VCS Opens Can of Registries

Steve Zwick

For nearly as long as there’s been talk of a Voluntary Carbon Standard, VCS supporters have been haggling over how to track Voluntary Carbon Units. The VCS Association says its decision to assign that task not to one but to four separate registries kept in synch via UN-designed messaging protocols will deliver the best solution – but hasn’t put the matter to rest. The Ecosystem Marketplace tells you why.

29 July 2008 | Registries are the backbone of any environmental market – coordinating as they do everything from the way credits originate to how they are validated and verified to how they are tracked through their lifetime and retirement. It’s a difficult task under any circumstances, and critics of the Voluntary Carbon Standard (VCS) Association’s decision to authorize four registries for tracking Voluntary Carbon Units (VCUs) in a scheme set to go live September 29 say it will only add to the complexity and increase the chances of double-counting.

One market player even derided the multi-registry solution as “a decision not to make a decision.”

Edwin Aalders, acting CEO of the VCS Association, vehemently disagrees – and says the multi-registry approach is all about competition, with the four registries – run by Caisse des Depots, TZ1, Bank of New York Mellon (BNYM), and APX – being chosen based on two factors: their ability to service all traders, large and small, and their ability to dig into the nitty-gritty of who owns what.

“The real shaking out came when we got into looking at how various registries deal with custodial services,” he says. “Some of them just had simple spreadsheet applications, while others had the kind of robust documentation that you would expect if you were, say, buying shares in a company.”

He says that, rather than chose one specific registry, they decided to set criteria – such as the use of proper independent third-party custodial services – and then give any comers who passed the test a chance at the game.

“If we limit ourselves to one registry today, we may find tomorrow that someone has come up with more economical ways of running things,” he says.

Tony Nunes, who runs the registry set up by BNYM, adds other benefits to using a multi-registry approach.

“It’s about having four different kinds of registries in different parts of the world providing global access for all types of participants,” he says. “That’s critical if this is going to work.”

Indeed, the blend of registries reflects the emerging makeup and geography of the ecosystem marketplace, with three of the four being run by financial institutions in different parts of the world (Caisse des Depots is in France; BNYM is in North America; and TZ1 is in New Zealand), and the fourth being run by a well-established environmental infrastructure provider (APX, which is also based in North America, manages more than two billion environmental certificates – including those of the California Climate Action Registry and the Gold Standard registry, as well as the major US renewable energy registries).

That diversity, however, has also spawned contentious answers to the critical question of how to coordinate the registries so that the same list of projects is replicated across all platforms accurately and in real time.

Messaging is the Message

At issue is the set of messaging standards that will be used to keep the registries synchronized with each other.

Such standards are akin to a common language that financial entities – including registries – use to communicate with each other, and the VCS Association had to choose between two lingua registras: the one used by banks and brokerages around the world, and the one used by national registries dealing in Certified Emission Reduction certificates (CERs) governed by the Kyoto Protocol.

In the end, the Association settled on the UN standards, called Data Exchange Standards (DES), but left the door open for a later switch to the standards advocated by the financial community – namely, the International Organization for Standardization’s “ISO 15022” standards.

Dueling Standards

Under the UN system governing Kyoto, individual nations maintain their own registries but can pass credits into the global market via something called the International Transaction Log (ITL), which was set up by the United Nations to verify and register credits, track them, note their passing upon retirement, and act as a central hub through which credits pass when being transferred between owners using different registries.

The UN developed DES to make sure that all registries are working with the same set of definitions. It lays out detailed contingencies for communicating about events unique to environmental securities.

ISO 15022, on the other hand, lays down rules and guidelines on how to build messaging systems for financial transactions such as the transfer of equities, money, and – now – environmental securities. It was developed in part by the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a not-for-profit cooperative launched by a handful of banks in 1973 that has evolved to include more than 8,000 financial institutions in more than 200 countries. Among other things, SWIFT provides the network through which money and securities are transferred across the world.

“If the ISO 15022 message standards are used, they could be carried over the SWIFT network,” says Peter Ware, SWIFT’s manager of industry initiatives. “If the UN standards are used, they would probably be carried over the Internet or through VPNs.”

For now, all four registries have committed to use the UN’s DES in order to meet the September 29 launch date, but Aalders says that decision is not etched in stone.

“We expect that we will shortly have the initial rules in place so that registries will be able to undertake their internal programming,” he says. “We also continue to follow any market developments and initiatives that would work towards a standard process with the aim of seeing if we need to adopt this at a later stage.”

APX, meanwhile, has been given the task of developing a central data base for keeping track of registries. This data base, however, will not be a hub like ITL.

Mi Casa, Su Casa

Unlike Kyoto, the VCS and its four registries will work under a so-called “nostro vostro” arrangement – where entities hold each other’s assets, and the “hub” depends on where the credits originated.

