# Blockchain and Carbon Markets: Standards Overview ††thanks: Citation: TODO:
Authors. Title. Pages…. DOI:000000/11111.

Pedro Baiz
Clearly; Imperial College London
<EMAIL_ADDRESS><EMAIL_ADDRESS>

###### Abstract

The increasing significance of sustainability considerations within both
public spheres (such as policies and regulations) and private sectors
(including voluntary commitments by major multinational corporations)
underscores the imperative to harness cutting-edge technological advancements.
This is essential to ensure that the momentum of this trend translates into
tangible outcomes, thwarting phenomena like greenwashing and upholding high
standards of integrity, all while expediting progress through automation. This
paper focuses specifically on carbon markets, which, after enduring years of
confusion and controversy, may finally be on the brink of converging toward
internationally recognized minimum standards. Beginning with an introduction
to fundamental concepts pertaining to carbon markets and Distributed Ledger
Technologies (DLTs), the paper proceeds to dissect the challenges and
opportunities within this burgeoning field. Its primary contribution lies in
offering a comprehensive overview of recent developments across various
initiatives (such as ICVCM, IETA/WorldBank/CAD Trust, IEEE/ISO) and providing
a layered analysis of the entire ecosystem. This framework aids in
understanding and prioritising future endeavours. Ultimately, the paper
furnishes a set of recommendations aimed at bolstering scalability and
fostering widespread adoption of best practices within international markets.

Review Paper

_K_ eywords Carbon Markets $\cdot$ DLTs / Blockchains $\cdot$ World Bank
$\cdot$ IETA $\cdot$ Standards (e.g. Gold Standard, Verra, ISO, IEEE) $\cdot$
Emissions Offsets & Insets $\cdot$ Regulations

##  1 Introduction

Recent setbacks to the crypto space (e.g. FTX, Terra) could give the
impression that the promised benefits of DLT are imaginary, but that is very
far from the truth. A good way to explain what has (and will continue) to
happen can be summarised with the computer science term GIGO (garbage in,
garbage out). The catastrophic failures seen in 2022 demonstrates that garbage
in the blockchain space could come from many different angles, from the actual
"digital asset" themselves to the way the entire organisation or ecosystem is
"governed". Standards and regulations are key to prevent GIGO and therefore
represent one of the main (if not the main) blocker to scalable and
sustainable business models.

The present document aims to provide an overview and review of the DLT space
for Carbon Markets. The review covers activities across all areas, from
academia to industrial and international non-profit organisations (e.g. World
Bank), specially to support widespread market adoption. The review paper aims
to particularly address the following challenges of this growing domain:

  * •

Lack of coordination between key international organisations related to this
broad and growing space. For example: IETA, ICVCM, ISO, IEEE, World Bank,
among many others (specially with for-profit organisations which due to
competition do not always engage others).

  * •

Lack of clarity on what exactly this space involves (scoping). In order to
move forward we need to avoid confusion of terminology, we need to identify
the key players & organisations, describe clearly the obstacles and enablers,
etc.

As this document will demonstrate, the number of initiatives focused on this
space has ballooned in recent years, mainly for 2 reasons: 1) Growing demand
in carbon markets (e.g. voluntary, regulated, article 6 Paris Agreement); and
2) Realisation from the DLT community that "digital assets" with a direct link
to valuable assets (e.g. commodities, physical assets like buildings) have a
better chance of success. Unfortunately, multiple DLT projects working with
carbon have demonstrated a lack of proper understanding of the complexities of
carbon markets, and vice-versa, carbon market experts lack a proper
understanding of DLTs, e.g. [1]. This paper aims to provide a comprehensive
overview that enables experts from any domain to gather a good grasp of the
current state-of-the-art and more importantly where we are heading.

##  2 Fundamentals of Carbon Markets and DLTs

As this paper is meant to be used by many different types of experts, it is
important to provide basic definitions that bring experts from different
domains up to the same basic level of understanding (e.g. technology vs
sustainability). This section will introduce basic concepts that will be
referred to in other sections of this document. Figure 1 provides an overview
of the entire ecosystem. The figure of the ecosystem shows how it can be
broken into different areas that relate to the physical layer (actual
emissions measurements) or financial markets (e.g. exchanges). By using the
concept of layers, such as transaction, registry, metadata and service, etc,
Figure 1 breaks the ecosystem into distinct areas, each of which requires its
own type of expertise (it is in fact extremely difficult to find experts that
understand all these areas in detail). In the following subsections, a deeper
dive will be provided for the broad area of Carbon Markets and DLTs.

Figure 1: End-to-End Ecosystem of DLT Carbon Markets.

###  2.1 Carbon Credits/Offset/Market

Carbon markets are mechanisms that allow countries, companies, and other
organisations to buy and sell credits for greenhouse gas emissions. The goal
of carbon markets is to create financial incentives for reducing greenhouse
gas emissions. Credits can be generated from either: 1) Avoidance/reduction or
2) Removal/sequestration.

