The SIF Joins Open Collaboration Partners to Facilitate Voluntary Industry Standards for Digital MRV and Open Source, Interoperable Carbon Market Infrastructure

The SIF Joins Open Collaboration Partners to Facilitate Voluntary Industry Standards for Digital MRV and Open Source, Interoperable Carbon Market Infrastructure

‍Published By Jonathan E. Rackoff

In early 2023, The HBAR Foundation (THF) Sustainable Impact Fund (SIF) team has continued our practice of robust participation in the climate and environmental standard-setting efforts underway at many of the world’s leading carbon credit certification bodies and ecological market industry groups. We commend such organizations as Gold Standard, Verra, IOTA Foundation, and ClimateCHECK for leading inclusive policy development exercises that are open, focused, transparent, responsive to stakeholder input, evidence-based, and expeditious. Working in an Open Collaboration via a trio of cross-functional working groups – Digital Monitoring, Reporting and Verification (dMRV), Digital Assets for Climate Impact, and Digital Infrastructure and Open APIs – Hedera, Nova Institute, and dozens of other teams across ReFi, blockchain, ESG, and carbon markets have joined us in dedicating time, energy, and ideas to realizing the goals of the Paris Agreement and UN Sustainable Development Goals (SDGs) though transformational systems change. In resembling the best examples of notice and comment rulemaking by government agencies, these quasi-regulatory deliberative processes have filled an increasingly critical gap in government oversight of the voluntary carbon market (VCM) and other emerging nature markets (e.g., biodiversity credits). 

The VCM has always suffered from under-regulation, but in recent years the real-world costs of this regulatory vacuum have risen. The growing urgency of climate action has converged with increasing public demand for ESG reporting by major corporates to drive a surge in demand for carbon and other ecological credits. Simultaneously, advances in fast, secure, low energy distributed ledger technologies (DLT) such as Hedera Hashgraph have enabled the supply side to begin scaling meaningfully for the first time. Yet for the VCM to grow by the orders of magnitude needed to meet Paris Agreement goals, digital transformation must be leveraged to address the VCMs’ perennial challenges–from transparency and price discovery, to insufficient liquidity and limited market access for smaller organizations, to long settlement times. This requires approaching the emerging technology infrastructure of carbon and ecological credit markets as a public good. Now is the moment for all market participants to agree on protocols, standards, and frameworks that are transparent, accessible, affordable, interoperable, open source, and equitable. We delivered this message to Gold Standard in two recent public consultations:

Draft general guidance for digitizing methodologies.

In January, Gold Standard, working with IOTA Foundation and ClimateCHECK in an Open Collaboration, sought public comment on the outputs of their Digital Monitoring, Reporting, and Verification (dMRV) Working Group, led by ClimateCHECK. Their goal was to advance MRV digitization to decrease MRV timelines and cost, streamline verifications through automated and continuous digital verifications with periodic spot checks, accelerate market engagement to help redirect capital to climate action, and, collectively, to build higher levels of confidence in GHG claims with superior environmental integrity justifying a price premium. But key questions remained. Given the rapidly evolving landscape of digital technologies for MRV, and the reality that readiness for digital transition varies sector to sector, location to location, how should Gold Standard prioritize areas to advance swifty on dMRV? The answer lies in the central role played by climate methodology developers.

Traditional MRV requires financially costly and often years-long analog procedures with a large margin for human error. This includes complicated and expensive upfront certification of projects and methodologies, followed by on-going manual audits of CO₂e avoided or removed at each project site using the given methodology. Those audits must be performed by third-party verification and validation bodies (VVBs) whose personnel are usually geographically remote and must conduct labor-intensive in-person site visits. Yet, VVBs often face staffing constraints resulting in protracted delays and misaligned incentives.

Digitization will not solve every problem, but we have often seen – most recently in high-profile media coverage of alleged systematic overestimation of the environmental benefits of analog Redd+ forest offsetting projects – the damage to public trust that estimation or related methodological errors can cause. This in turn holds back finance mobilization and exacerbates analog MRV’s already-significant variability across regional and jurisdictional boundaries. The resulting uncertainties erode confidence in nature-based emission reductions and the fungibility and comparability of removal claims at different scales. 

