Comment Text:
Chairman Rostin Behnam
Commodity Futures Trading Commission
1155 21st Street, NW
Washington, DC 20581
Submitted via CFTC.gov
RE: Request for Information 87 FR 34856 titled Climate-Related Financial Risk
Chairman Behnam:
Thank you to you and the Commodity Futures Trading Commission for your leadership on climate-related financial risk. A carbon removal marketplace founded in 2017, Nori connects purchasers of verified carbon removals with creators or carbon removal credits (or “supplier” in Nori parlance) who credibly remove and retain carbon dioxide from the atmosphere. In order to achieve our mission, we’ve designed a marketplace specifically for: 1) enabling climate change reversal by focusing exclusively on the removal of excess carbon dioxide from the atmosphere; 2) scaling carbon removal to the gigatonnes scale by building a marketplace that makes it affordable and as simple as possible for suppliers of carbon removal to get paid for credible carbon removal by buyers; and 3) ensuring that projects are providing real, additional, and credible carbon removals using science-backed and innovative quantification methods and methodology requirements. As of this submission Nori has quantified 86,732 Nori Carbon Removal Tonnes (Nori’s carbon credit or NRT) and generated over $1.4 million of revenue for our suppliers.
Nori is specifically responding to questions 22-25 in the RFI, focused on digital assets and the voluntary carbon markets (VCM). We applaud CFTC for wanting to collect input on VCMs, which are a critical way to help reach net zero targets and scale carbon management solutions.
Are there aspects of the voluntary carbon markets that are susceptible to fraud and manipulation and/or merit enhanced Commission oversight?
Every time a carbon removal credit is sold, an additional unit of carbon should be removed from the atmosphere and sequestered. This seems self-evident as the goal of VCMs is to incentivize decarbonization. However, today carbon credits can be traded between organizations and countries and be used as off-sets for all groups involved in the trading chain i.e. one unit of carbon can be claimed on multiple carbon accounts. As discussed below, Nori has developed a system to address this issue through the use of two crypto assets (the NRT and the Nori token) that ensure each time a NORI is used on our marketplace a new ton of CO2 is drawdown from the atmosphere.
Besides these basic accounting inaccuracies, there are problems with accounting for carbon credits when used for in-setting (the use of these credits to off-set supply chain scope 3 emissions) and their use in off-setting and VCMs. There is no system that allows an individual or corporate to track if a carbon credit has been used for insetting. Therefore, it is plausible the same carbon credit can be both traded multiple times and used for both insetting and offsetting but only a single tonne has been actually sequestered though, for accounting and reporting purposes, it will appear that multiple tonnes of CO2 were drawn down.
There are currently multiple definitions for additionality, permanence and measurement in VCMs. A common set of definitions and enhanced oversight from the CFTC will help to ensure the integrity of VCMs.
Should the Commission consider creating some form of registration framework for any market participants within the voluntary carbon markets to enhance the integrity of the voluntary carbon markets? If so, what would a regulation framework entail?
Establishing a registration framework to ensure quality and permanence can help to boost the integrity and impact of VCMs. But private markets have an important role to play in developing what VCMs will ultimately be most successful for buyers and sellers, and it is important to avoid impeding innovation.
A VCM built on quality will help lead to greater climate action. A high-bar for carbon credit certification must be met with an equivalently high-bar for carbon credit usage and emissions disclosure. Properly implemented, carbon markets have the potential to drive effective climate change prevention and remediation at a global scale.
An effective VCM must measure offsets by quality and performance. Carbon markets originated as a way to spread the cost of reducing emissions. VCMs trade data – digital credit for a physical action – so a race to the bottom on costs (without a regulatory backstop) inevitably came at the expense of carbon offset project quality. Restructuring VCMs with stronger quality metrics around additionality, permanence, leakage, and MRV, would incite tangible, efficacious carbon offsetting.
