Crypto Doesn’t Solve The Voluntary Carbon Market’s Biggest Problems

I started this blog when I was an enthusiast of carbon markets and before I was a practitioner. I have now spent a fair amount of time working within the forest carbon industry, and my opinions on many matters have shifted.

First, the planet is at a tipping point. As the UN Secretary-General stated about climate solutions, we need “everything, everywhere all at once” to make a meaningful impact on keeping global temperatures below the point of no return.

Tokenized carbon credits create a lot of efficiencies. Carbon credits will be easier to track and retire once all credits exist on, ideally, a single ledger or a series of interoperable ledgers.

However, blockchain-based ledgers don’t necessarily help us solve the problems of reducing carbon emissions and removing carbon dioxide from the atmosphere.

To tackle those problems, we first need radical decarbonization, which is easier said than done.

If our efforts to decarbonize lead to radical increases in the cost of fuel and energy, the subsequent inflationary effects will cause citizens of democratic countries to revolt at the polls, possibly dealing a fatal blow to the environmental movement.

At the same time, the world’s poor will suffer immensely due to rising food costs. We need to make renewable and sustainable energy cheaper than burning fossil fuels, ideally with cost-effective modular nuclear power. Cold hard, macroeconomics, and not lifestyle shaming or art destruction, is the only thing that can speed up the transition to green energy.

Second, in addition to massively reducing our carbon footprint, we must pull carbon out of the atmosphere. These two ideas are not mutually exclusive.

We have to remove much of the carbon we’ve emitted since the beginning of the industrial revolution. Unfortunately, technological solutions to carbon removal are early-stage and untested.

Nature-based systems, especially forests, are the world’s most scalable and cost-efficient carbon removal technologies.

In theory, we can plant one trillion trees on degraded lands across the globe without threatening agriculture (without major leaps in crop yields, competition between forest carbon and agriculture would result in higher food prices). (we really should be talking about planting forests and not trees but I’ll leave that for another post).

Assuming a high survival rate, those trees could remove up to 30% of the emissions we’ve created since the industrial revolution.

Moreover, forests provide critical ecosystem services like clean drinking water and predictable rainfall, protect biodiversity, and provide millions of jobs across the planet. In other words, investing in forests as a solution to climate change provides multiple positive externalities.

So what do we need to do to harness the power of forests to fight climate change?

First, as The Economist points out, we’ll save a lot of money in the long term by not cutting forests down.

The Voluntary Carbon Market (VCM) is a solution, providing a financial mechanism to complement public and private reserves to save as much of the world’s forests as possible. The problem with the VCM is its credibility.

A lack of rigor in measuring conservation projects’ environmental impact has led to a lot of skepticism at best and accusations of fraud at worst.

Many leading voices within the forest carbon industry have responded defensively, demanding that they be judged for their intentions and not their results. Not taking criticism is a luxury we cannot afford.

The VCM’s current credibility problems, however, can be overcome.

There is an emerging consensus that dynamic baseline measurement is an effective way to correctly account for and quantify a conservation project’s environmental impact.

The challenge for forest carbon project developers is to ensure they’re applying dynamic baselines before they start developing a project to have a clear financial picture rather than discovering after the fact that their projects are no longer economically viable because they built them on false assumptions.

To summarize, the first problem we need to solve is radical decarbonization, and the second is ensuring conservation-focused forest carbon projects are accurately measured and enjoy unquestionable credibility. We need to take on these problems simultaneously.

One of the consequences of the recent criticisms of conservation-focused forest carbon projects is that many buyers are looking to buy credits from reforestation projects since reforestation is far less controversial than conservation.

If you plant a tree where there was none before, or there hasn’t been for a long time, you’re adding to the earth’s capacity to remove carbon. The math is much more straightforward.

The problem is that active reforestation projects are expensive.

Unless you’re working on degraded or marginal agricultural land, you’re competing with other land use cases, some of which, like agriculture, is subsidized.

Then, it takes years for trees to start capturing carbon; during those years, you must perform maintenance to ensure high survivability rates. Because of the way carbon markets work today, you need a sizable piece of land for the economics of reforestation to make sense.

As a result, forest carbon project developers need investment to get going, and then they have to hope there will be a buyer once they start issuing credits.

If we want more reforestation projects, we need investment. It can be difficult to come by as high-interest rates make everything expensive and change expectations for returns. Risk is involved: a reforestation project with a low survivability rate will produce fewer credits than its model projects. More than anything, forest carbon lacks historical data that can allow investors to measure risks.

The third problem we need to solve is financing and investment. We need sophisticated and well-intentioned investors to help make forest carbon viable.

This will only happen, though, once forest carbon projects are credible. Once they are, we need more forest carbon project developers. We need national environmental entrepreneur ecosystems within a global industry to make forest carbon projects a viable and impactful solution to climate change. That scaling up takes time. Finally, we need carbon credit buyers willing to pay much more for quality credits than current prices.

So, how do blockchains and crypto solve for decarbonization, VCM credibility, investment, and supply expansion? The truth is, they probably don’t. Adding blockchain solutions at this stage likely increases the cost and complexity of forest carbon projects without tackling the industry’s main problems. Blockchains are a downstream solution.

Don’t get me wrong: I am still a proponent of blockchain technology, and there are a lot of adjacent problems that blockchains can help fix. For example, in many countries that host much of the world’s biodiversity, property rights are either inexistent, unenforced, or corrupted. Blockchains replacing paper-based property ledgers go some of the ways to help solve these issues.

Finally, for intellectual honesty, forests are not permanent carbon removal but a stop-gap measure. When we emit carbon into the atmosphere, it’s there pretty much forever. When we pull carbon out of the atmosphere through trees, we have about 100 years of storage. If forests are allowed to grow, they can compensate for the carbon emitted when trees die. Still, we should understand that biospheric carbon removal is no replacement for decarbonization. We will need more permanent solutions to keep carbon out of the atmosphere for the long term.

All of this sounds glum, but there are reasons to be optimistic.

The world has never invested as much in climate technology as it’s doing today.

Many new technologies are being developed, and new products are constantly being brought to market.

Since the world has never achieved anything like what climate change requires us to do, we need, as I mentioned before, everything everywhere all at once, and we need many solutions to fail and fail fast so we know what paths not to take.

To conclude, blockchains can and will help solve climate change, but they’re not the solution to our largest hurdles. If you see blockchain applications to these problems, I’d love to hear them.