Why a carbon removal market belongs on the blockchain
We’ve already written about Why Nori needs its own cryptocurrency, so this article is more about the blockchain aspect, and why a distributed ledger is crucial to operating a fair and transparent carbon removal market.
Many people are pushing back on the need for blockchains to solve large problems these days, even the US Department of Homeland Security.
When I get asked “why blockchain?” the first thing I say is that you can’t have cryptocurrency without blockchain, and you can’t have blockchain without cryptocurrency. So in order to get the benefits of creating new financial markets that we discussed in our previous article, blockchain is already crucial.
The main reason blockchain is needed is for verification of who owns the carbon removal certificate at what time. Public databases can provide transparency, but when you combine the transparency of the public ledger with the verifiability of records that cannot be tampered, corrupted, or bribed via the blockchain, you have something truly unique and valuable.
Provenance (a fancy word that means “a record of ownership”)
In carbon markets today, there is rampant double-counting and fraud. Companies routinely count emissions reductions against their carbon emissions after someone in their supply chain has done the same thing.
In the Nori market, there can only ever be one owner at a time of a Nori Removal Tonne (NRT). One NRT represents one tonne of CO2e removed from the atmosphere and stored for at least 10 years. Once the supplier sells an NRT to a buyer, it becomes non-transferable, and can never be sold again. No longer can buyers of these certificates claim emissions reductions that were paid for by someone else. Whoever owns the NRT is the entity who can claim publicly that they’ve been responsible for removing a tonne of CO2.
The same goes for suppliers. It is often the case that suppliers count their projects that reduced carbon emissions for themselves, and then sell offset credit to a buyer who also counts the emissions. In the Nori market, after a supplier sells a NRT, they no longer own it, and cannot claim that they have removed CO2 in their own emissions report.
Yes, it would be possible to do this in a centralized database. But that’s exactly what the current carbon registries use, and yet the double-counting continues. By building this application on a blockchain, everyone involved can completely trust that there is only one owner of the NRT.
Self-insurance means we can make a guarantee to NRT buyers
Our number one goal for quality with NRTs is that we want to guarantee to the buyer that each NRT they buy has an underlying value of 1 tonne CO2 removed. That might sound like a simplistic and obvious statement, but it turns out that the certificates that are traded in existing carbon markets have far less underlying value than the 1 tonne that they purport to have.
What if Nori issues 100 NRTs to a supplier, and then later some of that carbon got released? Who would be on the hook for making up the difference? We think Nori should bear that responsibility, so that the buyers can more safely and reliably purchase NRTs and trust that they are getting what they paid for.
But if we’re going to make that guarantee, we have to take on some kind of insurance to manage that risk. Nori as a startup doesn’t have access to an insurance policy that could manage this. But we do have the ability to set aside 20% of the total NORI token pool for a self-insurance mechanism.
By designing a market where each NRT has to be paid for with at least one NORI token, we’ve created a system where can self-insure. If there is a freak accident, and a future forest that sequestered 500 tonnes of CO2 is burned and releases the carbon to the air, we have the insurance reserve of tokens that can be used to buy new NRTs from a different supplier on behalf of the original buyer.
Nori is a market operator, not a broker
Another useful aspect of the blockchain is that by using smart contracts, Nori is able to take a role whereby we never actually take ownership of the NRTs. We’ve written previously about our open-source framework for an atomic swap marketplace. This enables the seamless transfer of the NRTs for a NORI token between buyer and seller. All without Nori ever touching either asset.
This is partially useful to Nori so that we avoid any regulatory requirements that exist for brokering in a commodity like the NRT. But this is also a benefit to the users of the platform. They can trust—because of the open-source nature of the smart contract—that the exchange of NORI for NRT is truly a bilateral agreement solely between the buyer and supplier.
To go back to that graphic from DHS, the answer to all of those questions for Nori is a Yes. We need blockchain to solve these existing problems in carbon markets and we need cryptocurrency to build a new commodity market from scratch. We’ve asked ourselves many times “do we really need to do it this way?” and without fail, we have always concluded that Nori without blockchain wouldn’t be Nori at all.