Are digital asset markets creating climate-related financial risk for CFTC registrants, registered entities, other derivatives market participants, or derivatives markets? Are there any aspects of climate-related financial risk related to digital assets that the Commission should address within its statutory authority? Do digital assets and/or distributed ledger technology offer climate-related financial risk mitigating benefits?
Digital assets can be utilized to solve a key challenge in existing voluntary carbon markets. Right now, carbon credits can be sold and re-sold infinitely many times before an end-buyer chooses to "retire" them and take final ownership. In today's market conditions, there is a severe shortage of supply of carbon credits, while the demand from corporations making "net zero" commitments is higher than ever. In order to increase the supply of carbon credits that actually make an impact on the amount of CO2 in the air, the incentives of this market need to be re-oriented to maximize financial gain for "project developers" or, the people/companies that are doing the carbon sequestration. Trading of a carbon credit from broker to broker does nothing to increase the incentive for project developers. The market should function so that every new dollar spent on carbon results in net new CO2 coming out of the air. At Nori, we do this on the blockchain using a two-asset model. The carbon removal credits that we sell are called Nori Removal Tonnes (NRTs). When a buyer purchases NRTs, they are immediately retired on-chain as NFTs that are made non-transferable. But if the NRTs can only be sold once, then there is no price discovery mechanism or reference price for carbon. That is why we introduce a second digital asset called the NORI token. There are a finite number of NORI in existence, and each one can be used (and re-used) to purchase one NRT, or one tonne of CO2. Thus, the NORI price will fluctuate based on supply and demand, but will come to represent the market-driven price for carbon.
Immediate retirement has other benefits too. Accounting for who owns carbon credits (a problem described in this recent Bloomberg article) is quite difficult when the carbon credits are trading behind closed doors. Nori's approach ensures that accounting for who owns the credit and can thus make claims to their carbon footprint is trivially simple in comparison.
We also use the two asset model for insurance purposes. When a project developer sells NRTs, the buyer pays NORI to them. But 25% of the NORI paid to the project developer are “restricted” over the course of a 10 year contract period. The developer has to continuously verify with Nori that the carbon has remained out of the atmosphere. If we discover any sort of carbon loss, then we claw back the restricted tokens, and use those to buy new NRTs on behalf of the original buyer. If the clawback is insufficient to make the buyer whole, then we have set aside 20% of the total token supply for an insurance reserve for exclusively this purpose.
More details about Nori’s model can be found here: https://nori.com/litepaper
A presentation describing the history of carbon asset trading, the inherent problems in existing market designs, and an explanation of Nori’s solution, can be found here: https://www.loom.com/share/15e26b18da9f4f19aaf7a2d87ca7c35e
Are there ways in which the Commission could enhance the integrity of voluntary carbon markets and foster transparency, fairness, and liquidity in those markets?
VCMs, which are projected to grow to a $50 billion market in the next eight years, provide an important pathway to achieve net-zero climate targets. Where carbon was once traded under cap-and-trade and compliance marketplaces, VCMs are growing globally as both governments and corporations seek to combat the climate crisis. Despite high growth in the past decade, there are open questions to address around additionality, leakage, verification, permanence, vintages, and other policy considerations.
With all of these open questions, CFTC can play an important role in issuing definitions for key terms in carbon markets. Doing so will boost the integrity, transparency, fairness, and liquidity of VCMs. While there are a wide range of durable carbon removal solutions and as many as possible should be brought to market, having CFTC establish a minimum threshold for entry will help to establish a baseline for durable CDR. Establishing this minimum quality will also help further differentiate between offsets and CDR.
VCMs have a significant opportunity to evolve in a manner that helps bring durable and promising carbon removal solutions to market. Based on the challenges and constraints in today’s markets, the recommendations above help grow VCMs, scale carbon removal, allows for greater transparency of carbon pricing and provides a greater menu of options for purchasers. We appreciate CFTC’s climate leadership and thank you for the invitation to submit our response.
Sincerely,
Paul Gambill, CEO
Nori Inc