“The best example of nostro vostro is the way banks interface,” says Helen Robinson, Chief Executive, TZ1 Registry. “When travelling, you can withdraw money from an ATM machine from a different bank because each bank has an account on the other bank, so that when you withdraw money, it goes through a robust network methodology that ensures that the money is there and the transaction can proceed.”

Likewise, each VCS registry will have an account on each of the other three registries, and if credits held in one registry are sold to someone who wants to use a different registry, the credits are transferred, and a record is held in the issuing registry.

To prevent double-counting, new credits can only be issued on one registry, which assigns a serial number to the credit and then keeps track of the registry throughout its lifetime. That “issuing registry” then becomes a de facto “hub” for trading in that particular credit – meaning that if credits that originated on that registry are then transferred between two of the other registries, they first have to pass through the originating registry.

When credits are either issued or retired, that information is bounced to the project data base, which is owned by VCS but administered by APX. Credits will be recorded in both the project data base and the issuing registry when they are created, and again when they are retired – but it is up to the issuing registry to track the credits as they change hands.

The Quest for Credibility

Critics of using DES say the voluntary markets face challenges the compliance markets don’t have to deal with.

“In the Kyoto Protocol’s Clean Development Mechanism (CDM), the regulatory body defines what an offset is,” says Aalders. “If you get a CER issued, you know you have a ton of carbon reductions that have been recognized by the institution and the host country.”

But voluntary credits are evolving entities created and coordinated by the private sector. As a result, they face a greater credibility gap than do compliance credits, says Robinson.

“If there is not robust interoperability between registries, it could undermine the credibility of the VCS,” she says. “This is more so than in the compliance market, because voluntary credits are still trying to earn the public’s trust.”

The DES Advantage

Marc Demarest, a lead software designer with APX, concedes that financial market protocols and the SWIFT network should be used to connect the registries to exchanges – but insists that DES is the best way for registries to communicate among themselves, and offers a very simple reason:

“That’s what the DES was designed to do,” he says. “It was built from the ground up to deal with the particular nature of environmental commodities – how they’re originated, validated, verified, and then traded, retired, or cancelled.”

He cites a litany of unique scenarios that only happen in environmental markets and for which SWIFT does not yet have messaging protocols – such as how to deal with a credit that goes bad.

“DES has a covenant mechanism requiring the project proponent to purchase equivalent numbers of valid instruments and replace the invalid ones with valid ones,” he explains. “It’s complex – especially when, say, the default happens nine months through a yearly period and the credits have been dispersed into the accounts of hundreds of people. How do you identify where those credits are and replace them in a way that does not create duplicity (replacement of the old credit with the new before purging the old)? DES has an answer, but SWIFT does not.”

The SWIFT Advantage

SWIFT’s Ware says the answers are in the works, and that the advantages of weaving the registries into the global SWIFT network far outweigh the disadvantage of having to retool ISO 15022 for carbon registries.

“We have a standards department looking at flows and relating them back to ISO 15022 message standards,” he says. “So far, it looks like we already have standards that can meet that need.”

Ware points out those message standards are just one aspect of the debate because of SWIFT’s status as a network over which messages can be carried.

“With DES, the registries will still need to implement a communication platform,” he says. “Most of the users are already connected and using the (ISO 15022) standards, and new users who connect with us are automatically connected to 8,000 other end points.”

Seeking the Competitive Edge

Regardless of how the messaging debate plays out, each registry believes it has a competitive edge over the others. Caisse des Depots, for example, will tout its status as an early mover in sustainable development and carbon finance, as well as its massive balance sheet.

Bank of New York Mellon (BNYM) will tout its status as the world’s largest trustee and depositary, with more than four million documents and $23 trillion in custody and administration.

“We have proven that we can manage the transfer and ownership of securities on a grand scale,” says Nunes. “We are also the first group to have proactively launched a carbon registry for voluntary carbon credits in 2006, when VCS-1 came out, and we already have more than two million credits registered, and are in the process of building out our registry to include other types of carbon credits.”

TZ1 will tout its ability to offer diverse carbon holdings in one place, thanks to its “meta-registry” structure, which links registries, banks, and exchanges regardless of the products they deal in so.

“The TZ1 Registry accepts multiple types of verified carbon credits to provide a holistic inventory carbon view,” says Robinson. “We provide a single core depository of carbon assets, as opposed to different segregated systems for different standards or regions.”

APX, meanwhile, will tout its experience and the fact that it already manages more than two billion environmental certificates – including those of the California Climate Action Registry and the Gold Standard registry, as well as the major US renewable energy registries.

“This will be our 9th major deployment of a market system, and we believe we’ve got state-of-the-art solutions for this type of application,” says APX Vice President Reiner Musier.

He, like the others, concedes the field could grow. But he also – like the others – believes the market will eventually settle on just one or two registries.

And they all agree their registry will be among those chosen two.

Steve Zwick is Managing Editor of the Ecosystem Marketplace. He can be reached at [email protected].