How Blockchain Technology Can Benefit the Environment: The Verification of Carbon Credits

Alex Horton2022-08-04

A primer on what to expect on the future of carbon - an emergent asset class

A carbon credit is a tradable certificate that represents the reduction of one metric tonne of CO2 or greenhouse gas emissions. In order to incentivize organisations to reduce their environmental impact, many governments and companies offer carbon credits in exchange for emission reductions. However, the process of verifying and trading carbon credits can be complex and time-consuming.

Enter blockchain technology. A recent study by IBM found that blockchain has the potential to streamline the entire carbon credit verification process. Blockchain (if you don't know by now) is a type of distributed ledger technology (DLT) that creates a tamper-proof record of transactions. It is often used to create digital currencies (dogecoin to the moon 🚀🌙), but it has many other potential applications. Blockchain could be used to create a transparent and tamper-proof record of all carbon credit transactions. This would increase trust in the market for carbon credits and make it easier for buyers and sellers to trade them. By creating a tamper-proof and transparent record of transactions, blockchain could help increase awareness and trust in this fledgling market. Carbon credits represent a new asset class, and as such, deserve the security and trust that only blockchain can provide.

Carbon: An emergent asset class

As the world wakes up to the reality of climate change, carbon is fast becoming an asset class that is poised to transform the global economy. A recent report by the World Bank found that carbon markets could be worth $250 billion by 2030. That is a huge opportunity for companies and countries alike to profit from the transition to a low-carbon future.

Carbon credits are a type of asset class that represent the right to emit a certain amount of carbon dioxide. They can be bought and sold on global markets, and their value is determined by the demand for greenhouse gas reductions. They are a way for companies and countries to offset their emissions by investing in projects that reduce greenhouse gases. Whilst it is important that pressures are still put on companies to decarbonise, the reality of carbon credits as a mechanism to encourage a transition to a greener economy is hard to ignore.

Also, it's important to distinguish between carbon offsets and credits. Carbon offsets are different from carbon credits in that they are not tradable on global markets. Carbon offsets are typically used by companies to offset their emissions from a specific project or activity. For example, if a company wants to build a factory in an area with high emissions, they might purchase carbon offsets to offset the emissions from the factory. Carbon credits, on the other hand represent a certain amount of greenhouse gas emissions that can be traded between buyers and sellers. Carbon credits can be used by companies to offset their emissions from any activity, not just a specific project.

The market for carbon credits is still in its early stages, but it is poised to become a major force in the global economy. Countries and businesses are beginning to understand the importance of reducing greenhouse gas emissions, and they are looking for ways to invest in carbon credits. This is likely to lead to continued growth in the carbon credit market, as more and more people become aware of its potential (I mean just look at what happened to Doge when Elon started tweeting about it).

Problems with verifying carbon credits

However, in order for carbon markets to reach their potential, they need to overcome some major challenges. With so much money at stake, there is a great need for a tamper-proof and transparent way of recording transactions.

Most notably, the offset industry is facing 5 key problems :

  1. There is a lack of standardization in the carbon credit market, which makes it difficult to compare and verify credits.
  2. The process of verifying carbon credits can be time-consuming and complex.
  3. There is a lack of transparency in the carbon credit market, which makes it difficult to track transactions.
  4. Carbon credits are often traded in secondary markets, which can be opaque and difficult to monitor.
  5. There is a risk of fraud in the carbon credit market, as it is difficult to verify the authenticity of credits.

Not everyone is convinced that carbon credits are the best way to reduce greenhouse gas emissions. Some climate leaders, including Bill McKibben and Naomi Klein, have criticized carbon markets for allowing polluters to continue emitting greenhouse gases. They argue that carbon markets simply allow polluters to buy their way out of responsibility for their emissions. Others argue that carbon markets are an important tool for reducing emissions and that they should be part of a broader strategy to combat climate change. The debate over carbon markets will continue in the years to come, but blockchain technology may go a long way to legitimising the role of carbon credits through verifying the role of carbon as an emergent asset class and addressing the key problems with verification.

Blockchain streamlining the verification process and creating new assets

There are a number of companies that are already using blockchain technology to verify carbon credit and offset projects and beginning to address these emergent issues. These organisations include Climate Chain Coalition, CarbonX, CUT, Toucan and Ivy Protocol. The Climate Chain Coalition (CCC) is an open global initiative to support collaboration among members and stakeholders to advance blockchain (distributed ledger technology) and related digital solutions (e.g. IoT, big data) to help mobilize climate finance and enhance MRV (measurement, reporting and verification) to scale climate actions for mitigation and adaptation.

CarbonX is a blockchain platform that allows businesses to offset their carbon footprints. Its key offering CarbonXHub is a private blockchain ledger capturing Internet of Things GHG (greenhouse gases) data for reporting, management, and conversion to a carbon commodity. Through verification of your GHG inventory on the blockchain, Carbon X is helping to ensure companies' carbon footprints are legitimate. CUT (or the Carbon Utility Token) leverages the trust and immutability of Blockchain Technology to offer a public ledger for certified Carbon Offsets. The pool of Carbon Offsets used in the CUT project is available to be transferred peer-to-peer and can be used to retire the full or partial Carbon Footprint of any given activity on the blockchain.

Toucan has created infrastructure (the Toucan Bridge) that helps to bring carbon credits onto the blockchain by providing secure and verifiable tokenization procedures. If for example, you have purchased carbon credits on the Verra registry, the Carbon Bridge allows anybody to bring their carbon credits on-chain in a tokenized form. Tokens have multiple advantages over legacy credits, including full transparency, programmability, fractionalization, and composability with the emerging DeFi ecosystem. Through tokenizing carbon, Toucan is helping to accelerate its utility as an asset. Ivy Protocol connects pre-certified carbon offset projects with the funding and resources needed to get started. Project owners can access the early-stage capital required to develop a carbon offset project whereas offset buyers can discover these projects and help nurture their development. Similar to Toucan, Ivy is tokenizing the underlying value of future carbon credits and allowing them to be traded after funding or used as DeFi collateral.

It's exciting times in the emergent carbon economy. As governments worldwide increasingly implement more stringent policies on GHG emissions such as emissions trading schemes, blockchain technology's capability to transform carbon into a verifiable asset class will play a pivotal role in transforming how we perceive value.


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