even in the compliance market, is not investment-grade.
Fourthly, it is a fact that the voluntary market lacks the capability to support more sophisticated forms of trading. A voluntary credit will never be investment-grade. It cannot be a financial instrument, and the voluntary market can never spawn a secondary market. This limits its ability to meet the needs of different kinds of participants. There is a dire need for an improved trading infrastructure to create a futures market and other derivative instruments. This will create more liquidity in the market, spur further trading, and incentivise further investment in the system.
It is with these inadequacies in mind that Red Sycamore formed Carbonyx Worldwide as a vehicle to raise funds for that offshore compliance exchange to meet these very needs. The trades will be on a blockchain for tracking by stakeholders and transparency. The exchange will accept all compliance credits, and trade in select international currencies. This is the grey market that exists now. The total addressable market is global because as we advance closer to 2030, the carbon tax will be implemented globally by signatory nations, specifically starting with the oil and gas, maritime transportation, mining and air transportation industries – four industries with the largest carbon footprints.
Ideally, we would all like to see a convergence on a common standard. However, for political and other reasons, that would be unlikely anytime soon. For example, the Americans and the Europeans cannot even agree on the classification of kelp for blue carbon. Rather, it should be the market demand that forces this eventual convergence. When there is sufficient market size, legislation will automatically follow, because no major trading power can afford to not be part of it.
The carbon credits to be traded through the Carbonyx Worldwide offshore compliance exchange, in order to be investment-grade, and considered a financial instrument in its own right, must have specific qualities. It must be based on real, verifiable carbon sinks, such as the ones established under Carbonyx BLUE. These credits must be substantiated through a verification and validation process by a reputable third-party verification authority, based on ground observation and remote sensing data. The reputation and track record of the carbon sink and stakeholders must be part of that audit.
The carbon credits must be measurable and quantifiable using recognised measurement approaches and processes, compared to a credible emissions baseline. This includes the application of relevant standards or protocols. The carbon sequestered through this process must be in addition to the natural sequestration. Failure to do this implies greenwashing. This is the problem with much of the voluntary market, and must be avoided to maintain the credibility of the compliance carbon credits.
Because these carbon credits are meant to be financial instruments, each credit created must be unique, traceable, trackable until retirement, and recorded on a blockchain. They must be able to be traced to a specific project, and timeframe. This requires the maintenance of an independent registry. This also means that they have to be independently verified, as mentioned above.
The Red Sycamore blueprint, through Carbonyx Worldwide and Carbonyx
BLUE, is for a scalable series of carbon sinks to create these carbon credits
to fulfill that anticipated market need, and traded on our own indigenous
exchange, and recognised on the EU ETS.
