Carbon credits exchanges are merely adopting ‘old-school’ models based on a traditional ‘walled garden’ approach. The COP28 award-winning solution by ZERO 13 offers an interconnected digital carbon market infrastructure that is leveraged by multi-blockchain technology. The article is by the Chairman & CEO of GMEX Group and ZERO13, Hirander Misra, that highlights the collaborative ‘network of networks’ approach to ensure the scaling of climate finance in a way that did not exist in the market before.
According to the World Economic Forum, there is a $4-5 trillion dollar climate financing gap hindering a climate-resilient future, yet fragmented, siloed, and analogue approaches are also hindering financial capacity building. To seriously address climate change, we must question and challenge what is already before us. It is not as simple as taking the next step up the ladder or adding to what you already have, it is about going back to the business model basics, clarifying what you want to achieve, and taking a completely different path to do so.
Ørsted, the Danish energy company, is leading the way in climate action by developing, constructing, and operating offshore and onshore wind farms, solar farms, energy storage facilities, and bioenergy plants. In 2009, 85% of Ørsted’s energy production was based on fossil fuels and only 15% on renewables. The company committed to switching to 85% renewable energy and only 15% fossil fuels by 2040. Many thought they were overly ambitious and said it couldn’t be done, but this transformative approach is proving successful.
Their commitment to renewable energy inspired us to launch ZERO13, our Platform-as-a-Service ecosystem focused on the 4Cs – Climate, Communities, Companies, and Countries. The ecosystem instils trust, enables interoperability, and supports monetisation between buyers and sellers of climate projects/carbon credits and other ESG assets with a focus on water, energy, and food.
What does this mean for exchanges and financial market infrastructure in the context of carbon markets? A good place to start is to learn from the past to see what might happen in the future: after the emergence of electronic markets, exchanges, for some time, became complacent towards innovation and the idea that there would be any real competition. Regulation then became more demanding, forcing the exchanges to react and create opportunities for start-up trading venue firms with progressive ideas and ‘disruptive’ technology to bring in new solutions. Interestingly, regulation could also be viewed as ‘disruptive’, as it was the driving force that pushed the exchanges to adopt innovation and adapt with the market in the face of competition.
That said, exchanges are not embracing change fast enough, and when they are looking at carbon credits markets, they are merely adopting ‘old-school’ models based on a traditional ‘walled garden’ approach. This ignores how distributed the carbon market is, as climate finance requirements and carbon credits supply could be in one country, while the finance and demand is in another. As such, a singular centralised exchange model simply does not work. The model needs to be distributed. But this also does not mean that a singular blockchain approach is the answer, as that too creates singular insolvency and custody risk.
The ‘walled garden’ analogy for traditional carbon exchanges
Old-school models adopted at carbon exchanges launched over the last few years have not worked. These venues generally have very little liquidity and while they say they are digital; many use a manual account at a registry such as Verra and input that information into the exchange system. Some may tokenise that input, but the majority still return to a ‘walled garden’. If carbon credits stop being sold or pledged, the ‘walled garden’ approach means they cannot now get back into the registry and are effectively orphaned at the exchange. In addition, buyers may be in a country with its own registry or may want to use a different registry to the seller of the credits yet are forced to open accounts at multiple registries as it’s not possible to move inventory around.
Despite all these factors, it astounds me that some exchange technology and post-trade market infrastructure vendors are stating that they have an interoperable carbon credit offering when they do not. Instead, they are merely offering an old-school centralised exchange model with integrations that take years to get in place. With the speed the market moves, this approach cannot scale.
It is much like everyone wanting to run their own cloud when we know it’s impossible to achieve economies of scale. No matter how you wrap it up or market it, providing just a matching engine does not make it a digital carbon exchange solution as there is no post-trade offering for climate assets. It is deployed into these exchanges standalone, so it’s akin to being landlocked and isolated, where ships of liquidity can’t sail. If each exchange has its own system connected to the market, they are effectively detached entities that are unable to help new markets grow, increase liquidity, and address the climate challenge.
In working to address the climate challenge we are not only dealing with some organisations ‘greenwashing’, but we are also faced with organisations ‘technology washing’. The use of the term interoperability is often used incorrectly to describe solutions that are, in fact, vertical and closed. It is time for those looking to deploy carbon market infrastructure to wake up and take a reality check, as by making incorrect claims about their technology, they are not only doing a disservice to their shareholders and customers but also to the climate.
ZERO 13: Ensuring trust and interoperability for carbon exchanges
An interconnected digital carbon market infrastructure is needed to address fragmentation and siloed approaches by encompassing interoperability across both APIs and blockchains, to bridge both traditional and newer digital approaches. This is what we are doing at ZERO13 with our COP28 award-winning solution, which utilises multi-blockchain technology and will scale climate finance in a way that did not exist in the market before, using a collaborative ‘network of networks’ approach.
It is evident that exchange and financial market infrastructure Model 1.0 is not fit to support the carbon markets and will likely become extinct over the coming years as standalone exchanges will not be able to survive. Today’s exchanges are perceived by many people like the phones of the past – slow and unintuitive with limited functionality – trying to operate in the era of iPhones and smart technology. Can we think of a time before the smartphone? Technological innovators like Apple and Samsung revolutionised and democratised the way we access and generate information and are seen as providers of knowledge rather than simply products. The days of supplying technology and commanding a premium for supplying products and services are over.
Model 2.0 is all about industry collaboration and distributed interconnection across jurisdictions to achieve greater positive climate impact, and ZERO13 are firm believers of this. We should be collectively working towards Digital Carbon Exchange 2.0 – the much-anticipated climate-focused sequel.
Hirander has expertise in extensive electronic trading and FinTech spanning 25 years, with successful syndication to investors and substantial exits. He is the Chairman & CEO of GMEX Group and its climate fintech platform-as-a-service ZERO13, which won the COP 28 UAE TechSprint for the use of blockchain to scale climate finance. He is one of the Top 10 influential business leaders of blockchain technology in the UK All Party Parliamentary Group report. He is also featured in LATTICE80’s Top 100 influencer list for the UN Sustainable Development Goals agenda for pioneering blockchain technology solutions. Hirander was also recognised as the Most Influential CEO 2024 – UK (Carbon Credits) by CEO Monthly, a digital magazine published by AI Global Media.
Previously he was the co-founder and Chief Operating Officer of Chi-X Europe Limited, instrumental in taking the company from concept to successful launch. At the time of his departure in February 2010, Chi-X Europe was the second largest equities trading venue in Europe, just behind the LSE Group, and was subsequently sold to Bats Global Markets (now part of CBOE Global Markets) for $365M.