There are two main types of carbon markets:

  * •

Regulated / Cap-and-trade systems: This system is imposed by a government or
regulatory body which sets a cap on the total amount of greenhouse gases that
can be emitted within a specific time period. Companies or organisations that
need to emit greenhouse gases must purchase allowances or credits from those
who have reduced their emissions below the cap. The overall cap is gradually
reduced over time, encouraging companies to find ways to reduce their
emissions. Currently we have this type of market in multiple jurisdictions
such as California, EU or China. The most polluting economic sectors are
initially covered (e.g. energy, cement, steel) and with time others should
eventually follow (e.g. Germany just started to cover building and transport
sectors).

  * •

Voluntary / Carbon offset programs: Carbon offset programs allow companies or
individuals to offset their own greenhouse gas emissions by purchasing credits
from projects that reduce or remove greenhouse gases from the atmosphere.
These projects can include renewable energy projects, reforestation projects,
methane capture projects, among many others. As this market is unregulated
there is a huge variety of options, also with high variability on the quality
of projects (leading to widespread green-washing claims).

The origin of carbon credits can be traced back to the Kyoto Protocol and the
UNFCCC CDM (Clean Development Mechanism). The CDM defined dozens of
methodologies to properly account for avoidance or removal of carbon, as each
specific sector/application involves its own set of complexities. The
complexity of Carbon Markets led to the formation of the Taskforce on Scaling
Voluntary Carbon Markets (TSVCM) which in 2021 published one of the most
comprehensive reports on the subject [2]. TSVCM was later rebranded to the
Integrity Council for the Voluntary Carbon Market (ICVCM) [3]. ICVCM offers an
independent governance body for the voluntary carbon market. Their purpose is
to ensure the voluntary carbon market accelerates a just transition to 1.5C
and it brings together the most important international organisations in this
space. It is also important to mention the Voluntary Carbon Markets Integrity
Initiative (VCMI) [4]. VCMI is focusing on corporate claims while ICVCM aims
to address the quality of the underlying carbon offsets. Both, ICVCM [5] and
VCMI [6] issued statements in summer 2023 to publicise their cooperation to
operationalise a high-integrity market to accelerate global climate action.

Bringing a consistent set of "principles" (e.g. standards), represents the
priority of ICVCM. In July 2023, ICVCM made the public release of their Core
Carbon Principles (CCPs) and Assessment Framework (AF) [7]. The 10 "Core
Carbon Principles" (CCP) are [7]:

  1. 1.

Governance: Effective governance. The program needs to establish strong
governance mechanisms that ensure transparency, accountability, ongoing
improvement, and overall high standards.

  2. 2.

Governance: Tracking. The program must employ a registry to uniquely identify,
record, and monitor mitigation activities and issued carbon credits, ensuring
a secure and clear means of credit identification.

  3. 3.

Governance: Transparency. The program is required to furnish extensive and
transparent details about all accredited mitigation activities. This
information should be accessible to the public in digital form and be easily
understandable to individuals without specialised expertise, facilitating the
thorough examination of mitigation efforts.

  4. 4.

Governance: Robust independent third-party validation and verification. The
program must establish program-level mandates for rigorous independent third-
party validation and verification of mitigation activities.

  5. 5.

Emissions Impact: Additionality. The reduction/removal emissions resulting
from the mitigation activity must be considered as additional, meaning that
they would not have taken place without the incentive generated by the revenue
from carbon credits.

  6. 6.

Emissions Impact: Permanence. The reductions/removals achieved through the
mitigation activity must be either permanent or, in cases where there’s a risk
of reversal, the program should have measures in place to mitigate those risks
and provide compensation for any reversals.

  7. 7.

Emissions Impact: Robust quantification of emission reductions and removals.
The reductions/removals of emissions resulting from the mitigation activity
must be accurately measured using rigorous and conservative methodologies that
encompass completeness and scientific rigour.

  8. 8.

Emissions Impact: No double counting. The reductions/removals from the
mitigation activity must not be counted twice; they should only be counted
once to achieve the mitigation targets or goals. This prohibition on double
counting includes avoiding scenarios like double issuance, double claiming,
and double use.

  9. 9.

Sustainable Development: Sustainable development benefits and safeguards. The
carbon-crediting program shall have clear guidance, tools and compliance
procedures to ensure mitigation activities conform with or go beyond widely
established industry best practices on social and environmental safeguards
while delivering positive sustainable development impacts.

  10. 10.

Sustainable Development: Contribution toward net zero transition. The
mitigation activity shall avoid locking-in levels of GHG emissions,
technologies or carbon-intensive practices that are incompatible with the
objective of achieving net zero GHG emissions by mid-century.

