In a world grappling with the pressing issue of climate change, the need for innovative solutions to curb carbon emissions has never been more critical. The Impact Challenge explores a fascinating concept that could reshape the way we approach carbon pricing - the Payments or a Cash-for-Carbon Model. Let's uncover how it holds the potential to revolutionize our fight against climate change.

Establishing an Agile Marketplace

Traditional carbon pricing methods, such as cap-and-trade schemes, have often fallen short of effectively addressing the intricacies of carbon reduction. What has been missing is a clear measure of carbon intensity per unit of transacted value.

A Payments Model could bridge this gap by creating an agile marketplace. This approach allows us to consistently assign financial value to positive or negative externalities arising from carbon reduction activities.

One of the significant advantages of this model is the trust it builds in the future viability of carbon markets. By using pay-as-you-go wallet technologies, we can develop a systemic management of carbon budgets through collaborative efforts among market participants. This stands in contrast to addressing instances of policy failures among numerous national and international policy programs.

Computational Efficiency and Digital Ledger Potential

A key benefit of a cash-for-carbon model is computational efficiency and the untapped potential that digital ledgers can provide to scale traditional pay-as-you-go wallets into a broad marketplace.

While digital payment authentication has faced challenges in adapting to existing infrastructure for merchants and financial institutions, it has become increasingly feasible to envision a digital ledger solution that integrates payment technology and carbon market dynamics.

For global efforts like the Paris Agreement to succeed, granularity at the regional, sector, and company levels is crucial, much like how payment providers follow transacted value.

The launch of the Task Force for Climate-Related Financial Disclosures in 2017 underscores the importance of tracking and reporting carbon emissions in financial terms. This involves linking carbon emissions to transaction-level activity, similar to how payments technologies are designed to deliver.

Seamless Tracking and Transparency

One of the fundamental distinctions between traditional carbon markets and their virtual wallet counterparts is the seamless tracking of carbon removal from the system.

A virtual wallet offers a more transparent mechanism that incentivizes participants to disclose their willingness to pay for reduced exposure to carbon risk. This transparency extends to monitoring and recalibrating default versus pre-committed carbon targets, making it easier to adapt to changing circumstances.

Cash-for-Carbon – A Look into the (Near) Future

As we move forward, the integration of alternative data through payment mobility apps is opening up exciting possibilities. These include compelling carbon-tracking solutions for both businesses and individuals. This trend is set to revolutionize the way we reduce carbon footprints in our daily activities.

Numerous economic sectors are poised to enhance their environmental and social stewardship by integrating payment innovations. However, the most significant impact is expected in streamlining supply chains in regions most affected by carbon-emitting economic policies.

In emerging markets, small and medium-sized enterprises are leading the charge in advocating payment solutions. They seek to access capital while generating measurable economic value from emission reductions. Payment solutions are also uniquely positioned to address the financial needs of a circular economy, making them the most efficient channel for directing and managing carbon sequestration payments, cash-for-carbon municipal programs, and congestion-charging schemes.

The integration of mobility payments represents a giant leap toward transitioning to a low-carbon economy. It paves the way for the emergence of the next generation of pay-for-good business models.

As we look toward a greener future, it's clear that the integration of payment technology with environmental stewardship is a necessary step that can drive us towards better functioning carbon markets.

This and other important ESG topics are discussed in my book, The Impact Challenge – available in open source – and a must-read for anyone passionate about the intersection of organizational learning and system innovation to achieve our shared sustainability goals.

About the Author

ALESSIA FALSARONE, SASB FSA, is a sustainable finance expert and a fellow of the Aspen Institute Business and Society Program. Her work bridges the gap between sustainability, financial innovation and risk management. A sought-after commentator for media outlets and contributor to academic programs, Ms. Falsarone is a member of high-level advisory groups that promote environmental and climate finance, including the G20 Environmental Ministerial, the London Stock Exchange, the Sustainability Accounting Standards Board (Value Reporting Foundation) and the UN Principles for Responsible Investment. In recognition of her innovative vision for business and society, she has received an Honoree Award from the Women’s Venture Fund and the 2021 Global Leadership Award by the SheInspires Foundation in the UK.

She is an alumna of Stanford University, the MIT Sloan School of Business and Bocconi University. Ms. Falsarone holds certified director status with the National Association of Corporate Directors. An avid advocate of sustainability in business education, she has contributed to educational initiatives on the topic at the Asian University for Women, the Society of Corporate Compliance, the Swiss Sustainable Finance Initiative, the United Nations, the World Bank, Stanford University and University of Chicago, including delivering training on climate risk and green finance in Asia Pacific and Latin America.

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