Quantum Commodity Intelligence - Chicago-based platform Laconic plans to disrupt carbon markets by transforming credits into sovereign carbon securities (SCS), a financial asset regulated in the US, and is currently in talks with 11 countries following an agreement with Bolivia earlier this year.
Laconic expects to act as an alternative for countries to raise finance abroad to protect forests.
Currently, parties to the Paris Agreement can either develop jurisdictional REDD+ programmes under international standards, such as Verra and the Architecture for REDD+ Transactions, or obtain funds from Western donors.
The idea is for sovereign governments to issue SCSs on the company's platform based on the targets set under National Determined Contributions (NDCs), which set out Paris Agreement goals, Laconic's Chief Executive Andrew Gilmour told Quantum.
"This is not a carbon project, a REDD+ project, or a jurisdictional project. This is the monetisation of a government's ambition linked to the Agriculture, Forestry and Other Land Use sector under its NDC," said Gilmour.
"It allows institutional buyers to trade this instrument because, from an accounting perspective, they can put those securities on their balance sheets as assets [contrary to carbon credits]," he said.
"For the first time, you have carbon as a financial asset," he added.
In November, the company signed a contract with Bolivia worth up to $5 billion if it reduces deforestation as set under its NDC, and new agreements are to be announced next year, he said.
Potential buyers have demonstrated strong interest, amid ongoing negotiations, and expectations are for the first settlement of Bolivia's SCS to take place in the first quarter of 2025, according to Gilmour.
"Effectively, the Bolivian government is saying 'this is my emission curve and our ambition is to lower that curve', and is willing to reach this target in exchange for promises of finance [via a financial security]," he added.
Paradigm shift
An SCS differs from a carbon credit because it is backed by a sovereign government via a contract that protects the buyers under US laws in case countries do not achieve the agreed targets, said Gilmour.
The agreement transforms what could be originally a carbon credit into a security similar to a sovereign debt bond, which foresees penalties for governments should they default on payments, addressing risks for buyers over projects' integrity.
Laconic will verify progress in real-time based on data from a three-metre resolution satellite surveillance under its Sentient All-Domain Augmented Response (SADAR) platform, said Gilmour.
Being a financial asset under the US Securities and Exchange Commission (SEC) rules will also allow market players to structure derivative instruments, such as swaps, based on those SCS, opening the door for the financial sector to get involved.
"You need to have liquidity for a healthy market.. and for that you need financial intermediation, meaning banks, hedge funds, tax authorities, trading companies, insurers, making markets with those instruments," said Gilmour.
"We had many regulatory consultations, we spent a lot of time in London, and Washington DC, with the SEC, with the Commodity Futures Trading Commission, making sure that all the rules were followed, and that's how we were able to do this," he said.
"It represents a paradigm shift [in how to trade carbon]," added Gilmour.
The company's platform has the technological capacity to "clear trades", meaning closing positions between buyers and sellers, effectively operating as a clearing house for carbon markets.
Countries will also have the option to reduce the amount of SCSs to be issued should they strike deals with other countries to sell offsets via Internationally Transferred Mitigation Outcomes (ITMOs) under the Paris Agreement's Article 6 or proceed with jurisdictional REDD+ programmes.
Laconic's SADAR platform will be integrated with national carbon registries to verify potential jurisdictional REDD+ credits and ITMO issuance to avoid double counting.
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