Carbon credits are seen as an important incentive in the fight against climate change. They make activities such as reforestation and preservation profitable, which gives local communities a viable alternative to exploitation. At the same time, however, it's critical that there is a process in place to verify the environmental impact of such activities and the resulting carbon credits. This process is known as monitoring, reporting, and verification, or MRV. What follows is an explanation of the process, how it works, why it's necessary, and how it's being digitized.

Note that the focus will be on MRV for the voluntary carbon market, not the compliance market.

What is MRV?

In short, the monitoring, reporting, and verification (MRV) process is an environmental fraud protection mechanism that prevents carbon credits from being issued in the absence of legitimate proof of climate impact. It puts the burden of proof on carbon projects to provide evidence of CO2 emissions prevention or removal.

  • Monitoring - Covers data collection from a variety of sources, including satellite imagery, soil sensors, and infrared imaging, to back up climate impact claims made by projects.
  • Reporting - Encompasses the structuring and submission of the monitoring data for review by a standard.
  • Verification - Involves the evaluation by the standard of the report submitted by the project. Verification results in carbon credits being issued.

How does it work?

To ensure that MRV issues carbon credits that genuinely reflect climate impact, the following process is used:

  1. Project estimates - Every carbon project begins by estimating its climate impact, calculated according to existing, peer-reviewed methodologies approved by standards such as Verra and The Gold Standard. Estimates take the form of tonnes of CO2 emissions projected to be prevented or removed, which corresponds to a number of "ex-ante" carbon credits. A 3rd-party auditor approved by the chosen standard must then confirm the estimates.
  2. Monitoring and reporting - Once the project is approved, it can begin monitoring and reporting impact. A variety of manual and tech-driven processes are used to build a body of evidence to back up the estimates that is then submitted to the standard as a report. The monitoring and reporting period can take up to one year to complete.
  3. Verification and issuance - The standard reviews the reports and issues carbon credits based on the "ex-post," or actual, amount of C02 emissions prevented or removed. This process typically takes a year to complete.

What are the challenges?

MRV is, generally speaking, quite effective, but there are some significant challenges that need to be improved upon in the quest to scale climate action:

  • Speed - The manual nature of MRV means that it can take somewhere between 2 and 5 years from project inception to the first issuance of carbon credits. This puts significant cash flow pressure on projects, forcing them to seek pre-financing or simply not start the project at all.
  • Cost - Related to speed is the associated cost of MRV. Projects often encompass vast tracts of land that are expensive to monitor. The verification process, both of the project itself and carbon credits, can also come with heavy costs. Third-party auditors need to conduct site visits, for example, and standards typically take some percentage of the issued credits.
  • Monopolisation of verification - In the absence of government regulation, private organisations have had to act as the gatekeepers of carbon credit issuance. Verra, the largest of these, controls roughly 75% of the market. And while this dynamic does have its benefits, it gives Verra undue influence over the industry and increases the barrier to entry for competitors.

Why is it needed?

Despite the challenges, MRV is central to the idea of carbon accounting. Its absence would drive the proliferation of questionable carbon credits (and climate impact), pushing prices down and wiping out the incentives projects and communities rely on to continue choosing prevention and reforestation over exploitation.

Improvements are certainly needed to address some of the challenges, but the fundamental concept of third-party confirmation of climate impact isn't going anywhere.

Efforts towards digitalization (dMRV)

With the need for scale restricted by MRV's manual nature and issues surrounding over-centralisation, it's no surprise that digitalisation has become a major priority. Solutions in three broad areas of technology are being developed and implemented to help the MRV process become more efficient, open, and trusted:

  • Monitoring technology - Perhaps the biggest advancement in terms of digitalisation is technology such as drones, satellites, and sensors being used for monitoring. The amount of data produced can provide a much better understanding of climate impact, in real time and at a fraction of the cost. Such data can then be shared across geographies to increase the accuracy of estimates for future projects.
  • Artificial intelligence (AI) - In tandem with advances in monitoring technology is the emergence of AI and the ability to automate the monitoring and reporting process. As climate impact scales and the amount of data increases, it's no longer possible for humans to monitor, report, and verify each project. AI has a big role to play in doing a large chunk of this work and speeding up the time from project inception to carbon credit issuance.
  • Web3 - The holy grail of dMRV is verification, yet it is the hardest to achieve. Web3 solutions have been proposed as means to create a decentralised certification standard that can compete with Verra. Open Forest Protocol is one such example. What Web3 can do is provide the infrastructure and incentives for independent experts to verify project estimates and reports and, thus, issue credits without the need for a centralised organisation.

All in all, the hope is that dMRV can lower the barriers to climate action and lay the foundation for scale.