Most of the principles stated above are obvious and agreed among all
carbon/standard registries (e.g. Gold Standard, Verra) but some can be complex
to agree on. For example, Permanence is a problem for AFOLU projects
(Agriculture, Forestry and Other Land Uses) but it’s usually straightforward
for Energy projects. Probably the most complex principle of all relates to
“Additionality” as many organisations disagree on what exactly this can
constitute for specific scenarios.

###  2.2 DLTs/Blockchain

Distributed Ledger Technology (DLTs) encompasses a broad range of databases
with transactions that are shared and replicated across a network of
computers. It allows multiple parties to record transactions and share the
same version of the truth, without the need for a central authority.
Blockchains are one of the many types of DLTs. DLTs use cryptography and
consensus algorithms to ensure the integrity and security of the data. They
are often decentralised, meaning that there is no single point of control, and
the ledger is maintained by a network of participants rather than a single
entity. Figure 2 provides an overview of functional and emergent
characteristics which help to describe DLTs and more importantly to highlight
their benefits in most application domains (including carbon markets).

Figure 2: DLT/Blockchain Characteristics.

There are many types of DLTs, depending on which characteristics we require
for the specific application, for example ’permissionless vs permissioned’,
consensus mechanism (e.g. Proof of Work, Proof of Stake) among many others. In
the specific case of Carbon Markets, the growing importance of “Governance”
and “Regulations” means that well known financial requirements such as KYC
(Know Your Customer) and AML (Anti Money Laundering) are becoming essential.

Looking at the CCPs described in the previous section (e.g. real, MRV, counted
once) it becomes obvious how the core requirements of a good functioning
carbon market could benefit from DLT systems as they can provide a secure and
transparent way to track and verify carbon credits. By using DLTs, it is
possible to create a transparent and secure record of carbon credits that
cannot be altered or tampered with. This can help to ensure the integrity of
the carbon market and encourage its scalability. Moreover, DLT can be used to
automate the buying and selling of carbon credits through the use of smart
contracts. Smart contracts are self-executing contracts with the terms of the
agreement between buyer and seller being directly written into lines of code.
This can help to streamline the carbon credit trading process and reduce the
need for intermediaries.

###  2.3 Ecosystem

As the above areas merge and mature, there are specific terms/concepts that
are relevant to this Ecosystem. A great example of this comes from the Climate
Warehouse [8], an initiative proposed by the World Bank that has been running
for the past few years completing a number of pilots with Governments and many
other market stakeholders. In recent years, all these efforts have converged
to the Climate Action Data Trust (CAD Trust)[9].

CAD Trust offers a decentralised, blockchain-powered digital infrastructure
that connects these registries and provides public access to the information
in a harmonised and user-friendly format. Their objective is to maximise the
transparency of carbon credits, minimise the risk of double counting, and
enhance the overall integrity of the markets. With a decentralised and secure
digital infrastructure, the services built by the public and private sector
such as compliance reporting, transacting, and benchmarking can be easier and
more effective. Figure 1 follows the pattern of the Climate Warehouse / CAD
Trust [10, 9] using the concepts of layers which helps to understand all the
different components and their interaction.

##  3 Recent Developments (State of the Art)

Probably the first published work on combining carbon credit and DLT comes
from Leonhard [11]. His proposal developed a solution that allowed teams of
academics to issue carbon credits as crypto currency on the Ethereum network.
Mok et al. [12] in 2019 provides one of the first World Bank examples of
testing the use of blockchain to build a meta-registry for decentralised
climate markets. Franke et al. [13] examines the benefits and constraints of
applying blockchain technology for the Paris Agreement carbon market mechanism
and develops a list of technical requirements and soft factors as selection
criteria to test the feasibility of two different blockchain platforms.

Other applications of DLT in carbon/energy comes from Ashley et al. [14] which
describes a solution for autonomous blockchain of custody for renewable energy
credits and carbon credits that leaves a simple audit trail, significantly
reducing the associated time and cost, and enabling producers to monetize
their credits immediately after generation. Their work cited the Clean Energy
Blockchain Network (CEBN) and other real-life experimental deployments. Pan et
al. [15] provides a similarity assessment between the mechanism of carbon
trading and blockchain. The study confirms the potential value of the
technology on this specific domain. Kim et al. [16] proposes a blockchain-
based carbon emission rights verification system to learn proven data further
by using the governance system analysis and blockchain mainnet engine to solve
these problems. Probably the most comprehensive and up-to-date reviews on the
topic of TRLs (Technology Readiness Levels) for DLT + Carbon Markets comes
from Sipthorpe et al. [17]. The paper provides an objective, academic review
of blockchain solutions for carbon markets. In surveying the entire market,
they found the current ecosystem is diverse, fragmented, and relatively
immature.

