The Voluntary Carbon Market (VCM) has grown 340% in three years. Blockchain will propel this rise even farther.
Carbon credits have emerged as the preferred open market tool for companies and nations to reduce their emission of greenhouse gases that contribute to climate change. Carbon credits allow a buyer to purchase an offset to their existing emissions through funding external projects that target either Emissions Abatement (preventing emission elsewhere) or Carbon Direct Removal (sucking CO2 from the atmosphere).
Since 2019, the Voluntary Carbon Market (VCM) has grown exponentially in response to the attention and regulatory pressure incited by climate change and global warming. The market was valued at $295 million in 2019, and by 2022 it had reportedly grown to $1.3 billion.
A January 2021 industry report by McKinsey asserts that market demand could increase 100x in the next 30 years to cross $100 billion. That’s as large or larger than the size of the automotive aftermarket ($80B), pet care market ($100B), music streaming market ($45B), and gaming market ($90B).
However, the existing VCM infrastructure can hardly accommodate existing demand and offers little chance of scaling without modernizing. Origination and capital flow will be bottlenecked, and reporting, retirement, and accountability of carbon credits, which already suffer from issues of transparency and audibility, will surely be lightning rods for criticism.
In this context, Blockchain promises to be a key enabling technology and accelerant for industry growth to a $100 billion market cap. As “Web3 for climate” is just coming online in 2023 at Bitgreen and elsewhere, here are 10 reasons in three categories how the blockchain will transform the carbon credit market in the next five years:
Capital Markets
1. Reduce Transaction Costs By 5% or more
The vast majority of carbon credits are packaged and sold over-the-counter (OTC) by trading desks and commodities brokers. A typical fee charged by brokers ranges from $0.20 to $0.50 per metric ton of CO2. Assume $15 per credit and the broker earning both the buy and sell fee, and that results in approximately 3%-5% additional cost to the credit. Compare 3%-5% with the bid-ask of a liquid natural gas futures contract, roughly 0.6%, and you clearly see how much value could be saved.
Blockchains such as Bitgreen will operate digital open markets for carbon credits in 2023. Many inefficiencies in the transaction process will be eliminated, reducing costs and post-transaction settlement time. Carbon projects and sellers will directly offer credits for sale and ensure more of the project revenue returns to the originator, indigenous community or CO2 removal agent.
2. Open Access to the Full Purchaser Market
In the past, several influential gatekeepers were able to limit the expansion of the voluntary carbon market by permissioning access to their databases of certified carbon credits. Verra is noteworthy for requiring purchasers to have a Verra account, which created some oligopolies of distribution partners for Verra VCUs. Brokers won’t deal with individual retail buyers either, so the industry developed networks of rent-seeking agents who had tacit permission to purchase and distribute credits. The cost was passed onto the purchaser.
One of the key advantages of open, permissionless blockchains for the carbon credit market is that it will welcome purchasers and sellers of all types to participate in buying, selling and retiring carbon credits. Expect some permissioning — such as KYC for purchasers, but otherwise web3 will welcome vastly greater participation in carbon markets than ever before.
3. Target Specific Impact Areas
Carbon credits address diverse and specific impact areas related to climate change. These impact areas can include renewable energy, energy efficiency, waste reduction, afforestation/reforestation projects, building retrofits, methane capture, CO2 capture, and more. Credit profiles also vary by natural ecosystem, geography, impact coefficient, and UN Sustainable Development Goal (ie. “co-benefits”). Currently, purchasers can identify their preferred credit type, but it may be expensive, time consuming, and difficult to verify the data. Blockchains will consolidate and standardize the profiling of carbon credits for easy comparison, and via media-rich online marketplaces will raise the requirement for projects to showcase their co-benefits and unique attributes.
4. Create Bespoke Carbon Portfolios
Piggy-backing on #3: Target Specific Impact Areas, we envision (and have heard from purchasers) the desire to create diversified and bespoke baskets of carbon credits. Buyers have a natural aversion to single-bullet exposure to a project failing to meet its carbon reduction requirements and thus prefer diversification. Additionally, many investors and intermediaries, such as asset managers, will want to customize their portfolios for their own benefit or for resale, arbitrage, or regulatory hedging an existing portfolio of emissions from various fossil fuels. The bundling of bespoke indexes and portfolios will be streamlined and flawless using blockchain, and will allow portfolios to be recombined (recomposed) into other tokenized offerings on DeFi.
Credits Management
5. Retire Credits Instantly and Verifiably
Blockchains will communicate directly with leading registries via APIs. That means that when a Gold Standard or Puro.earth carbon credit is purchased and retired on Bitgreen, a minimum of four messages are immediately shared between the two entities: an initial purchase message, verification message, retirement message, and another verification message. Not only do multiple parties authenticate the transaction and retirement, the messages are transparently and immutably recorded on the blockchain for any third-party auditor. We envision the retirement and reporting status quo, which is currently all over the place and lacking coherent standards, to make material strides in coming years as regulation and public pressure forces companies to augment their precision and accounting for carbon offsetting.
Thanks for reading this far! Click here for 10 Reasons Blockchain Will Transform Carbon Credits (Part 2)
About Bitgreen
Bitgreen is a leading blockchain community focused on promoting sustainability and impact initiatives. Purpose-built as a parachain on Polkadot, Bitgreen enables decentralized and regenerative finance solutions for sectors including renewable energy, mobility, SME and microfinance, carbon credits, and human betterment.
Discover us at https://bitgreen.org