The SIF believes that such liabilities should be reduced where possible, while engaging in capacity building for digitization and digitally native technologies by local communities for verification . This may involve sector-specific guidance for digitizing analog GHG methodologies as well as development of framework and classification systems for digital MRV solutions. And Gold Standard must be attentive to issues such as market demand and technology readiness. But the urgency of the world’s growing climate emergency demands that we use, today, all of the innovative new tools, techniques, and technologies at our disposal today. That requires fully leveraging the increased availability of satellite data and geostatistics enabling spatially explicit measurement of carbon stocks and more straightforward attribution of reductions; cloud computing and AI/ML tools enabling analysis of massive datasets; and remote sensing combining LiDAR and L-band synthetic aperture radar and IoT in-situ automated reporting. To do so,, we need to rapidly increase the availability of standardized, credible, and transparent methodologies – digitized or digitally native – that incorporate these innovations.

Hedera’s Guardian solution makes it possible to keep pace with this demand for new, fit-for-purpose digital/digitized methodologies. The Guardian is a modular open source Policy Workflow Engine (PWE) that enables applications to offer a requirements-based tokenization implementation using best-in-class identity management and DLT libraries. In principle, it facilitates the creation of empirical knowledge structures that will lead to unfettered collaboration, learning, and iteration. In practice, it means lower barriers to entry for project developers and compressed timeframes for processing of new dMRV methodologies, all with access to richer, broader, and more complex data sets than previously possible.

Using the Guardian’s open-source codebase and the close technical support afforded by us, our partners, and across the inclusive, sustainability-focused Hedera ecosystem, the SIF has already built the largest repository of digital/digitized methodologies in the world. In the past, developers were forced to invest months or years and hundreds of thousands if not millions of dollars to build out an initial codebase. But developers shouldn’t have to reinvent the wheel. Run using JSON, the standardized file and data interchange format using human-readable text, a developer on Hedera will need ~14 days to digitally onboard their chosen methodology.

We conveyed to Gold Standard that our community’s highest priority should be the mass digitization of existing analog MRV methodologies and uploading novel, natively digital ones. It is imperative to drive carbon projects and the climate financing they mobilize away from uncertain estimates based on subjective judgments by human beings – the features of traditional, analog MRV – towards verified results supported by empirical data continuously generated by automated sensors linked to transparent public ledgers. Accomplishing this means bringing online a diverse array of net-new digitally native and maximally digitized methodologies as soon as practicable.

To maximize dMRV utilization and effectiveness, legal, policy, institutional, cultural, and stakeholder environments must be enabling. But we advised Gold Standard against delaying to study the potential obstacles. We need not speculate about readiness or implementation challenges ex ante.Nor should we be overly concerned with identifying a theoretical optimal point for dMRV that varies sector to sector, or location to location. Let actual practical experience reveal and help gauge the significance of these frictions, which in turn can assist us in tailoring and targeting policy intervention to reduce them. 

After all, the Guardian on Hedera offers project developers more than just a tool for digitizing individual methodologies, but an industrial-scale workflow to onboard hundreds of new digital and newly digitized methodologies. The SIF anticipates onboarding at least 300 methodologies in 2023. To achieve higher impact climate actions and tangible benefits to stakeholders from decreased MRV time and cost, it is essential to be able to compare methodologies apples-to-apples in a rigorous, quantitative fashion. And this is within reach today using the Guardian.

Governance of MRV methodologies and digital infrastructure.

This month Gold Standard, also in connection with its Open Collaboration with co-leads ClimateCHECK and IOTA Foundation, again requested stakeholder input. Here, the subject was a draft model framework – prepared by the Open Collaboration’s Digital Infrastructure and Open APIs Working Group, funded in part by a grant from Google Charitable Giving – to facilitate creation, submission, peer review, and deployment of new and iterative advancements on existing digital climate methodologies, tools, and processes. Their objective was laudable: to develop a streamlined procedural infrastructure for identifying, categorizing, vetting, and, where there is consensus that idea has merit, operationalizing a potential improvement – labeled an “Impact Enhancement Proposal'' (IEP) – to how carbon and ecological assets are created, managed, bought, and sold.

While the model framework remains in early-stage draft development, impressive progress has been made. By emulating other digitally focused industries – the Python programming community’s Python Enhancement Proposal process, for example – the Digital Infrastructure and Open APIs Working Group has devised a voluntary quasi-regulatory governance structure for natural asset markets predicated on openness, transparency, and interoperability. Its reach stands to be long, from dMRV methodologies, to verification and validation procedures, to price discovery and liquidity enhancement tools, even anti-greenwashing rules for environmental benefit claims.

The SIF’s mission of bringing the balance sheet of the planet to the public ledger depends in no small part on the emergence of precisely this kind of organized community governance. Legacy markets have long been dismissed as opaque, flawed in their arrangements and implementation, ineffective in achieving the needed environmental benefits, even as recapitulating a neo-colonial pattern of land use that divests indigenous peoples of their traditional livelihoods. Absent government oversight that is competent, consistent, and coordinated, self-regulation will be essential to promoting trust, access, and equity in lockstep with efficiency and growth.