In terms of standards focused publications, one of the first works in the
space of DLT standards comes from Anjum et al. [18]. Their work compares
popular DLTs across key areas such as consistency, scalability, security
principles and many other areas. The overview is aimed at practitioners
looking to expand beyond the traditional finance space to all other areas of
applications (e.g. supply chain, healthcare). Deshpande et al. [19] provides a
comprehensive overview of DLTs Challenges, opportunities and the prospects for
standards. As a BSI (British Standards Institution) report, it provides
perspectives across short, medium and long term standards on the growing DLT
space.

Hyland-Wood et al. [20] argue about the need for standards in the DLT space by
summarising some existing international standards work and propose directions
for additional standards development that could meaningfully be explored in
the near future without negatively impacting additional invention. Marsal-
Llacuna et al. [21] toke a different angle on the topic of DLT standards by
discussing new standard drafting models emerging from the disruptive
blockchain community. These models can challenge traditional standard
development bodies. Gramoli et al. [22] listed standards organisations and the
efforts they devote to standardise DLT. They identify a lack of terminology
that can hamper communication on this topic and propose clarifications to
address these ambiguities. Finally, they propose a high-level description of
DLT by describing three elements of their functional architecture (consensus,
security and ownership). Lima [23] provides a case of the importance of DLT
standards, providing one of the first classification of DLT/blockchain
standards and a comprehensive overview of the IEEE ecosystem.

Aristidou et al. [24] provides an assessment of DLT standards, currently and
future, with a focus on government applications. This aims to consider
applications that tackle corruption, fraud, lack of transparency, alienation
and disconnection of citizens from decision-making centres to ensure proper
governance conditions are offered to citizens. Bello et al. [25] focused on
comparing traditional payment systems standards within blockchain systems. For
example, they compare the Payment Application Data Security Standards (PA-DSS)
applicability towards transaction-supported blockchain platforms to test the
standard’s applicability. Drljevic et al. [26] paper explores standards and
risk as factors, which can support or hinder the sustained application of
blockchain in a broad scope of environments. They conclude that a gap exists
in normative frameworks that affect the adoption and sustainable use of
blockchain technology. Closing this gap can support the sustainable use of
blockchain technology. König et al. [27] provides an overview of
standardisation work about blockchains and DLTs, a set of comparison criteria
for future work and a comparison of the existing standards work itself. With
that information, aligning to existing standardisation efforts becomes easier,
preventing duplication and supporting prioritisation (exactly the main
argument of the present paper but across a broader domain). Naga et al. [28]
explains the standards and categorization of blockchain and its protocols. It
includes the protocols of network and data organisation, distributed consensus
protocols, the framework of autonomous organisation that relies on smart
contracts executed in distributed virtual machines, and the human–machine
interface implementations. Tan et al. [29] reviews a total number of 167
blockchain standard projects. Highlighted topics including foundational,
security, privacy & identity, application, data and test & assessment. Zhi et
al. [30] summarised the current status of blockchain standardisation in China
and abroad, with particular focus on the fields of energy and power. The paper
also proposed a standardisation framework for these sectors.

The importance of standards in developing well functioning markets is
undeniable. We can for example cite the work of Perrons et al. [31] which puts
forward case study evidence from the Intel Corporation and the Energistics
Consortium showing what the geoenergy sector can learn about blockchain from
other industries, and highlights that the absence of data standards and
interoperability has contributed to blockchain’s failure to deliver
significant value in the geoenergy domain thus far. Keogh [32] sets the case
of how a standardised framework could enhance food traceability, drive FSC
efficiencies,enable data interoperability, improve data governance practices,
and set supply chain identification standards for products and assets (what),
exchange parties (who), locations (where), business processes (why), and
sequence (when). In more general terms, Schmidt et al. [33] quantifies a novel
channel that contributes to greater trade integration: the release of
harmonised, voluntary product standards. Their study shows that harmonised
standards have contributed up to 13% of the growth in global trade.

To the best knowledge of the author, this work represents the first overview
of DLT and carbon markets focused on the role of "standards". This work is
particularly unique in its comprehensive and up-to-date approach that covers
the intersection of DLT and carbon markets as shown by Figure 1.

###  3.1 Challenges and Opportunities

The growing area of DLT and Carbon Markets has experienced multiple
challenges, particularly around credibility. As an example we can cite the
debate between Verra and Crypto players like Toucan/KlimaDAO [34, 35]. The
problem emerged because Toucan had tokenized millions of retired Verra-issued
credits. Verra wants to make sure that retiring a carbon credit means that it
has been fully used to offset a company’s emissions and cannot be used again.
However, the work done by Toucan allowed for a digital version of that carbon
credit, called a BCT, to be traded as a digital commodity, which undermines
the original intention of the carbon credit.

