The thoughts expressed in this Guest Opinion are those of the writer and do not necessarily reflect the views of S&P Global.

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In 2015, Richard H. Lawrence, then living in San Francisco, California, launched a non-profit organization, Cool Effect, both to facilitate the voluntary market in carbon credits to incentivize companies to reduce their carbon dioxide emissions cost-effectively and to rigorously vet carbon offset projects and their CO2 offsets to provide certainty to the market.

Lawrence came up with the idea under unusual circumstances (as happens with many great idea and entrepreneurial ventures). It started with a family trip to Honduras to help educate his children about what is going on in other countries, which he combined with a mission by a group of doctors who were delivering much-needed medicine and care to Honduras’ poverty-stricken citizens in the coffee-growing regions of the country.

During this trip, Richard and his family saw women and children on nebulizers in classrooms, where they set up care clinics. A rare sight to see, especially in developed countries, Richard’s daughter ventured out to understand the phenomenon. She explained to her father that, at the time, many Honduran homes were built with adobe stoves that were heated by burning wood. The residents’ lung problems stemmed from the poor ventilation of the homes -- the residents inhaled toxic wood smoke at higher concentrations than would be the case if they were sitting in front of a well-ventilated fireplace in New Hampshire.

With that realization, Lawrence’s family decide to start a non-profit, Proyecto Mirador, to provide fuel-efficient Dos por Tres stoves in rural homes across Honduras. As Lawrence began to raise funds for his project, Jeremy Grantham, co-founder and chief investment strategist of Grantham, Mayo, & van Otterloo, began to educate Richard on climate change and the implications of global warming. Those conversations sparked Richard to independently educate himself on climate change by reading various books on the subject, including Economics of Climate Change by Nicholas Stern, which advocated for the creation of a Voluntary Carbon Market (VCM). To provide a sustainable business model for Proyecto Mirador, Richard decided to fund Proyecto Mirador by selling carbon credits.

Richard and his wife founded Cool Effect to promote climate change solutions.  Subsequently, Cool Effect was then certified by Gold Standard, a standard and logo certification mark program for non-governmental emission reduction projects engaged in selling carbon credits. During the early years of Cool Effect’s certification process, Cool Effect worked tirelessly with Gold Standard over the calculations that quantified the CO2 reduction enabled by replacing burning wood for efficient stoves.

Lawrence quickly realized that to make a real dent in reducing CO2 emissions, Cool Effect projects needed to be scalable and sustainable. The stoves project needed a sizable market to help scale so that it did not depend solely on fundraising efforts. Nicaragua, Honduras, and Guatemala have a combined 1.2 million addressable homes, demonstrating that a stove replacement project could have major effects on reducing CO2 emissions.

In addition, Lawrence and his Mirador team set up an administrative department to facilitate the outsourcing of the logistics and construction work for the stoves, while Cool Effect facilitates the monitoring and verification process of the stoves’ environmental impact. This setup created 25 microenterprises, both owned and operated by Hondurans. Today, they have employed about 190 employees in Honduras on incentive compensations: based on the quality and quantity of installed stoves.

Nonetheless, Lawrence also understood that CO2 offset accounting for companies is complex and even more problematic for entire countries. In addition, some organizations are double-booking their CO2 offset, which provides a false sense of CO2 reduction. Avoiding this double-booking practice is termed the “additionality” challenge within the industry. Corporations with the expertise to assess whether credits truly provide additional CO2 reduction will likely purchase credits from Cool Effect. However, small businesses may buy credits from organizations that cannot generate additionality because smaller companies generally lack the personnel to vet these credits. Because Gold Standard’s validation and verification process is stringent, Lawrence realized that the carbon offset market also needed strict oversight and auditing of the claimed CO2 reductions.

Cool Effect’s verification process is labor-intensive. For example, Cool Effect will conduct a kitchen performance test: go to the house where the stoves will be installed, weigh the wood for cooking a week before the stove installation, then return a week after the stove installation and weigh the wood for cooking again. After the first verification test, the kitchen performance test is done annually and verified by a third-party organization.

In addition to carbon accounting complexities, some voluntary carbon market brokers abuse the unregulated market. Brokers facilitate the transactions between buyers and sellers in the voluntary carbon market. Currently, transparency about the quality of the credits that are sold and bought is nonexistent. The lack of transparency creates an inefficient market. The VCM is not regulated, and without proper oversight, the net impacts of the trading of emissions permits on the levels of CO2 cannot be accurately assessed.

Transparency is only one aspect that Cool Effect wants to address. Another point of contention is the lack of standardization in the voluntary carbon market. One reason is due to the array of methods used to reduce CO2 emissions of capture. The Taskforce on Scaling Voluntary Carbon Markets, launched by Mark Carney, UN Special Envoy for Climate Action and Finance Advisor to UK Prime Minister Boris Johnson for COP26 and chaired by Bill Winters, Group Chief Executive, Standard Chartered,[i] represents one effort addressing this issue. The Taskforce will take stock of existing voluntary carbon markets and efforts to grow these markets, identify key challenges and impediments, build consensus on how best to scale up voluntary carbon markets and finally, present a blueprint of actionable solutions. It issued a major report in January 2021.[ii]

The infancy of the VCM creates substantial barriers to entry. Corporations are currently subsidizing the total cost of green projects by purchasing green credits in the VCM. However, there are still funding gaps that are supplement by donations and foundations. Market participants cannot scale impactful projects because price information is not accessible to all parties. The upfront cost of the certification process can outweigh any non-profit organization’s capital reserves.

Last, large emerging and developing markets can contribute the most to CO2 reduction. A major challenge confronting the world is to develop ways for these countries to participate in the market without the burdensome upfront cost. Climate change is a global problem that can only be solved through incentives that encourage emerging markets to participate.

[i] https://www.iif.com/tsvcm.

[ii] https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf?_cldee=Y2ZAY2xpbWF0ZWhvbWVuZXdzLmNvbQ%3D%3D&recipientid=contact-0a171530e312eb1180ec000d3a0ee828-ebe91636ad3144ad9f3c07dc18a5cafb&utm_source=ClickDimensions&utm_medium=email&utm_campaign=Press%20Emails&esid=f64e8b28-c160-eb11-80f0-000d3a0dce1c.