Blockchain Technology and Its Impact on the Voluntary Carbon Market
Blockchain technology can play a significant role in enhancing the voluntary carbon market by addressing operational challenges and enhancing trust among participants. These factors all help in the price and valuation of carbon credits. But, it is not as simple as buying carbon credits on the secondary market, tokenizing them and suddenly they are better, because… blockchain! For the ultimate impact, the integration needs to start at the inception of the project.
Developing a carbon project is a multi-year effort that involves many different parties, surveys, data analysis, consultations, etc. It is a lot of hard work and requires a lot of coordination. Many of these process stages can benefit from automation, underpinned by smart contracts. Smart contracts can automatically enforce compliance with predefined rules and execute transactions when conditions are met. This reduces manual intervention, minimizes errors, and streamlines the entire process. Operational efficiency in the development stages means that carbon projects have the opportunity to start issuing carbon credits sooner. That is good for the local communities, good for investors, and good for the planet.
The immutable ledger is another key opportunity for blockchain to add value to voluntary carbon development. Securely recording all transactions and activities, not only demonstrates the progress a project is making in its journey to issuing credits, but it can also enable efficiency and assurance in the verification process. Ultimately the ledger promotes trust. Trust that carbon credit issuance, transfers, and retirements are accurately recorded, transparent, and cannot be tampered with. As a result, the entire carbon credit lifecycle becomes auditable, enhancing transparency and reducing the risk of over-claiming.
Where voluntary carbon standards support the tokenization of carbon credits, and it is essential to be aware that not all standards support this, blockchain enables the tracking and tracing of credits from their creation to retirement. Each carbon credit can be associated with a unique identifier and linked to relevant data, such as project information, emission reductions, and ownership history. This traceability increases confidence in the integrity and authenticity of carbon credits, reducing the risk of double-counting or false claims. Tokenized carbon credits can also facilitate real-time settlement of transactions without the need for intermediaries. By removing intermediaries, such as banks or clearinghouses, the technology reduces costs and speeds up the settlement process. This enables quicker access to liquidity and enhances liquidity management in voluntary carbon markets.
The fractionalization of carbon credits is another valuable feature blockchain technology can bring to voluntary carbon. Fractionalization refers to the process of dividing a carbon credit into smaller units, allowing for more precise measurement and trading of specific types of carbon reductions. In the simplest form, this would be taking a carbon credit representing a metric tonne of avoided or removed carbon dioxide and breaking it down into smaller units such as kilos while ensuring that there is no miscounting, double counting, and making sure that the credit representing one tonne is retired once the one thousand kilos are retired. In the context of REDD+, fractionalization of carbon credits can help to increase the value of specific credits from a project. For example, where a project is reducing and avoiding emissions from a rainforest environment that contains both forests and wetlands, fractionalization allows a carve-out for the more valued wetlands-originated carbon credits, which can sell for multiple times the value of forest-related credits, as the wetlands sequester more carbon over a more extended period of time.
While Gold Standard is piloting the tokenization of carbon credits themselves, VERRA, which is the biggest standard by a long way, is still considering its position on tokenized credits. Even if the end credits are not tokenized, the real value of blockchain technology is embedding enhanced trust in the carbon development process itself. The immutable nature of entries during the development process ensures that once a transaction is recorded, it cannot be altered or deleted. This feature builds trust in the system, as participants can rely on the historical data stored on-chain. Entries can integrate external data sources, such as IoT devices or satellite imagery, to verify carbon reduction claims. For example, sensors monitoring emissions from a project can provide real-time data that can be recorded on-chain. This data enables easier and potentially real-time validation of carbon reduction claims, instilling confidence in the market.
In the voluntary carbon market context, blockchain supports greater project development operational efficiency, enhanced trust and transparency for information during the development process, as well as potentially supporting an improved trading environment.
