In conversation with Finextra, Hirander Misra, chairman and CEO of GMEX Group, and CEO of its carbon tracking company ZERO13, spoke on the complexities of the carbon market and untapped potential for its growth.
Misra says that he launched ZERO13 upon realising the breadth of how unorganised the carbon market was as a whole. ZERO13 was developed when they noted a gap in the market when it came to carbon exchanges, because there was no carbon market infrastructure. The climate fintech uses AI and blockchain technology to address the challenges in the global carbon market, such as fragmentation, greenwashing, and lack of transparency.
“Carbon, by its very nature, is an intangible asset, has been driven from the sustainability side. Sustainability people don't generally know about financial markets, and financial markets people don't really know about sustainability, right? This is where a lot of my career was spent, bridging the gap between technology and business originally. So it comes back full circle,” says Misra.
The fintech, which won the UAE TechSprint award at COP28 for innovation in blockchain in climate finance, provides a platform-as-a-service to connect providers to the market to trade and issue carbon credits and ESG assets. The technology is designed to connect international carbon exchanges, registries, and owners to verify, price, and make settlements using APIs and blockchain technology.
How to regulate a decentralised market?
Misra aptly states that the carbon market is decentralised and non-standardised, making trading difficult. The carbon market is not really a market, and people confuse registries with the market constantly. Misra explains that there is not interoperability between various carbon registries, such as Vera, Carbon CX, Gold Standard, etc., which makes it difficult to manage and standardise carbon credits, especially as they are not based in only one country.
He notes that government-to-government trading is still in its infancy. Comparing the carbon market to the London Stock Exchange, Misra points out that there are buyers and sellers in the matching process; exchange trading operates within a centralised system. However, in the carbon market, the investors, the project, and the demand could be scattered all over the world. Misra compares the carbon market to crypto a few years ago, in that people don’t know how to invest in it and how the pricing mechanism works.
While the dispersed nature of the carbon market instability is its natural state, Misra highlights that just a few years ago, it was challenging to get anyone to admit that the market was decentralised.
Advocating for standards to enable orchestration between registries, Misra states the industry is still largely unregulated and therefore communication between players and collaboration is essential to widen the market and enable accessibility.
“Once you have an orchestration layer, you can connect to each entity, whether it's country or an operational entry, and everyone can then connect to you and access everything else. You end up orchestrating that with, I call it a hub and spoke model. If other folk are running vertical silos, you can then go horizontal and vertical across that. It then creates a network of networks. It means our network can then interconnect more easily with another network, or directly into other services like Ghana Carbon Registry.”
Challenges in carbon market infrastructure and new opportunities
According to Misra, the UK has the opportunity to blossom into a climate hub, with the potential to open up the market and securitise carbon assets, and channel investment liquidity into them for countries in the global south, filling the multi-trillion dollar financing gap. Carbon assets could be a national export commodity.
Misra cites the example of the London Stock Exchange, which created a framework for Special Purpose Vehicles (SPV) to be listed on the market, generating cashflow into the carbon market as investors take shares which can get a return based on the carbon credits.
Speaking to how the Trump administration in the US has impacted the global climate finance industry, Misra comments:
“For projects that are economic, he'll ensure the US finances them. To the final guidance note, voluntary carbon credit derivatives trading under the Democrats was approved by the CFTC. If like other commodities, even though it's intangible, carbon becomes a more tradable asset class, then the biggest beneficiaries are going to be the US futures exchanges.
“Equally for us in the UK, there is the opportunity for exporting technology and know-how into the global south countries on an economic construct. Geopolitically, it provides a good counter to other nations. We're not going to see the Trump administration pull back from this, they'll be very much involved where it makes economic sense.”