Blockchain and enterprises in the voluntary carbon market
In this blog post, I will go through two approaches to growing the voluntary carbon market (VCM): Blockchain-based VCM and Enterprise-led VCM.
I will present my views on how to make sense of these two approaches, in terms of each of their advantages, risks, and potential integration.
Premise
The scale of the efforts made by enterprise companies to grow the VCM easily overshadows the ground-up work of on-chain VCM. Frontier led by Shopify, Stripe, Meta, Alphabet, and McKinsey & Company commits to buying $925M of carbon credits between 2022 and 2030. On the other hand, approx.400K tonnes of credits — mostly at the price below $10 — have been retired on-chain up until now. Furthermore, on-chain carbon credits presumptively don’t reflect the actual value of the offsets.
So, is on-chain VCM unnecessary to achieve net-zero emissions? Questions ought to be raised, but I believe that the pursuit to scale on-chain VCM will lead to better outcomes overall.
Towards Institutional Regenerative Finance (ReFi)
Firstly, we can draw a parallel between on-chain VCM and Institutional DeFi.
Institutional DeFi is a category of protocols that serve institutions with sophisticated requirements on security and compliance. With the high-touch support provided by brokers like Fireblocks and Securitize, large institutions are able to tap into DeFi.
Following the footsteps of DeFi, on-chain VCM could become the infrastructure that supports trades spanning enterprise-scale deals. We can call this Institutional ReFi.
Brokers like Fireblocks which bridges traditional finance to DeFi could take part in onboarding large carbon credit purchasers. Alongside that, enterprises such as Frontier, which facilitate large volume credit purchases, might also integrate with Institutional ReFi to provide services like carbon offsets MRV (measurement, verification, and reporting).
Black swans of blockchain
The inherent uncertainties (i.e. unknown unknowns) of new technology, should be taken into account when dealing with a problem that basically has a time limit such as climate change.
One could argue that there are more potential “Black Swans” in the blockchain space than traditional finance. For example, “The DAO Hack” wreaked havoc and delayed the successive upgrades of Ethereum. Not to mention the smart contract vulnerabilities and poor key management that result in multi-million dollar losses.
Enterprises-led VCM
Enterprises pioneering the VCM are paying a premium on carbon credits, moreover developing frameworks that are rigid enough to correctly evaluate each offset technology. These are not trivial work and will be extremely hard, if not impossible, for a ground-up project to execute. Does this mean that a centralized VCM that enterprises are quickly bootstrapping will be the VCM that will get us to net-zero emissions? This is entirely possible IMO, for the reasons I mentioned above.
Another way to view this is that there exist some financial incentives to capture the VCM for profit. Labeling the actions of capturing these incentives as good or adversative is not in the scope of this blog post; though it is important to note that efforts to grow the VCM are public goods.
Furthermore, a distinction should be made between the following two.
- enterprises developing a centralized VCM
- enterprises being brokers of a blockchain-based VCM
Something akin to the latter outcome — a future where custody providers become guardians of the market — is considered undesirable in Institutional DeFi. More on this can be learned in a podcast episode by Bankless.
Whether aiming for an agile but centralized VCM, or an uncertain but open and decentralized VCM, Institutional DeFi could be one of the precedents that the on-chain VCM can learn from.
A pluralistic pathway to scale
Having diverse pathways to achieve a common goal is fundamentally good. Blockchains and mechanism design could lead to innovations that just aren’t possible with traditional approaches. (e.g. KlimaDAO which is tackling climate change with macroeconomics) And large enterprises partnering, and leveraging their far-reaching access to businesses and customers to grow the VCM is also necessary.
The mental model of epistemic pluralism, which emphasizes the importance of a diverse range of collective entities and cultures of knowledge that intersect and collaborate, is useful to make sense of the development of VCM, assuming everyone is acting in good faith; though as I said earlier that assumption is open to be discussed.
Future integration of enterprise and on-chain VCMs
In my previous blog post, I emphasize the benefits of an on-chain VCM. To summarize the points I made in the context of this blog post: the hardness and composability of blockchain applications will foster innovation, and the transparency inherent to blockchain applications will take part in solving the accountability issues raised in traditional VCM.
Even though blockchains might not be the immediate best solution, one can envision a world where the price of carbon which will have been externalized up until so is priced into the blockchain-powered economy. Furthermore, pricing in the cost of carbon could become the precedence for cost internalization using blockchain, for other instances of cost externalization.
Such world can be realized if the carbon credits rapidly bootstrapped by enterprises eventually bridge to the blockchain to be tokenized. The tokenization of carbon credits doesn’t necessarily need to happen right now. But as blockchains become mature, we can imagine a world where tokenized carbon credits are in full leverage of the power of blockchains.
Concluding
Enterprise companies will likely play a crucial role as a broker for carbon credits trading. Blockchain-based carbon credit trading is a ground-up effort and will take some time to achieve an impactful scale. Moreover, with the uncertainties inherent in new technology, let alone the fact that blockchains still don’t have many examples of being impactful in the “real world”, an on-chain carbon market might not be the best solution for a problem that has a time limit.
Although one can imagine the carbon credits rapidly bootstrapped by enterprise companies without blockchain at first, will in the future be tokenized and traded on-chain.
Remarks
Even though I’ve been distinguishing on-chain VCM and enterprise brokers as they are currently disjoint, these two do have partnerships, working together to achieve scale. Such as Shopify partnering with Nori, among other carbon offset suppliers.
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