It is worth mentioning that Verra is not against the use of technology like
DLT, but against the lack of honesty/transparency, e.g. [36]. In August 2022
Verra launched a public consultation period during which it collected input
from market participants and potential partners on how Web3 can be properly
brought into the fold [37]. Other carbon credit standard registries such as
Gold Standard has similar views [38]. Figure 3 provides an overview of this
fact, Challenges vs Opportunities are usually related and represent two sides
of the same coin. A great example of this comes from the UNEP blog "Blockchain
solutions to carbon market challenges"[39].

Figure 3: Challenges and Opportunities in the growing space of DLT + Carbon
Markets.

Despite bad experiences over the past years, there are examples of good
practices that help move the field forward. In this regard we can cite the
example of EEX admitting the blockchain-based ClimateTrade to the European
mandatory carbon market [40]. EEX also partnered with another blockchain-based
voluntary carbon market company, AirCarbon Exchange from Singapore. It is
important to highlight that EEX (European Energy Exchange AG) is one of the
main companies appointed as a common auction platform for the EU ETS Market by
the European commission [41] (regulated EU carbon market). These positive
examples show that when organisations adopt best practices and cooperate, it
is possible to deliver real-life DLT applications in carbon markets. In the
next section, specific recommendations will be made to help address some of
the existing challenges and take advantage of the ongoing opportunities.

##  4 Areas of Future Standards Development

The future ecosystem of DLT and Carbon Markets should, broadly speaking,
resemble that shown in Figure 1. In the following subsections each of these
layers and components will be described, individually or as a group. In terms
of key initiatives and non-profit organisations, Figure 4 provides a Venn
diagram view. Having IETA in the centre demonstrates the focus of developing
an ecosystem that is focused on market participants (IETA is the oldest and
main international trading association for carbon markets).

Figure 4: Overview of current non-profit international initiatives.

###  4.1 Markets

The previous section should have demonstrated that Carbon Markets are
extremely diverse and fragmented. Regulated markets are by nature fragmented
and diverse because they follow national/regional priorities, for example
alignment to the region’s NDC (Nationally Determined Contributions) as part of
the Paris Agreement. Fortunately, more cooperation is emerging on this front
across countries, especially with the ongoing work in Article 6 of the Paris
Agreement.

Voluntary Carbon Markets offer a less political avenue of progress. In this
regard we should highlight the ongoing work that ICVCM and VCMI are trying to
accomplish by trying to bring together the main Carbon Market stakeholders
from around the world. This task involves less politics and more technical in-
depth knowledge of what Core Carbon Principles (CCPs) should apply to all
carbon credits.

In this front the main action point relates to engagement of international
initiatives bringing multiple organisations together (including competitors)
to address common challenges. The role of IETA (International Emissions
Trading Association) should be highlighted as they are engaged with all the
main international initiatives in this space, namely:

  * •

ICVCM. IETA is part of the governing body of the ICVCM and in fact they are in
charge of the "digital assets" work stream (the ICVCM group focused on DLT and
other digital technologies).

  * •

World Bank and UNFCCC. IETA continuously engages these organisations and more
importantly contributed to the ongoing work taking place in CAD Trust.

In terms of specific types of "Standards" that are expected to be covered in
this area, we can cite (but not be restricted) to the following examples:

  * •

Contracts Types. IETA and other market makers have a long history of setting
common international standard contracts for carbon credits. This is expected
to continue under a digital (DLT) framework but with the added value of making
contracts "smart" and therefore supporting a wide range of automations.

  * •

Project Types. ICVCM emerged primarily to help develop a universally accepted
set of CCP (Core Carbon Principles). They are setting and enforcing a
definitive global threshold, drawing on the best science and expertise
available, so high-quality carbon credits efficiently mobilise finance towards
urgent mitigation and climate resilient development. There is still extensive
ongoing work on this space across many different market participants for
specific methodologies.

The above examples are essential to develop mature and liquid international
carbon markets. In fact, clarifying project types is essential in order to
know if fungible or non-fungible tokens (NFTs) are to be created. This is
still an active area of discussion but most likely DLT carbon markets will
require a range of "fungible NFTs". 111Fungible NFTs refers to the idea that
adding/splitting emissions from the same project type (same CCPs) is ok
(fungible tokens) while between different project types is not (NFTs).

In Figure 1 market standards fall mainly into the "Registry", "Metadata" and
"Service" Layers. ICVCM CCPs is a perfect example for the registry layer while
the Data Model from the Climate Warehouse / CAD Trust is a good example for
the metadata layer[9]. In terms of the service layer, there are multiple
standards that can be applicable, for example Compliance Reporting could
leverage International Standards such a GRI or the new IFRS ISSB (depending
strongly on the specific service/application). ISO Technical Committees such
as TC 68 (Finance) and TC 322 (Sustainable Finance) also have a key role to
play in this space such as for example GLEIF / ISO 17442 (Legal Entity
Identifier) or ISO 6166 (International Securities Identification Number -
ISIN).

