How Blockchain Will Open A New Standard for Carbon Credits
Tree to Token
From the deep tropics of Guatemala, far out to the plains of Kenya, the incentive to keep trees in the ground is not strong enough to override the financial ticker of the 21st century. Because financial gains and losses have been the only scope of development, it has led to disconnection with nature and severe climate repercussions.
In order to change the trajectory of a rapidly warming planet, we must re-evaluate the systems we use and what we value. This is where the idea of carbon credits has emerged, and the existing voluntary carbon market in development right now. We know what you’re thinking — how the heck is this going to work? To begin, no one organization, technological solution, or country can solve this problem on their own. The driver of the Regenerative Finance (ReFi) movement is simple: a healthy planet goes hand in hand with a healthy economy.
Carbon Credits and Types of Carbon Credits
A carbon credit is a tool often used to incentivize the avoidance or removal of carbon emissions. These credits exist and were created as a market-based mechanism to mitigate climate change that connects those who can efficiently create the carbon deficit, with those needing to add a carbon deficit to their organizational balance sheet. They are usually generated through adherence to accepted carbon standards, which are overseen by either voluntary or regulated carbon registries and standards-setting bodies.
In a forestation scenario these standards provide the rules to determine which forest projects may qualify and to calculate the amount of carbon being sequestered through these projects. This value is then turned into a tradeable carbon credit, with each credit typically representing one metric tonne of carbon. Once verified, the credits are most-often sold to companies looking to counterbalance their carbon footprints.
There are two primary types of carbon marketplaces on which these credits can be traded (Carbon Credits):
- Regulated Carbon Markets — Also referred to as “Compliance Markets’ ‘, these markets are created through government regulations and require that participants comply with designated emission limits — so, there is a “cap” on the amount of carbon dioxide that can be released by participating organizations. Companies that emit less carbon dioxide than they have allowances for can sell their unused allowances to companies that emit more than their allocated amount. Prices of carbon credits are determined by supply and demand. The largest compliance market currently is the EU Emissions Trading Scheme (EUETS)
- Voluntary Carbon Markets (VCM) — Here, there is no legal obligation to participate in the marketplace. Instead, organizations are able to purchase carbon offsets from voluntary suppliers, typically verified through 3rd party, non-profit standards bodies. Participants in the VCM are led by commitments to ESG (environmental sustainable goal) targets such as those set by the SBTI and others. Buyers on the VCM have a wide range of credit types to choose from, from supporting avoided emissions projects like hydro power, to forestation projects, to direct air capture machines pulling C02 from ambient air and injecting it underground. These various methodologies are further complicated by a range of certification options and MRV standards.
For the most part, voluntary market credits are not interoperable with compliance market credits. While a range of credit generation options exist, for the purposes of this article, we will double click on a particular genre of credits commonly referred to as nature-based-solutions. These can be generally grouped into two categories — Carbon Emission Avoidance or Carbon Removal. Although not a completely exhaustive list, here are some of the most common NBS solutions in the space:
- Reforestation — these additionality credits are generated from activities that involve planting trees in an area where the forest had previously been cleared or destroyed. These projects are either terrestrial (land-based), or wetland (marine or freshwater), such as mangrove restoration projects.
- Afforestation — generated from activities that involve planting trees in areas where there was no forest previously.
- Agroforestry — generated from activities that involve the integration of trees into agricultural landscapes, such as intercropping, alley cropping, and silvopastoral systems.
- Peatland — generated from activities that involve the protection and restoration of peatlands, which are among the most carbon-rich ecosystems in the world.
- Conservation — generated from activities that involve the protection of carbon-rich ecosystems, such as rainforests, savannas, and grasslands.
- Avoided Deforestation — generally refers to the conservation of any forest area that would have otherwise been destroyed for commercial purposes.
In an age of critical research and fact checking, criticism, counter-criticism, and debate can ring loud and clear and is thoroughly encouraged. Carbon credits alone will not and cannot be enough to address the climate emergency and must be a complementary strategy to direct emissions reductions- however credits, and particularly those from nature-based solutions are a step in the right direction to embed ecological health into the financial system. Many friends in the ReFi space have shared their thoughts about recent criticisms, and each is vital to what makes up the emerging voluntary carbon market. Particularly, the integration of digital technologies is proving foundational in building a long lasting economic structure. Below, find some of the key players in the ReFi industry today.
