Net Zero Company — CDR Token quality assurance

In my last blog post from earlier this week I have introduced the Net Zero Company (netzerocompany.org), the concept of utilising crypto markets to help society transition to net zero and the core ideas and principles embraced by the Net Zero Company.

I have mentioned that a key differentiator between the Net Zero Company’s CDR Tokens and some other “carbon-meets-crypto” initiatives is the Net Zero Company’s careful approach to creating a trustworthy representation of physical, monitored and audited carbon dioxide removals. This article provides more details on the several layers of carbon credit selection/ curation as well as the structuring and design features that are involved to achieve a high level of trust that a CDR Token represents a physical, monitored and audited carbon dioxide removal.

The carbon credit selection/ curation process for the “carbon credit vault”

1. The Net Zero Company will start with focusing on Verified Carbon Units (VCUs) issued by Verra under the Verfified Carbon Standard (VCS). Verra is a great organisation lead by my old friend and former colleague David Antonioli. They are a non-profit organisation and they ensure that the carbon credits issued by them, the VCUs, are only issued with respect to emission reductions and carbon dioxide removals generated, monitored and audited in line with the rules and processes of the VCS. This is an elaborate set of rules designed to bring transparency and accountability to the voluntary carbon market. Verra was a big leap forward for the voluntary carbon market when it started and they — as well as other great standard providers — continue to provide a crucial function for the carbon markets.
2. Verra provides its vital transparency and accountability function to the process of generating carbon credits which can be used in the context of various different approaches to the net zero transition. The Net Zero Company focuses on a “hard core net zero” approach of balancing physical, monitored and audited flows of greenhouse gas into the atmosphere with physical, monitored and audited flows of greenhouse gas out of the atmosphere. Hence the Net Zero Company will only select VCUs representing carbon dioxide removals to include in its “carbon credit vault” backing the CDR Tokens issued by the Net Zero Company.
3. This does not mean that the Net Zero Company considers the other VCUs issued by Verra as “low-quality”. The reason we do not select VCUs representing avoided emissions/ emission reductions for the “carbon credit vault” backing the CDR Tokens is simply that these types of carbon credits cannot be used within a conceptual framework which requires carbon credits to represent carbon dioxide removals. Or simply put, they are called CDR Tokens because they are backed by CDR carbon credits and not ER (emission reduction) carbon credits.
4. There are other great standard providers which provide a function similar to Verra. We are initially focusing on VCUs issued by Verra because our team is most familiar with the Verra rules and processes. Verra has translated CDM rules into voluntary carbon market rules and our team is familiar with CDM rules (and the Verra rules) on a very detailed level. One of our co-founders has been involved with the development of many CDM methodologies and has served as member of the CDM Methodology Panel. Our initial focus on Verra does not mean we consider the other standard providers as “low-quality” in any way.
5. When selecting CDR carbon credits for the “carbon credit vault” backing the CDR Tokens we are not directly focusing on CDRs generated by new technologies, such as Direct Air Capture and others. These are great technologies and we hope that they will quickly succeed in scaling up and bringing the costs per ton of CDR down. However, at this stage these technologies are still very early stage. Right now there is no Verra methodology for them, they are removing only a very small volume of carbon dioxide per year and they are not yet competitive on the cost curve (costs per CDR). Hence — for the CDR Token — we are starting with a focus on nature-based CDR solutions which are already more mature. Later this year, the Net Zero Company will issue tCDR Tokens which will be backed by a separate “carbon credit vault” only containing carbon credits issued with respect to CDRs generated through certain technologies (more about this in another blog).
6. So as a first layer, we are selecting VCUs which represent physical, monitored and audited carbon dioxide removed from the atmosphere. Various types of projects can generate these types of carbon credits today, in particular afforestation/ reforestation projects and improved forest management projects.
7. One can be of different opinions when it comes to certain details of carbon credit methodologies (just as with all things that are complex). For that reason we will apply an extra layer of scrutiny in addition to the Verra rules selecting specifically those CDR VCUs which we believe are the most appropriate to back our CDR Tokens, combining climate, re-release (“permanence”), do-no-harm and general reputation risk management considerations.

