Tokenizing Carbon Credits
Can tokenization actually help solve the challenges in the voluntary carbon markets today?
In a previous post, I wrote about how ReFi is challenging the world to think differently. The tokenization of carbon credits is one example of ReFi in action. But, what is a carbon credit?
“A carbon credit represents a ton of carbon dioxide that has been removed or never emitted into the atmosphere due to the work of an impact project (Toucan).”
Think about activities like afforestation, direct air capture, solar energy, wind farms, etc. These help to either remove existing carbon dioxide or reduce (avoid) the amount of carbon dioxide being emitted.
For the purposes of this article, rather than focusing on the compliance carbon market, I will focus on the less regulated voluntary carbon market (VCM) as this is where the most opportunity for tokenization to improve the process lies today.
To keep the process super simple, there’s essentially 3 steps in the voluntary carbon credit lifecycle:
- Project Development: design, register, and build the carbon credit
- Monitoring, Reporting, & Verification: third parties validate the process, verify the reductions/removals, and issue the credit to the project developer
- Exchange & Retirement: once issued, developers can sell credits — buyers can claim the credit and retire it from usage
Sounds pretty simple, right? Well, it’s not, it’s actually incredibly complex with a lack of universally adopted global standards and supporting technologies. There is also a general lack of transparency and credible supply, a risk of double-counting and fraud, and a varied solution landscape.
Even with these challenges, the VCM space is red hot as organizations around the world rush to comply with the goals they set out for in the Paris Agreement. The projections for market size growth are astounding:
“Overall, the market for carbon credits could be worth upward of $50 billion in 2030” — McKinsey
With the rise of blockchain and other distributed data technologies, people are asking the question — can tokenization solve the challenges?
Imagine pieces of the current process, but with blockchain:
- Project Developers could transparently prove their project through an integration with the ledger
- A single token (and data) standard could be agreed to for natively issuing carbon credit tokens
- Marketplaces will facilitate the transfer and validity of tokens between developers, customers, and secondary customers
- Marketplaces will also provide clarity to customers around credit provenance and token retirement
These are just some of the areas of opportunity.
Across web3, alliances, start-ups, and enterprise are all trying to leverage tokenization to bring real business benefits:
- Bring transparency into the provenance and credibility of credits
- Encourage more project developers to enter the market through clear transaction mechanisms
- Improve access to high quality carbon credits
- Create more efficient markets to reduce trading and compliance costs
In the market today, you have a plethora of organizations working to improve carbon emissions: InterWork Alliance, ACX (Air Carbon Exchange) Carbonbase, Microsoft, Allinfura, Celo, Toucan, etc. For further reading, see the table at the end.
The opportunity is huge, but it requires complex coordination across a large number of global stakeholders. Given the multi-party nature of this workflow, blockchains/distributed ledgers can be a massive enabler if done correctly.
The technology might just be there now, but as a society — can we get there?
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For further reading, I found this chart helpful from the recent World Economic Forum report.