###  4.2 Governance & Regulations

Governance is an essential area for any well functioning organisation.
Unfortunately, few scandals in the crypto space in recent years can ultimately
be traced back to poor governance (e.g. lack of processes, controls, checks).
For example, the fall of FTX can be traced back to the liquidity crisis of the
FTT token and his trading firm, Alameda Research Company, as Reuters reported
that Bankman-Fried moved up to $10 billion in FTX customer funds to Alameda,
whose assets were primarily held in the FTT token [42]. Despite all the hype
and work in areas such as DAOs (Decentralised Autonomous Organizations), DLT
projects and organisations can still exhibit poor governance practices. Recent
studies demonstrate that many popular DAOs are actually extremely centralised
(most tokens are concentrated in the hands of few accounts/individuals)[43].

One of the main reasons why Governance can be poor among DLT projects is
because some support the ethos of DeFi (e.g. anyone in the world can lend
money to anyone else, without the intervention of incumbents such as
government or traditional banks). This ethos can contradict proper regulatory
oversight which means that many of the great characteristics of DLTs could be
compromised, e.g. Trust or Transparency can be jeopardised by poor KYC/AML.

The specific types of standards that are expected to be covered in this area
include:

  * •

CCPs. This focus area of standards aims to bring integrity and minimum levels
of quality of carbon credits. ICVCM represents the most recent international
initiative in this space, in fact ICVCM is an independent "governance body"
for the voluntary carbon market (bringing together many other non-profit
carbon credit standard bodies like Verra or Gold Standard).

  * •

Organisation Governance. The growing importance of "Sustainability" and "ESG"
(Environment, Social and Governance) considerations across the corporate and
financial world has given rise to many initiatives in this space. Some
examples include: ISO 37000:2021 series and B Corporation Certification [44].

  * •

Regulators Involvement. This refers specifically to VCM (Voluntary Carbon
Markets) as regulated is well defined by each specific jurisdiction.

As an example of regulators’ involvement in VCMs we could cite the recent
report and consultation from IOSCO[45]. The Board of the International
Organization of Securities Commissions (IOSCO) published in November 2022 a
discussion report with the aim of advancing the discussion about what sound
and efficient Voluntary Carbon Markets (VCMs) should look like and what role
financial regulators may play in promoting integrity in those markets. As an
international organisation, IOSCO is in close contact with important national
regulators like the SEC in the US and the FCA in the UK. In Figure 1
governance standards or regulators involvement covers everything, particularly
aspects not shown in such figure and which relate to the organisations
involved in the ecosystem.

###  4.3 Physical Layer

In Figure 1 the physical layer can relate to a wide range of options, each
dependent on the specific economic sector. Although all economic sectors emit
emissions, there are four which are particularly important due to their large
proportion of emissions generation: 1) Energy, 2) Buildings and Materials
(this also involves Heavy Industries such as Cement, Steel), 3) Transport and
4) AFOLU (Agriculture, Forestry and Other Land Uses).

Standard areas that are of importance in the physical domain include:

  * •

Carbon Accounting (CO2). The most important standard initiatives in this space
are the GHG Protocol[46] and the ISO 1406X Series (developed by ISO TC 207).
ISO and GHGP are actually extremely similar and therefore either could be
used/extended. The main advantage of GHGP is that it is openly available,
while the advantage of ISO is that it provides a comprehensive set of
standards for verification and accreditation (ISO 14065 and 14066).

  * •

Energy. In most sectors, emissions and energy are directly linked. ISO 50000
standard demonstrates this very clearly, but the fact is that different
economic sectors can offer more relevant domain specific options. For example,
in the built environment BREEAM[47] represents a top international option.

  * •

Other GHG (Greenhouse Gas) Emissions. CO2 is actually not the worst man-made
emission, for example methane (CH4) common in agriculture is 25x more damaging
than CO2, while nitrous oxide (N2O) is 298x[48]. Carbon credits are normally
issued in CO2e (CO2 equivalent) metrics which aims to account for this fact.

  * •

Hardware & Software. At the physical layer, in addition to "carbon" or "domain
specific" standards we should add the role that sensor network standards could
play. Ensuring that a reading/measurement actually represents the physical
world encompasses a wide range of technologies. Standards on "Blockchain and
IoT Integration" represent a good example of this broad and expanding space.

Although general methodologies to measure GHG are now well established with
internationally recognised standards (e.g. GHGP, ISO 1406X), there is still
ongoing R&D (and future Standards) to properly assess emissions and baselines
for specific economic sectors. One huge area of concern and ongoing work is
represented by Scope 3. 222Scope 3 emissions, also known as indirect
emissions, are emissions that result from activities that are not directly
controlled by an organisation but are related to its operations. These
emissions can occur along the value chain, including upstream and downstream
of an organisation’s operations.

