Market Fragmentation

Both compliance and voluntary markets remain extremely fragmented in terms of CO2 offset pricing. The below diagram from the World Bank shows current global ETS levels:

The problem of fragmentation is further exacerbated when we look at the VCM whereby the compliance market is considered relatively stable. Prices for voluntary carbon credits are highly variable by vintage, project type, co-benefits, and verification agency, ranging from less than a dollar to over $50 per ton of CO2. Projects that are “nature-based” and involve long-term carbon sequestration (e.g. forest conservation) and especially those with environmental and social co-benefits (e.g. wildlife habitat, biodiversity, water quality, indigenous and other community values or worker rights) typically attract higher prices. See the table below for 2021 figures compiled by the Oxford Institute of Energy Studies:

Another problem of the VCM is that it is dominated by a number of small brokerages that keep pricing opaque in contrast with every single functioning global market for equities, commodities, currencies, and real estate. A lack of transparency in commissions has led to margins in excess of 100% further diverting funds from Least Developed Countries (LDCs) with buyers being unaware of such enormous diversion of funds.

The idea of carbon offsets has been around for a long time. In fact, the United Nations Framework Convention on Climate Change (UNFCCC) agreed in 1997 that carbon credits were a good way of reducing the emission of CO2 and other greenhouse gases.

The history of emissions trading is even longer, and British economist Arthur Cecil Pigou proposed a carbon tax framework over a hundred years ago.

The idea behind carbon offsets is simple: if you pay someone to take some of your pollution, then you can essentially compensate for your emissions elsewhere. The problem is that it’s difficult to easily verify that companies have offset their emissions.

Over the past two decades, there have been many attempts at creating a market for carbon offsets, but they've largely failed because it's difficult to create a market where people trust each other enough to transact. Unfortunately, this model doesn't scale very well - it requires every single buyer and seller in the entire world to trust each other completely before any transactions can occur.

This brings us back full circle - how do we create a global market where everyone trusts each other? How do we build scalable solutions on top of these existing platforms? And how do we incentivize people to use these platforms when they themselves aren't trusted? These are all questions that can be answered with blockchain.

Last updated