Flowcarbon — Flowcarbon operates at the intersection of carbon and new technology in order to protect earth’s natural carbon sinks and scale quality carbon reduction and removal projects, on-chain
Toucan — Toucan’s primary mission is to create public infrastructure for carbon markets running on open blockchains
Senken — a gateway to buy, retire, and sell carbon credits on chain in a transparent and trackable manner
Regen Network — ecological assets for the ReFi economy: Regen bridges between real life ecological impact and the incentives that web3 finance provides.
Moss — Using tokenization of specific carbon credits as well as NFTs, the MOSS MCO2 token represents tokenized carbon credits from projects directly working to prevent deforestation and protect the Amazon rainforest.
dMRV: The Foundation of Carbon
We’ve talked a lot about carbon credits, carbon markets, and our friends in the ReFi space who are using these mechanisms to create groundbreaking, digitized environmental solutions. But the pot is still boiling: HOW are we confirming that all the carbon being traded, exchanged, accredited, retired, and showing up on marketplaces, is actually legitimate? That 1 tonne of carbon really is being sequestered and that tonne of carbon is represented by a token? Enter digital Measurement, Reporting, and Verification (dMRV), and by extension, Open Forest Protocol.
MRV, Measurement, Reporting, and Verification, is a pillar of legitimate carbon, on or off chain. It is the foundation for all manner of climate mitigation efforts, from energy reduction to reforestation. It is the integral step in proving an intended impact has been achieved. As a framework, MRV is essentially how you take real world carbon removal activity data, and convert it into a tradable asset (the credit). MRV is the backbone of the carbon market.
Within the context of forest monitoring, MRV involves three interconnected procedures:
- Direct Measurement of data (such as tree height, diameter, species, on-site photos, etc.).
- Standardized data Reporting by compilation into an inventory.
- Verification of reported data to ensure reliability and validity.
So far, with legacy systems, MRV has been siloed, expensive, opaque, and often inaccessible by the projects and initiatives on the ground. It has seen only partial attempts at digitization and as a result is a clearly identified bottleneck between the market’s demand signals and the capacity for the market to respond with additional supply. The chain of command can be complicated and difficult to navigate — to read more on the ins and outs, head over to our MRV piece. Due to a lack of transparency, MRV is prone to dishonesty which has eroded trust in the carbon financing system as a whole. It’s time for a ground-up rethinking and application of appropriate technologies to create a better system. Blockchain technology — an immutable, globally accessible ledger of project data — ensures a transition to an on-chain carbon management system and market that is the first of its kind in the world, connecting supply and demand in a way that surpasses that of any current industry. .
In short, we call this dMRV. In partnership with one another, and by working together to improve the practices of regenerative finance, not only is it viable to move carbon on-chain as many of those mentioned above are doing, but to move the entire process of MRV on chain. In doing so, we have the capacity to remove opacity from every step within the system. Parties can coordinate across the planet in the delivery of the highest quality, data backed credits ever brought to market while broadening participation in the supply-side to all qualifying projects; not just the largest, most well-capitalized.
In a union of technology and people, there need not be aching questions about the validity of a credit, the location of a forest project, or whether the validators of the plot are validating accurately. With blockchain as our tool and people as our builders and shakers, the emergence of a truth based carbon market IS possible.
At Open Forest Protocol, we are contributing to this global vision with the creation of the first on-chain MRV system.
- Deliberately designed to be used by forest projects of any size; projects as small as 0.2 hectares are welcome and as large as the project operator determines is feasible
- By choice, we decided to provide a free MRV tool to increase reach, use, and scale of forest monitoring worldwide, a no-cost MRV is open for all to use
- Building on the infinitely scalable, user-friendly, and climate-neutral NEAR Protocol blockchain, OFP has integrated immutability and decentralization directly into the MRV framework
- Robust verification of environmental data is done via a network of decentralized Validators that work to generate consensus around the validity (or lack thereof) of data uploaded from participating forest projects
OFP’s foundation for an accessible and inclusive MRV system, built with grassroots projects in mind, allows annual verification to be done at no up front cost to the projects on the ground. Using an on-chain MRV system implies immutable truth from tree to credit, interwoven into the incredible systems being built within ReFi. With a solid understanding of carbon credits, their utility, and the promise of a sound carbon market, all under the umbrella of dMRV, we are well on our way to a truly decentralized climate-aligned future.