The dramatic progress being achieved by SIF grantees such as Envision, Evercity, Atma, Tolma Earth, Krypc, Tymlez, and Dovu convinces us that real-world gains from DLT-supported digitization will radically transform these perceptions, and faster than the traditional environmental community would believe. But past baggage also means that our industry has little margin for error. For this reason, the SIF offered a range of focused additions to the draft IEP framework. Here are our top three:

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1. Regulatory Change. To the existing taxonomy of IEP types – which include “Informational IEPs” (guidelines, publications, reports, and studies proposed as canon), “Process IEPs” (ground rules for interacting with the ecosystems, such as updates to submission and consensus policies), and “Standards IEPs” (digital methodology suggestions, API and infrastructure specification recommendations, etc.) – we proposed an additional “Regulatory Change IEP” type or subtype. Multi-jurisdictional regulatory vacuum has been a defining feature of the VCM for years, but private governance cannot help but operate in governments’ shadow. Growing impacts from human-induced global heating could easily lead our voluntary processes and standards to become entangled with if not preempted by legal rules. Alternatively, complex public-private collaborations could emerge; private peer-review processes frequently become married to statutory, regulatory, and sometimes subregulatory (e.g., implementation guidance based) prerequisites for public funding. The Regulatory Change IEP would be a vehicle to identify and prioritize actions to bridge this gap, from proposed targets for government advocacy, to specific legal proposals (e.g., model statutory language), to develop technical support documents and educational materials.

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2. Ethics Review. The Work Group has proposed a centralized Steering Council as the body responsible for reviewing and approving IEP submissions that have been provisionally accepted following a prior IEP editorial review phase. To augment the legitimacy of this Steering Council in acknowledgement of the equity concerns often raised in connection with nature-based projects, we suggested a partially independent “Equitable Transitional Review Board” (ETRB) be established to guard against inadvertent environmental justice violations, North-South inequity, indigenous exploitation, and cultural insensitivity.
   
   The model here should be the multi-disciplinary Institutional Review Boards (known as IRBs) in biomedical research settings, which for decades have protected the human subjects of clinical studies and vulnerable communities from a wide array of legal, ethics, and social risks, while also ensuring scientific integrity and a proportional relationship between risks to target groups and potential benefits to participants and scientific knowledge. Balancing the sensitive and occasionally contested nature of these issues in our contemporary political discourse against the growing urgency of taking bold climate action, our goal here is not to create an undue process hurdle. This Board should not necessarily get a unilateral veto.
   
   Still, we feel strongly that a dedicated vector of some kind must be established for community visibility and engagement on these critical social dimensions. It cannot fall to the Steering Council alone, which – perfectly sensibly – will mostly be composed of technical experts at first. We therefore recommended that an ethics phase be explicitly added to the process map for IEP review and approval. The goal is twofold and bidirectional: to carve out dedicated time for the ETRB to weigh community referrals and to give the ETRB a fair opportunity to notify and include the public in controversial questions before they can lead to scandal.

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3. Appellate Process. Finally, in the event an IEP is rejected by the Steering Council for any reason, ethics or otherwise, we suggested that a well-defined procedural mechanism be developed to secure robust appellate rights. For the model framework to gain wide adoption and resist government preemption, a minimum level of democratic legitimacy is essential. After all, the Steering Council, like any other voluntary standards-setting body, holds power only so long as the community it governs – here, the participants in the VCM and other ecological credit markets – consents. IEPs seen to be rejected unfairly, irrationally, or without sufficient evidentiary basis could easily lead their sponsors to pursue them by other means or in competing venues. Therefore, we advised that negative determinations from the Steering Council be accompanied by public notice, clear written justification, and an opportunity to be heard by an independent appellate committee.

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As the digital infrastructure for IEP submission evolves and the private governance of dMRV methodologies advances, the SIF will be here: monitoring continuously; offering public comments wherever appropriate; partnering and participating whenever beneficial; offering advice and counsel to whomever needs it. Climate change, ecosystem degradation, and biodiversity loss – these are no longer problems we can afford to tackle seriatim, or in isolation, or using just one ideology or strategic approach. Their sheer size and daunting stakes require constant iteration on multiple tracks at once. Amongst them, DLT-enabled solutions and Hedera-based innovations specifically will continue to play an outsized role in accelerating our collective sustainable impact.

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