Crypto Carbon’s Credibility Conundrum

By Matthew Carpenter-Arévalo

As is clear from the name of this blog, I see value in applying blockchain technology to carbon markets.

If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up to my substack here.

Having said that, there are a lot of problems with carbon markets that blockchain technology does not solve. In addition, there are some new problems that blockchains create. An objective look at carbon markets considers both.

Taking a carbon sequestration project from inception to monetization is incredibly slow, manual, and expensive.

Imagine you’re reforesting: even before you can initiate a project, you have to find a parcel of land, possibly buy it or come to an agreement with the land owner(s), test the soil, project tree growth, and future carbon capture, socialize the project with local communities, source trees, hire people to plant trees, monitor their growth, pay for someone to audit your models, receive a registrar’s certification, and once you’ve jumped through all the hoops, you have to find a buyer that values your reforestation project at a price that represents a return. If you’re in the global south, you probably want to find a buyer in the global north, which is no easy task.By the time you’re able to monetize your project, you may be five years out from when you started.

I’ve left out a lot of the things from my list that must be done, but you get the point. If you know anything about Blockchain, you can imagine it helping solve a few, but not all of these problems.

On top of all the other problems that must be solved, crypto (I’m using crypto and blockchain interchangeably here and I know I shouldn’t but I will anyway) brings with it its own baggage, and herein lies a major problem.

For example, in the recent State of The Voluntary Carbon Markets 2022 Q3, we find good news for the carbon market overall and bad news for crypto-carbon.

In 2021, according to the researchers, prices for carbon credits climbed by 60%, trading volume increased by 66%, and the total value of the market rose by 2x. Rising tide raises all boats, right? Not quite. To quote the report,

Cryptocurrencies were identified as respondents’ least preferred transaction method. Blockchain, as a disruptive technology for carbon markets, could represent a new area of innovation and demand in the VCM, or if abused, a potential throwback to the days of ‘carbon cowboys’.

Corporations, rather than individuals, are driving the demand for carbon credits in the voluntary carbon market. Even before corporates have begun to look into the blockchain-based technology behind regenerative finance they’re hesitant. Why?

Because buyers associate the use of blockchain technology with the messy, wild west, multi-million dollar heist/pump-and-dump headlines that emerge from the crypto space. And this is a problem.

The biggest threat to the voluntary carbon markets, and carbon offsetting as a whole, is credibility.

Blockchain technology may solve problems like double-counting, but its application also raises questions about credibility due to the technology’s association with the crypto market in general. Because carbon markets already struggle with credibility issues, adding the word “crypto” to different solutions has a compounding effect.

You might be thinking, “Ok, but your statement is based on responses to a single survey. How widespread is the sentiment?”

If you’re looking for a single source of truth, you might find it in pricing.

In a recent analysis of the quality of its inventory of tokenized Base Carbon Tonne (BCT), KlimaDAO, responding to criticism leveled by CarbonPlan, points out that tokenized credits from the same projects and vintages as non-tokenized credits trade for three times less the off-chain price.

In other words, in the same way you might expect to find different prices for the same product when at the mall or when shopping on Amazon, the same carbon credit receives a lower price on-chain, in part because there is less demand.

Recognizing as much, Toucan, the world’s leader in tokenizing carbon credits, states “until there are diversified sources of demand on-chain, prices may continue to diverge from traditional markets”.

In theory, there should be more demand for on-chain credits than off-chain.

After all, transacting carbon credits on-chain is much easier than transacting carbon credits off-chain, and often times we’re talking about buying and selling the exact same product.

With less friction, better pricing information, and fewer middlemen, transacting on-chain should be the way forward. And yet, not only do we have differences in price, but we also have additional scrutiny of tokenized credits.

Articles that are highly critical of tokenized carbon credits often miss the point: as Toucan itself points out in the same article cited above, “Because all data on tokenized carbon credits is publicly available, the ongoing presence of questionable carbon credits in traditional markets is brought to light. Tokenizing carbon can therefore expose some of these market characteristics, which can help to build greater integrity as the market scales into the future.”

In other words, the issue of questionable credits isn’t limited to tokenized carbon; tokenized carbon merely brings sunlight to an issue that plagues the industry. That sunlight, even if it puts existing credits into doubt, ultimately brings transparency to the industry.

Finally, up until this point, we’ve discussed the tokenization of credits from registries such as Standard Verra or the American Carbon Registry, but there are other tokenized carbon credits that operate using their own tokenomics.

Recently Nori, a company we’ve highlighted here on the blog, received public criticism that questioned the 1:1 ratio of its proprietary $NORI token. My point is not to bring Nori into disrepute, but rather to point out that, so long as carbon-backed tokens are based on what can be complicated tokenomics, there is likely to be skepticism from corporate buyers, since no one wants their carbon credits to be wrapped up in a Terra-Luna-like crash or stolen from under their nose due to a hack. Corporate buyers of carbon credits already have a lot of complexity to manage and a lot of risks to mitigate. Adding more complexity & perceived risk turns them off entirely.

So what’s the point? You might ask.

The question of whether or not crypto has a place in carbon markets is a non-question. We need to eliminate problems like double-counting, and blockchain helps with that.

What’s more, a lot of crypto solutions are technologically awesome. Take, for example, SushiSwaps’ automated carbon offsetting via KlimaDAO. A user makes a transaction on SushiSwap and can opt-in to automatically retire a small number of carbon offsets. Such a level of technological integration is amazing; what’s more, you can trace the origin of the offset in a way that is impossible when an airline offers to do the same. There is so much that is happening in the crypto-carbon space that we should all want these solutions to achieve mainstream success.

Until then, blockchain-based solutions can lead the way in innovation especially because they are unencumbered by a lot of the regulatory issues the mainstream industry has to deal with.

Blockchain still has many applications that can improve carbon markets; indeed, as I’ve argued before, I don’t know how we scale carbon markets without blockchain.

That being said, we do have to admit to ourselves that, from the public’s perspective, questionable carbon markets combined with questionable crypto-influenced technology don’t necessarily add up to a credible solution for the planet.

The question is not to crypto or not to crypto, then. The question is how do we make carbon markets credible? Anything that gets us closer to scientific and technological soundness is welcome.

If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up to my substack here.

Please note that the opinions expressed here are my own and may not represent the views of my employer.

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Matthew Carpenter-Arevalo

Ecuador/Canada. Working on Carbon Origination. Ex@Google, Ex@Twitter. Founder of @CentricoDigital. Contributor @TechCrunch @TheNextWeb.