Solving Carbon Offsetting Challenges with Blockchain Technology

In the past several years, the use of carbon credits as a method of meeting climate change goals and tackling global warming has faced growing criticism around greenwashing. Certain environmentalists argue that, by buying carbon credits, corporations are given a free pass to claim they are working toward climate targets without reducing emissions from their own operations.

Yet, financing projects that produce carbon credits may be critical in slowing climate change, especially on the short timeline needed before irreversible damage occurs. Instead of abandoning them, carbon credits can be optimised using blockchain technology.

Here’s how using blockchain technology to create tokenized carbon credits could be an effective solution.

What Are Carbon Credits?

Carbon credits (or carbon offsets) are environmental financial products derived from activities that avoid, reduce or remove emissions of carbon dioxide or other greenhouse gases that would otherwise end up in the atmosphere.

A carbon credit is essentially a body of data evidencing that an emission reduction has occurred at a particular place and time. It enables the transfer of that claim to parties that have financed that emission reduction — as opposed to being an instrument that gives a party a right to emit a metric ton of CO2e.

They can be purchased by governments, companies or consumers, giving the rights to claim such emission reductions against one’s carbon footprint.

Why Is Carbon Offsetting an Effective Tool Despite Criticism?

Carbon credits are a powerful tool for funnelling capital to projects that can reduce emissions. While it would be ideal for organisations to focus on reducing emissions from their own local operations, climate change is a global problem. So, the global average rate at which global greenhouse gas emissions are reduced is more important than where the emissions are reduced.

Also, not all industries can achieve zero emissions, at least not immediately. Without carbon credits, it would be extremely challenging for many types of industry to participate meaningfully in global decarbonisation efforts — and we need this participation and capital to meet Paris Agreement climate goals on the timeline needed.

That said, a combination of corporates reducing their emissions as far as feasibly possible, plus offsetting of remaining emissions which cannot be reduced, would be the most effective approach.

The Challenges of Carbon Offsetting

Most traditional approaches for the monitoring, reporting and verifying (MRV) of carbon credits use manual processes that can be open to error, and the end-product is not tied to the underlying environmental data in a granular or permanent manner that can be easily traced.

This leads to a few serious challenges:

• there is limited transparency around these carbon credits;
• there is a lack of reliable data;
• MRV processes are costly;
• double counting is possible — selling the rights to the same metric ton of CO2 avoided more than once; and
• the entire end-to-end process is very slow, often with verification and issuance delays.

What is a Tokenized Carbon Credit?

Tokenization is the process of creating a digital representation of a digital or physical asset on the blockchain. Therefore, a tokenized carbon credit is a token that represents the financial product created around an emissions reduction.

Tokenized assets and digital securities can be a more streamlined, cost-effective and ultimately beneficial way of owning and financing assets, removing friction costs and resulting in a more streamlined investment, trading and reporting processes.

Tokenizing Traditional Carbon Credits vs Blockchain-Native Carbon Credits

Some organisations tokenize carbon credits that were originally created in the traditional approach (manual processes) to enhance liquidity and take advantage of the benefits associated with tokenized assets.

While this has its advantages, it doesn’t necessarily address the underlying issues that are still plaguing the traditional carbon markets. A blockchain-native carbon credit, however, would.

The Benefits of Fully Blockchain-Native Carbon Credits

A blockchain-native carbon credit is the result of end-to-end tokenization of a carbon credit — from creation, to transfer, to retirement. In this situation, the climate-relevant data is recorded and then referenced directly on-chain, then permanently and verifiably linked to a digital carbon credit product, effectively tying source data to the end product.

The outcome is a transparent digital carbon credit that is permanently linked to verifiable data, making the carbon accounting much simpler when it comes to the transfer and retirement of the product.

Benefits include:

• a high level of transparency and reliable data — the blockchain is essentially shared, immutable ledger;
• double counting is very difficult because all transactions are recorded on the blockchain;
• digital MRV processes are more efficient and cost-effective;
• reducing or avoiding critical bottlenecks;
• overall, carbon credits are quicker and cheaper to produce — a huge benefit given the urgency with which we must combat climate change.

Allinfra Climate’s Environmental Financial Product Tokenization Tool

Allinfra Climate’s Environmental Financial Product Tokenization tool provides organisations with an efficient method to create tokenized products that have complex underlying calculations, such as carbon credits or carbon credit forwards, direct from source data in a single platform.

For organisations that wish to create, transfer and/or retire these environmental financial products, this tool allows them to do so using a cost-effective, user-friendly platform. Not only is the result a higher-quality end product, but Allinfra Climate’s zero-knowledge private data rollups ensure the provenance of the publicly available, aggregated data supporting each tokenized product can be proven, without revealing the private, underlying granular source data.

And because the platform works across different data types, producers who want to integrate an element of traditional carbon credits with manual input from experts — combining technology with human verification — can do so with Allinfra Climate.

Achieving Climate Goals with the Tools Available to Us

Rather than debating which is the best solution, it is vital to use the various technologies and tools available to us in a timely manner in order to achieve our climate goals.

While it will take more than just tokenized carbon credits and carbon forwards to achieve Paris Agreement goals, they can be a very powerful tool in the meantime to efficiently deploy capital to projects that make a verifiable positive impact on the environment.

Are you a green project owner who is ready to create environmental financial products? We can help. Reach out to our team to learn more about Allinfra Climate.