Mitigation Credits Research about guardian HOT 7 CLOSED

Should be assigned to Max to how we report to Mitigation. Would have to have CET's first to how we know how to deal at a business level. Shawn to add Max when hes in ZenHub.

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@anvabr @envisionblockchainpm is there an update on this?

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@sergmetelin as per the comment above this ticket is waiting for @Mpinnola's input

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I assume "mitigation" in this context refers to non-offset GHG reductions, such as those resulting from corporate energy conservation or efficiency initiatives? In general, this would be measured as the delta between the baseline and current emission levels. These reductions aren't typically traded/tradable. For example, if a Company A reduces (aka "mitigates") their emissions by 100 tCO2e compared to their baseline, but they only needed to reduce by 50 tCO2e to meet their goals, they can't just sell the other 50 to Company B, or at least that's not really how it works now.

Just putting a random thought out there; if we did want to enable such a transaction, perhaps instead of Company A selling Company B 50 "mitigation credits" they could instead accept 50 CETs from Company B at a certain price (i.e. Company B could essentially pay Company A to take 50 CETs off their hands). So maybe if an offsets trades at ~10$, maybe CETs can be traded at ~-10$. This would allow the monetization of mitigation without the need for a new asset type.

I could use a bit if clarification of what a "mitigation asset" refers to, but if I am understanding clearly, I and not sure of the feasibility/utility/necessity of this new asset type.

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@Mpinnola In the blockchain space there are limited tools to represent real world concepts, chiefly a single tool - tokens. Everything needs to be modelled as a token (of some type), to enable accounting/tracking of mitigation results they need to be recorded as tokens. They don't need to be tradable, although I think it would be prudent to leave the capability for this for the future. Please see my re-written definition of the ticket.

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@anvabr

I'm not necessarily suggesting this as a solution, but currently, mitigation can already be represented by token balances in a scorecard. I.e., successful mitigation efforts will simply be represented and accounted for by receiving less CETs, which is inherently valuable and measurable. For example, a company upgrades to fuel efficient vehicles and they end up receiving 75 CETs instead of 100. This represents a reduction of 25 mtCO2e. Now if we introduce mitigation credits, then they will not only receive less CETs, but they will also receive 25 mitigation tokens. Now their efforts have been effectively double counted, once by receiving less CETs and again when they receive mitigation credits. This is the issue I am struggling with. Also since the mitigation is already accounted for with less CETs, I contemplate the necessity for mitigation tokens.

I have outlined a few abstract ideas below, but they will require more thought and discussion:

1. If the idea is to allow companies to profit from mitigation, the best solution I can think of at the moment would be to simply make CETs tradable, but with a negative value. In other words, allow companies to effectively pay others to take on their CETs. If a company reduces their CETs beyond their baseline or targets (mitigation), they can now afford to take on someone else's CETs, along with a payment. To avoid companies dumping CETs to companies that don't care, we could institute rules such as, you can only take on an amount of CETs to the degree that you can still meet science based targets. If there is some government program that incentivizes mitigation, payments could be issued simply based on the delta between a baseline or target and the CET balance at the end of the current reporting period.

2. If mitigation must be represented by its own token type, we need to figure out a way to avoid the double counting mentioned above. One abstract solution could be the following: If a company reduces its CETs compared to a target or baseline, perhaps they can have the option to receive "mitigation tokens." However, instead of simply selling them, they can only be swapped for another companies CETs (at a price). For example, two companies both have a baseline of 100 CETs and a target to reduce to 50 CETs. Company A mitigates to 25 CETs, Company B only reduced to 75. Company A can receive 25 mitigation credits that can only be swapped for 25 CETs (at a price). To be honest, this doesn't seem like a very clean solution. The same dynamics can be achieved by simply measuring mitigation as the delta between the balance and the baseline, and assigning a negative value to tradable CETs. This solution seems unnecessarily complicated and less reflective of reality. I think the first solution achieves the same thing but much simpler.

3. Perhaps mitigation tokens could be issued based on a reduction from a baseline or target, but to avoid double counting, they cannot be used to reduce CET balances or offset CETs. They would simply be act as an additional incentive mechanism that can be traded, bought, sold, or held as investment if the price is expected to increase.

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@anvabr

One existing system that may be able to guide us here is the cap-and-trade system, which already provides a mechanism to incentivize mitigation. While this is a regulatory mechanism, perhaps it can guide us in the concept of a voluntary “mitigation credit.”

Under Canada’s cap-and-trade system, subjected entities are given emissions limits. If measured emissions are below the limit, “surplus credits” are issued. If emissions are above the limit, the entity must make a payment, or purchase and retire surplus credits or offsets. In similar systems, entities are issued carbon allowances that represent their limit. After a compliance period, any surplus of allowances can be sold, or they can purchase additional allowances if they emit above their limit.

https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/output-based-pricing-system/overview.html

I think what we need to determine is; do these systems make the concept of a “mitigation credit” obsolete, especially if an entity is already subject to a cap-and-trade program? Effectively, a surplus credit or an allowance credit may achieve the same function as a hypothetical “mitigation credit” in the sense that mitigation can be measured as the delta between a limit (or baseline or target) and actual emissions, and rewarded via the issuance of surplus credits, or the actual surplus of allowance credits.

My next question is, why not focus on tokenizing surplus credits, or allowances, and then perhaps facilitate voluntary cap-and-trade systems? In a voluntary system, the limit could be a voluntary target or a baseline. If emissions are lower that the limit, mitigation has occurred, and credits can be issued. If emissions are over the limit, credits must be purchased. We could call them “mitigation credits” if we want, but effectively this is a voluntary cap-and-trade system.

Let’s model an example based on the concept of “surplus credits”

• Company A has a baseline or target of 1,000 mtCO2e
• Emissions are measured via CETs
• At the end of 2022 they have a balance of 800 mtCO2e
• 200 “mitigation credits” are issued
• Company B has a baseline or target of 1,000 mtCO2e
• At the end of 2022 they have a balance of 1,200 mtCO2e
• They are required to offset 200 mtCO2e or they can perhaps purchase 200 “mitigation credits” from company A

Or we can model the “allowance credit” system

• Company A has a baseline or target of 1,000 mtCO2e
• 1,000 allowances are issued at the beginning of the monitoring period
• At the end of the at the end of 2022 they have a balance of 800 CETs
• 800 tokenized allowances are burned, and they have 200 left, that can be sold

Both are modeling cap-and-trade systems, both can be tracked with tokenized credits and emissions, both measure and incentivize mitigation. In addition, there are existing systems and standards that can guide us. If we don’t want to go this path, the next step should be to identify what functions the hypothetical “mitigation credits’ would serve that are not captured by tokenizing a cap-and-trade system.

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