DigFin Green: AirCarbon X’s Thomas McMahon

DigFin Green is our occasional series profiling leaders in fintech companies addressing environment, social, and governance (ESG) solutions, using technology to power financial services towards sustainable outcomes.

Thomas McMahon is co-founder and CEO of
Singapore-based AirCarbon Exchange (ACX), a global trading environment for
voluntary carbon credits.

McMahon has a career in commodities trading
and exchanges. He was held senior roles in Asia for New York Mercantile
Exchange (NYMEX), including helping it establish a new exchange in Dubai, open
its first Asian office in Tokyo, launched a merc exchange startup in Hong Kong,
and served as SEO at Singapore Mercantile Exchange.

Since 2017 he has moved into the digital
asset space, establishing or advising several startups, including Digiassets
Exchange and Abaxx Exchange, as well as chairing the Dgitial Exchange Association
in Singapore.

ACX went live in January 2020.

What problem are you addressing?

Thom McMahon: To help the voluntary carbon market be profitable, support the right sustainability projects, at scale. The financialization of a new benchmark happens only once in a decade, and this is carbon’s time.

There is a lot of friction involved in
owning a carbon credit, knowing how to price it, and turning these OTC
instruments into something that integrates with balance sheets, accounts, and
reporting requirements.

That is because traditional commodities
markets are very traditional, operating on old technology, while carbon credits
are essentially digital in nature.

What does ACX do?

We are a blockchain-based voluntary carbon
marketplace.

A carbon credit represents the mitigation
of 1 tonne of carbon dioxide. There are two registries today that the market
uses to record the issuance of credits: GoldStandard in Switzerland and Vera in
the US. If you can prove to them you’ve got an audited mitigation, they will
issue you a carbon credit in the form of an electronic receipt.

But there’s little to no regulation
regarding these credits, so they reside in a no-man’s land. They can’t sit on a
company’s balance sheets, and banks won’t touch them. Today they just exist as an
investment product.

Moreover, each credit is tied to just one
event: you can sell it to a company (like an oil and gas company) that wants to
offset its emissions. You can trade these credits but they ultimately need to
be retired, to log a permanent non-use of an emitting activity. There are no
standards around pricing. Because these can’t sit on a balance sheet, companies
tend to use their charity, corporate-responsibility or marketing budgets to
acquire them.

But starting next year, it will be mandatory
in markets such as Hong Kong, Singapore and the US that companies prove their
net-zero emissions commitments. Carbon offsets provide that verified removal.
This is our market.

What does this look like in practice?

Blockchain, because it is immutable, gives proof of a credit’s creation, its transaction history, and its retirement. We’re doing what platforms for trading currencies did 10 years ago, creating standard reporting and records, but using smart contracts to support asset-backed tokens. No matter how many times these get traded, each can be traced back to the original issuer.

In the oils futures markets, contracts aren’t
tied to a particular barrel. Only when someone takes final delivery do the traders
identify which barrels of oil to exchange. But ACX operates in real time: we know
where carbons sit, who owns them, what project they relate to, and their market
price. This makes it seamless to buy, sell or retire the carbon.

Since we went live in January 2021, we’ve
signed up 152 member firms. Some are alternative investors, such as hedge
funds, credit funds, and family offices. Most are multinational companies. So
far 60 million tonnes of carbon has traded on ACX. We’re now the second biggest
venue in the world for voluntary carbon.

What else do we need to know?

We’re using a recent fund raise to move
into new market segments. These include credits for plastics, hydrogen, and
what we call “environmental instruments”.

The purpose of carbon credits is
decarbonization. But EIs are about transitions, technologies that are halfway marks
to achieving net-zero emissions. Energy companies can transition into hydrogen
gas, oil can be used to create plastics. For example, Coca Cola wants to recycle
all its bottles in Southeast Asia, so we’ll have a plastics credit token to
help monetize and trade that.

We’re working with Eventus to provide a
comprehensive market surveillance program. Their Validus platform handles trade
surveillance, transaction monitoring and anti-money laundering screening. They
already do this in spot markets and are developing a solution for derivatives
markets as well.