As an example of this ongoing work, we can cite the recent work in the
Transport sector. Organisations such as the Smart Freight Centre has produced
the GLEC Framework [49] which provides a specific standard for "Quantification
and reporting of greenhouse gas emissions arising from transport chain
operations" (ISO 14083 published in 2023). GLEC / ISO 14083 builds on top of
generic standards such as GHGP or ISO 1406X to provide more accurate emissions
quantification. This can hugely influence CCPs such as MRV, Real and
Baselines.

###  4.4 Database Layer

This layer of the ecosystem relies mainly on very generic standards and
regulations (not specific to Carbon Markets or DLT). All data driven
businesses, specially those that can gather data from a wide range of sources
(e.g. IoT, Satellite) require a multi-stage data processing pipeline, from raw
data entries (e.g. sensor, image) to valuable insights (carbon units). The
main broad areas of work under this layer include:

  * •

Cyber Security. Any data platform should be protected against cyber attacks,
especially when the system contains valuable datasets. Well-known standards in
this space include certifications from ISO 27000 and SOC 2.

  * •

Privacy and Confidentiality. Ultimately, all emissions data relates to
physical systems that relate to people or organisations. Due to a growing set
of regulations involving personal information, it should be properly handled
(anonymously). Additionally, organisations could have issues with
confidentiality (sharing data between competitors requires careful
considerations).

The complexity in this layer of the ecosystem is that it needs to establish a
delicate balance between accurate quantification of emissions (essential for
meeting several CCPs) and privacy or confidentiality concerns. Audit &
verification of data and its processes is also essential. Getting this balance
right could lead to amazingly fair and accurate "baselines" (e.g. baseline
transport emissions for a disabled person can not be the same as that of an
able adult).

###  4.5 Transaction Layer

Similar to the Database layer, the transaction layer involves aspects that are
common for those working on financial transactions. A recent article by
CoinDesk called "2023: The Year of Regulation vs. Decentralization" [50]
demonstrates how recent catastrophic failures in the crypto space is leading
to regulators like the SEC and CFTC to step in the coming years. Some specific
areas of work on this layer include:

  * •

Identity (e.g. KYC & AML). International organisations like the Financial
Action Task Force (FATF) have a long track record in setting
standards/guidance in this space. One recently release standard that has
substantially grown in importance among the financial sectors in the EU is ISO
17442 333The Global Legal Entity Identifier (LEI) System is designed to
uniquely and unambiguously identify participants in financial transactions
[51].

  * •

Payments. In this domain we should highlight the role of ISO 20022. A single
standardisation approach (methodology, process, repository) to be used by all
stakeholders of international payments. Examples of users include important
international organisations like the Swift network [52].

  * •

Interoperability. This is probably the most needed, but also the most complex
aspect of the DLT ecosystem. Many organisations, national and international,
could be cited regarding ongoing work. The above literature review covers some
good papers that touch on this point. A reasonable landscape of initiatives is
provided by the EU[53]. We should specially highlight the role of broad
international initiatives like ISO TC307 (Blockchain and distributed ledger
technologies) and TC68/TC322 (Finance and ESG).

Each of the listed areas above can encompass a large number of standards. For
example, although LEI (ISO 17442) has proven amazingly successful for legal
entities / organisations, we still don’t have something similar for
individuals (unfortunately this is a more challenging task due to many privacy
concerns).

In this layer we should also highlight the recently published "Draft Standard
for Using Blockchain for Carbon Trading Applications - IEEE 3218" [54]. This
standard specifies technical framework, application processes and technical
requirements for carbon trading applications based on blockchain, including
functions, access, interface, security, and carbon consumption voucher coding.
Currently, IEEE C/BDL (group responsible for IEEE 3218) and ISO TC322 experts
are engaged to continue mapping and drafting relevant standards in this broad
space, see Figure 4.

###  4.6 Other Digital Elements

There are many other digital elements that require standardisation to achieve
a fully functioning ecosystem, especially elements that help connect layers in
Figure 1. Some specific areas include:

  * •

Wallets. DLT Wallets are digital accounts that enable users to manage their
crypto holdings. Some of these are specific to L1 DLTs and extensive work is
underway across many domains to support international standards (e.g. ISO
TC307).

  * •

Tokens. As described previously, tokenization represents an important area of
work as we may require fungible and non-fungible (NFTs) tokens for supporting
a comprehensive international carbon market.

  * •

Smart Contracts. These lines of code that automate transactions can be
directly related to traditional carbon credits contracts, specially to support
guarantees for important CCP such as permanence or insurance claims. For
example, if a fire/flood destroys a forest, carbon credit investors are
automatically compensated.

