Powering Carbon Markets 3.0
A new era for carbon markets:
The voluntary carbon market (VCM) is on the verge of big change. The way that the market is built and currently operates cannot handle the demands of the future.
In order to help in the fight against climate change, the carbon market has to grow about 100x and the only way to do it is by transitioning to the new, more scalable technologies, the main one being blockchain.
Simple answer is that the carbon market needs to become more inclusive, transparent and liquid.
- Current markets are composed of two main carbon registries who verify carbon credits. These two are US-based Verra and Swiss-based Gold Standard. Together these two registries account for roughly 80–90% of the market. Only corporations can create accounts with these companies, while individuals and smaller enterprises (SMEs) cannot offset their carbon footprints on these platforms.
- We need the carbon market to learn from the crypto market on inclusivity. Cryptocurrency markets are global, as both individuals and companies can trade crypto in about 200 countries, 7 days a week, 24 hours a day.
- Also, as the crypto market is based on instant settlements, or so called atomic swaps, we can trade without any credit risk as long as we know that the carbon credits are verified and real. Current carbon market requires lengthy onboarding processes, escrow systems and the buying and trading has to happen on business hours.
- As said, the current carbon market is highly dependent on Verra and Gold Standard and access to their data on carbon credits status (active, offsetted, etc.)
- Last year, Verra stopped allowing so-called bridging from their registry to blockchain after over 20 million credits were already bridged by companies like Toucan. This move happened in May 2022 and we are still waiting for an update with very little transparency to their new rules on tokenisation.
- The most important function of the carbon credit, tokenised or not, is the offsetting. This is when the carbon credit has been taken out of the market and offsetted against individuals’ or companies’ carbon footprints. Traditional registries are run by a single entity with possibilities of reversing retirements, while blockchain is immutable and, therefore, retirement transactions cannot be reversed.
- There is a lot to improve on pricing transparency as the market is now mostly based on OTC-trading and the few exchanges that are out there are not open to the public.
- We are keen to see how World Bank’s and IETA’s Climate Action Data Trust (previously called Climate Warehouse) will improve the transparency of these traditional registries and merge the blockchain data from the Carbon Market 3.0 in order to create a better, more comprehensive and transparent meta registry.
- As said, the most important functionality to a carbon credit is to offset its holder’s carbon footprint and help them to reach net zero.
- However carbon credits are also sustainable assets that can be invested in and traded among the market participants, thereby creating and bringing more liquidity to this new market.
- We have learned from the crypto markets that cryptocurrencies, stable coins and utility tokens can be volatile and risky investments, but at least they are liquid and the liquidity has been an important part of the crypto markets’ growth and it will be the same for the Carbon Markets 3.0.
One more thing: The risk of centralisation
As the current carbon market is extremely centralised with Verra and Gold Standard having about 80–90% of the verification/registry market, you can’t just ignore the risk of this level of centralisation. It was just 14 years ago, 2008, when the financial crisis was partly caused by Standard & Poor’s, Moody’s and Fitch giving inflated ratings to banks’ collateralised loan products that eventually led to the collapse of the American housing market.
This is why it’s important for this new carbon market to also keep pushing new and innovative verification methods and next-generation, blockchain/Web3 native registries.
Our Roadmap for 2023:
Our focus is to help carbon projects, financiers and brokers to get a jumpstart on this new, technology-driven carbon market with our Marketplace platform.
We offer market participants everything they need to expand their offerings to the blockchain-based carbon credits without any upfront technology investments. Read more about our Marketplace Partner Program here.