Tokenization of Carbon Credits: A six part Series on the different Options for transferring Certificates on-chain
Abstract
Consumers as well as companies are becoming increasingly aware of environmental and climate protection. Those who want to compensate for their unavoidable CO2 emissions rely on carbon certificates from the so-called “voluntary carbon market”. But unfortunately, this market currently has various shortcomings. Above all, long transaction times, a lack of digitalisation and intransparency make it difficult to operate efficiently. Therefore, the voluntary carbon market has emerged as a serious use case for blockchain technology. But how can the traditional process be implemented and what has to be done to bring those paper certificates on-chain? Since there are several approaches, we have analysed the different processes and will illustrate the advantages and disadvantages of each solution in a six part series.
Introduction
Before we dive into the process of tokenization, let’s first get an overview of the stakeholders in the voluntary carbon market and what a typical process looks like:
As an example, consider a nature-based project such as the reforestation of a tropical rainforest in South America. The project developer is providing technical assistance and support for the planning, implementation and optimization of the project with regards to project finance, certification strategies, business and management plans as well as monitoring efforts.
He is seeking funding from or through the token seller in return for the carbon credits the project generates. Furthermore, the project developer will hire a verification firm, which is verifying the project concerning the underlying methodologies and the way the credits have been calculated. Once approved and verified, the carbon credits issued by the project will be registered in a traditional carbon registry such as Verra, Gold Standard or BioCarbon Registry.
A carbon registry system is a platform that enables organizations to track and manage their carbon certificates. It also allows companies to claim a credit to offset their unavoidable emissions, a process called “retiring”. Once the company has retired a credit, a certificate for the owner will be issued and it is immobilized in the registry.
The Tokenization Process
While the individual process of tokenizing carbon credits might be different, the underlying concept is mostly similar.
Carbon credits are issued “per vintage”, meaning that a project is issuing a certain number of carbon credits in a specific year. Typically one carbon credit reflects one ton of carbon avoided or removed from the atmosphere.
This vintage is brought on-chain by converting it into a NFT (ERC-721 token) and then fractionalizing it into x pieces of interchangeable ERC-20 tokens. In this case, x is the total number of equal carbon credits from this project in that particular year.
Scenario 1 — Centralized Traditional Registry synced with Decentralized Blockchain Registry
In this series, the first scenario we want to look at is the centralized traditional registry synchronized with a decentralized blockchain-based registry.
The implementation of this tokenization scenario requires a two way bridge between the traditional registry and the blockchain, where the credits can be moved on and off the blockchain while ensuring transparency and traceability to avoid double accounting and preserving the integrity of the credit.
The main idea is to keep the traditional registry in sync with the blockchain registry at any time. The tokenization process itself as well as each other transaction on the blockchain, such as token transfers between wallets, will be transferred to the traditional registry.
The purchase of carbon credits from a company will also be updated in the traditional registry. Once the company decides to claim the offset, the corresponding ERC-20 token will be “burned”, which will lead to mark the credit as “retired” in the traditional registry.
Conclusion
While this is a viable scenario, it raises the question of why and whether it makes sense in the long run to keep two registers in parallel. Anyone who has ever tried to link two database systems and keep their records in sync knows that this is extremely challenging.
However, the inclusion of blockchain technology would provide efficiency gains while allowing the existing registries to continue to operate unchanged. This is why well-known registries such as Verra seem to favour this approach, at least for now.
About the Team
Nadine, Wolfram and Timm combine competences from various areas such as operations, corporate communications, business development, finance, regulation, accounting and consulting.
As the Bloomberg for green tokens, they create a holistic database for tokenized, sustainable assets and ecosystem-based tokens that offers a trusted, one-stop solution for investors and companies.
Nadine Wilke
Nadine.wilke@particula.earth