Probably the biggest challenge in this space comes from the development of
standards that work across different Layer 1 DLTs. For example, ERC 20 is a
very common standard in Ethereum but having common standards across all
existing DLTs is a much more challenging endeavour due in part to the
different characteristics of different DLTs (not just due to consensus
mechanisms or protocols). All this eventually falls back into the broad
"interoperability" umbrella.

##  5 Conclusion

The present document has provided a comprehensive up-to-date overview of the
DLT for Carbon Market space. Figure 1 layered approach aims to break a very
complex and fast changing ecosystem. As mentioned in the introduction, the
paper aims to address two key challenges that are hampering progress, namely:
Lack of coordination between key international organisations and lack of
clarity on what this domain involves. The second point is now hopefully
covered while the first one requires an ongoing approach between all the
stakeholders engaged in this growing space. Some specific recommendations with
which this paper can conclude are:

  * •

DLTs for the Carbon Markets ecosystem would benefit from a commonly used
breakdown of components as shown in Figure 1. A holistic view of the ecosystem
is important to identify priorities & gaps that are hindering the ultimate
goal, while a focused approach is important to deliver successful solutions
(carbon market experts do not need to learn the details of DLTs but they need
to understand how all fits together, and vice-versa).

  * •

R&D is still extremely important across the ecosystem (specially when
involving new tech). As discussed across the present document, some
areas/layers have well established concepts and standards but others are still
in their infancy. Even topics such as carbon measurement with well-known
standards such as GHGP or ISO 1406X are being extended to accommodate recent
developments and further accuracy.

  * •

Engagement across all stakeholders is key for progress. The great experience
gathered from the Climate Warehouse / CAD Trust demonstrates the huge progress
that can be achieved when working together, including between competitors.
Although some for-profit players aim to move fast (typical of tech startups),
it is unlikely any single for-profit organisation will completely dominate the
market. This is not just due to the size/fragmentation of the market but also
to the growing role of regulators.

  * •

In order to prevent the GIGO concept continuing causing havoc on the DLT +
Carbon Market space, it is essential to understand that the ecosystem is only
as strong as its weakest link. For example, we could develop amazing standards
for DLT interoperability, but if carbon credit registry quality is poor, the
ultimate output will be poor (Garbage).

Standards are known to significantly influence trade, economic growth, and
opportunities for innovation. It is the view of the author that a lack of
minimum standards (best practices) is hindering the entire ecosystem of DLTs
for Carbon Markets. As this paper describes, the challenge is to bring
together in a comprehensive way a wide range of layers which are evolving
fast, each at their own pace and under its own requirements. Hopefully the
present work helps to bring anyone to the same level of understanding in order
to address the gaps/priorities areas.

###  5.1 How to get involved?

An important goal of the present work is to encourage cooperation and prevent
fragmentation of a very young and growing market. The ongoing climate crisis
requires scalable solutions that deliver ground impact fast (high integrity
solutions). All the non-profit organisations listed in here are approachable
using a variety of means. Either via memberships models for companies (e.g.
IETA is an industrial association) or via national standardisation bodies
(e.g. most national standards organisations are part of ISO).

The suggested path to engagement in order of priority involves:

  * •

Governments: Depending on which branch of government, these could join many of
the conversations, specially when connecting via UNFCCC (e.g. Paris Agreement,
COP).

  * •

Non-profit: This can involve think tanks, charities, research, universities
and many other types of non-profit organisations interested in
supporting/engaging this space. Any of these could engage ISO via their
national bodies.

  * •

For-profit: Companies such as startups or incumbents are better placed joining
industrial bodies, in this regard we should highlight the role of IETA. Due to
conflict of interest, for profit organisations can not always directly engage
government or organisations like ISO (unless otherwise specified). In these
circumstances it is better to engage the organisations mentioned here as
individuals if possible.

  * •

Individuals: Many organisations mentioned here (e.g. ISO, IEEE, ICVCM) can be
engaged with on a personal basis. For example, some national standards bodies
(ISO) can allow for "experts" (e.g. independent consultant) to join committees
on a personal basis (not necessarily linked to a specific organisation -
although this depends on national standards procedures).

##  6 Acknowledgement

The author would like to acknowledge the non-financial support of non-profit
organisations and colleagues at ISO TC322, ISO TC307, ISO TC207, IEEE
(specially C/BDL/BCN), IETA (specially Alasdair Were) and Imperial College
London (specially Prof. Julie McCann). Regular meetings and valuable updates
from their members helped to provide a more comprehensive view of the growing
field of "Blockchain/DLTs for Carbon Markets".

##  7 Conflict of Interest

P.M. Baiz is co-founder and CTO of Clearly, a startup helping Corporate and
Financial Institutions transition to net zero transportation more efficiently
(Higher RoI, Lower Risks, Higher Impact). He is also an Honorary Senior
Research Fellow at Imperial College London.

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