The core structure/ design of the CDR Token process

1. The CDR Token process is designed so that each CDR Token represents a physical, monitored and audited carbon dioxide removal from the atmosphere.
2. The Net Zero Company will use a custody services provider to hold the Net Zero Company’s CDR VCUs in a separate VCS registry account which will perform the function of the Net Zero Company’s “carbon credit vault” backing the CDR Tokens.
3. The Net Zero Company will ensure that the number of CDR Tokens in circulation is matched by the number of CDR VCUs in the “carbon credit vault”.
4. Whenever a CDR Token is used to balance a greenhouse gas emission in the Net Zero Registry the Net Zero Company will retire a CDR VCU in the “carbon credit vault”. (I will explain the functionality of the Net Zero Registry in more detail in another blog post.)
5. The Net Zero Company will use a third party auditor to audit and confirm that the Net Zero Company has complied with the above structuring and design principles and that the CDR carbon credits held in the “carbon credit vault” which backs the CDR Tokens comply with the carbon credit selection criteria.

Managing and addressing re-release risk

1. Whenever carbon dioxide is removed from the atmosphere there is a possibility that this carbon dioxide will be re-released into the atmosphere at some stage in the future (e.g. as a result of a forest fire). Within the context of the Net Zero Company’s “hard core net zero” approach of balancing physical, monitored and audited flows of greenhouse gas into the atmosphere with physical, monitored and audited flows of greenhouse gas out of the atmosphere, the Net Zero Company will take appropriate measures described below to manage and address this re-release risk.
2. This issue has two dimensions for the Net Zero Company. It can impact the CDR carbon credits in the “carbon credit vault” and it can impact the carbon credits which will have been retired when CDR Tokens were used within the Net Zero Registry to balance greenhouse gas emissions.
3. The Net Zero Company will continuously monitor whether re-release events occur with respect to both types of CDR carbon credits, those in the “carbon credit vault” and those which have been retired in the context of CDR Token use.
4. If a re-release event occurs with respect to carbon dioxide removals represented by CDR carbon credits in the Net Zero Company’s “carbon credit vault”, the Net Zero Company will replace these carbon credits with other CDR carbon credits which meet the Net Zero Company’s CDR carbon credit requirements as described above.
5. If a re-release event occurs with respect to carbon dioxide removals represented by CDR carbon credits which have been retired when CDR Tokens were used within the Net Zero Registry to balance greenhouse gas emissions the Net Zero Company will purchase and use CDR Tokens to balance these re-release greenhouse gas emissions within the Net Zero Registry.
6. This approach reflects the Net Zero Company’s approach to the issue of “permanence” or “duration” of carbon dioxide storage. The Net Zero Company approaches this issue from the perspective of balancing flows of greenhouse gas into the atmosphere with flows of greenhouse gas out of the atmosphere. From this perspective the re-release of greenhouse gas into the atmosphere which has previously been removed from the atmosphere is — at that moment — a new flow of greenhouse gas into the atmosphere. This new flow of greenhouse gas into the atmosphere needs to be balanced by a flow of greenhouse gas out of the atmosphere.
7. In my opinion, as described in my previous blog post, the entity using a CDR to balance its greenhouse gas emissions is morally — and potentially legally — responsible to balance any future re-release flows of such CDRs. The Net Zero Company will manage this responsibility on behalf of the entities using CDR Tokens within the context of the Net Zero Registry.
8. A key aspect of managing re-release risk is CDR carbon credit selection. When selecting CDR carbon credits for its “carbon credit vault” the Net Zero Company will assess and consider the relative probabilities of re-release events for the respective CDR projects.
9. The VCS rules include a great mechanism which performs a similar function. Here is a blog post from Verra from 2019 containing a very good description of their “buffer mechanism”. Whenever VCUs are issued for carbon dioxide removals or emission reductions achieved by certain projects, a certain percentage of VCUs (depending on various factors relating to the re-release probability of the particular project) is held back and added to a “buffer pool”. If re-release events occur VCUs from this “buffer pool” are used to replace the impacted VCUs. As the Net Zero Company has a very specific approach to addressing re-release risk consistent with its specific approach to net zero (balancing flows of GHG into the atmosphere with flows of GHG out of the atmosphere) the Net Zero Company will not be able to use the VCS buffer mechanism in its current form.