Carbon credits and the transformative power of the blockchain

Blockchain technology is used to help create a more transparent and efficient carbon credit market. The demand for carbon credits has grown significantly with the increasing focus on mitigating climate change and reducing carbon emissions.

However, the existing carbon credit market is fragmented and lacks acuity, making it difficult for buyers and sellers to navigate. Can blockchain technology be used to create a more transparent and efficient carbon credit market?

Also known as carbon offsets, carbon credits allow the owner to emit an equivalent amount of tons of carbon dioxide or other greenhouse gases.

According to Coherent Market Insights, the global carbon credit market is expected to reach USD 2,407.8 billion by 2027, a CAGR of 30.7% between 2020 and 2027.

The last time the world saw a significant drop in carbon emissions was during the Covid-19 pandemic’s global shutdown. Emissions in 2021 increased to 36.3 gigatonnes. Global energy-related carbon dioxide emissions increased by 6% in 2021 to 36.3 billion tonnes, the highest level ever, and to combat this the UN has created carbon credits as a temporary measure until the end of 2023.

The value of the carbon offset market is estimated to exceed $500 billion by 2050

Source: Bloomberg

There are two carbon credit markets: voluntary and compliance – the latter enforced by world governments.

The value of the global carbon credit market reached $850 billion in 2021 (an increase of 164% from 2020), and the current top players in the compliance market are Europe, the United States, and China. In particular, risks and challenges in the carbon credit compliance market are mostly related to policy changes and failures and geopolitical tensions; interestingly, the voluntary carbon market reached $2 billion in 2021, having already quadrupled in size in 2020.

However, trust is an issue with the voluntary carbon market, given a general lack of transparency in MRV (measuring, reporting and verification), potential for fraud and low-quality carbon offset credits. Considering blockchain-powered platforms provide greater transparency, and therefore trust, it is hardly surprising that blockchains are being used more and more in this market.

UK blockchain carbon offset platform, Carbonplace, has raised $45 million and uses distributed ledger technology (DLT) to provide a settlement network for carbon credits, ensuring simultaneous transfer of credit ownership and payment.

Furthermore, by turning credits into tokens, the World Bank’s division International Finance Corporation (IFC) is looking to create a fund and thus encourage more capital to trade carbon credits. As the carbon credits are converted into digital assets on the Chai blockchain, they will be tracked

The World Bank’s “Climate Warehouse”.

Nevertheless, while there are many other players in the industry, blockchain adoption (as a solution to various carbon credit problems) has limitations.

Blockchains are little more than Excel spreadsheets on steroids – which hold and enable data to be shared cryptographically.

Blockchains cannot determine how true the emission reductions that come with carbon credits are. They are also unable to verify the claims of credit sellers regarding the lifetime of credits, although one company that wants to tackle such challenges is Sunified, as it records the generation of energy every 30 seconds.

Thus providing evidence that the electrons were generated via solar or wind turbines. Sunified’s blockchain-powered platform also keeps track of the time and location of when and where the stream was created. Another example is a company called Wis@key, which uses NFTs to record the planting of trees, creating a token for each tree planted (geo-located and monitored using satellites) – such information is important when it comes to having the opportunity to receive carbon credits.

In Australia, a company called TYMLEZ offers organizations a step-by-step guide to creating a tokenized carbon credit using its blockchain-powered platform.

However, there is the possibility of zombie projects finding their way onto blockchains. This comes with the migration of carbon offset registers using blockchains.

One of the largest registries of conventional carbon credits is held by an organization called Verra, and it has allowed the transfer of carbon credits to a blockchain via the Toucan protocol, creating Base Carbon Tokens (BCTs). Unfortunately, as CarbonPlan.org explains, two problems have been identified:

“…a series of what we call ‘zombie’ projects that were inactive until the financial incentive to generate BCTs arrived, a striking finding that almost all bridging credits come from projects that have been excluded from large segments of the conventional offset market due to quality concerns.”

The concern is that there are a number of projects that cannot attract buyers in the voluntary carbon market because of their dubious claims about whether they actually have any positive impact on carbon reduction. When these projects are converted into BTCs, there is a market that casts doubt on whether BTCs actually have the same beneficial impact in reducing the impact of carbon emissions. So, once again, the difficult question of trust is raised.

The result of this is that some feel that the creation of digital carbon credits using blockchains has caused more harm than good because some carbon credits represent emission reductions that are dubious at best. However, many of these problems could have been avoided if more thorough due diligence had been carried out on projects that have been allowed to use the Toucon protocol.

Still, the concerns surrounding BTCs using blockchain technology have not prevented all organizations from embracing blockchain carbon solutions. Indonesia incentivized blockchain-powered carbon trading by signing an agreement with Singaporean digital exchange startup Metaverse Green Exchange. And another application can be seen in the partnership between WWF and BCG Digital Ventures which, of many features, “helps people and businesses avoid illegal, environmentally harmful or unethical goods.” Furthermore, McKinsey has estimated that “global demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. Overall, the market for carbon credits could be worth over $50 billion by 2030.”

Meanwhile, the voluntary carbon credit is an important source of funding for projects designed to reduce carbon emissions, and also helps those companies looking for ways to improve their ESG credentials and meet their climate change commitments.

Paul Brody, EY’s global blockchain leader believes: “In a blockchain-based ecosystem, you can have a very fluid, digital interaction, where you can choose from a dozen different providers, and you can evaluate them all on a digital basis.”

Therefore, what is required is adopted worldwide standards for which projects qualify to receive carbon credits based on their impact on reducing carbon emissions. Essentially, the carbon credit market needs greater transparency to generate greater trust and confidence, thereby creating an active market for buyers and sellers of carbon credits.

At least in theory, blockchain technology offers a promising solution, but whatever technology is used, the success of any new carbon credit trading platform/marketplace will undoubtedly depend on the quality of the data used.