Crypto can’t fix the carbon offset – but crypto fans are trying anyway

There’s a strange new attempt to use controversial technology to tackle climate change: turning carbon offset credits into crypto tokens. Both carbon offsets and crypto are hot-button topics in the sustainability game. Cryptominers have been notorious sources of climate pollution, and buying carbon offsets is a popular way companies are trying to free themselves from their greenhouse gas emissions, a strategy that has largely failed in the past. Now parts of the crypto industry claim they can make offset credits better – but experts are still skeptical.

To understand how these new tokens are an old-fashioned carbon offset in crypto clothing, we need to get down to the basics of how they work. We start with carbon credits.

Carbon credits 101

Carbon dioxide is a byproduct of doing business in our current economy, and it will remain so as long as we depend on burning fossil fuels. Use of electricity, transport of people and goods – all result in carbon emissions that warm our planet. This is bad. Now there’s a solution to stop Earth from turning into a charred and flooded hellscape – stop emitting so much carbon dioxide. But it is very inconvenient for companies and requires them to change how they operate and move things around the world. Some companies think they’ve figured out a way around all of this. If they continue to emit but want to be able to say they are going “green”, they can only invest in efforts to prevent or capture carbon dioxide emissions elsewhere. It will negate the effects of their own pollution, or so the thinking goes. Now people have to figure out how to keep track of that carbon.

This is where carbon offset credits come into play. A carbon credit represents a metric ton of carbon dioxide that has been captured or otherwise avoided being released into the atmosphere. Carbon credits have been used for a long time by companies and individuals interested in offsetting their emissions. An airline or one of its passengers, for example, can buy carbon credits to offset the pollution from a flight, in the process freeing travelers from the stain of climate pollution.

But if all of this sounds too good to be true, that’s because it usually is. We’ll come back to this – but first the blockchain.

Blockchain 101

The flashy new thing we’re talking about here is turning those credits into crypto-tokens, which involves bringing the credits we talked about above into a blockchain. A blockchain is basically a shared record of transactions, meaning that the record is usually maintained by many different people or entities to make it harder to corrupt (The Verge has a good explanation here). It is important because you want to avoid problems such as double spending with cryptocurrencies or double counting when it comes to reductions in greenhouse gas emissions.

Linking credits to blockchains using tokens, the argument goes, could potentially make it easier to see what the heck is going on in carbon markets. And it’s meant to make carbon credits more attractive and valuable – which could incentivize better quality projects. One of the most splashy examples of this concept is the upcoming “Goddess Nature Token,” created by a startup called FlowCarbon, whose founders include Adam Neumann of WeWork fame. The goal of GNT is to usher in “a fluid, transparent market that everyone can access”. In other words, the aim is to make it easier for everyone to buy carbon credits and see how these transactions take place.

However, how beneficial it would actually be to the planet is up for heated debate. The elephant in the room is the energy hunger of some blockchains. The biggest culprits are the major cryptocurrencies, Bitcoin and Ethereum, which use a particularly energy-intensive and polluting process to verify transactions. Their electricity use can rival the annual electricity use of some small nations. Some of the carbon offsets that have been turned into crypto-tokens are available on Polygon, a blockchain essentially built on top of Ethereum. As a result, although Polygon says it avoids the energy-intensive crypto mining process, it is still responsible for some of Ethereum’s carbon dioxide emissions.

Other tokens have turned to blockchains that use a different system that uses much less energy. But all this shows that trying to solve climate change through these kinds of techno-fixes is difficult business, with many pitfalls to avoid.

Moreover, compensating for emissions the old way, pre-crypto, was already a risky venture because many carbon credits on the market are frivolous: they do not represent real reductions in emissions. So turning those credits into tokens just doesn’t get to the root of that problem.

“If cryptocurrencies are buying up bad quality credits and tokenizing them and creating value out of them, that seems very problematic to me,” says Barbara Haya, director of the Berkeley Carbon Trading Project. “You don’t want to create value out of things that are based on false claims about carbon impact.”

Carbon offsets 201: the quality control problem

Carbon registries issue carbon offset credits from offset projects that are intended to reduce the concentration of carbon dioxide that builds up in the atmosphere – for example, by preserving a forest or planting trees that draw down CO2 that warms the planet.

The problem is that the carbon offset markets are full of bad credit. They can, for example, represent efforts to preserve a forest and its potential to store CO2. Often, studies have found, these forests were never in danger of being razed or the threats they faced were exaggerated – so paying to “protect” them didn’t actually help further limit the amount of global warming pollution building up in our atmosphere . . In fact, many credits traded do not actually represent reductions in greenhouse gas emissions, the Berkeley Carbon Trading Project has found. Offsetting is “not yet a credible climate solution at all,” Haya says, and the overall quality of offsets hasn’t really improved over time.

Blockchains have not solved the quality control problem

There are many companies trying to sell crypto as a climate solution. Back in October, a blockchain project called Toucan and a decentralized autonomous organization (like an environmental “crypto-cooperative”) called KlimaDAO released a new token. It’s called the Base Carbon Tonne (BCT), and it represents carbon offset credits that have been moved from a traditional carbon registry to a blockchain.

Carbon offset markets are “opaque, full of middlemen and suffer as a result of questionable quality and lack transparent price signals,” Toucan said in a post in October when it launched.

Bringing carbon offset credits into a blockchain theoretically makes the risky process of trading carbon credits more transparent. People can see the record of transactions clearly on the blockchain: which credits were sold when and for how much, and what kind of carbon-reducing project it originated from.

Toucan’s first attempt to bring carbon credits onto the chain quickly caught on. After a few months, about a quarter of all the credits in the world’s largest registry had been moved on-chain using Toucan’s platform. But the popularity didn’t necessarily lead to success in reducing pollution from the planet.

A high-profile analysis by researchers at the non-profit organization CarbonPlan found that almost all of the credits were of such poor quality that they would have been banned from the global offset scheme for international aviation, considered an industry standard for offsets. Part of the problem with many of the credits was that they were tied to old “zombie projects,” according to CarbonPlan, that other buyers probably hadn’t touched because of quality issues. Once converted to tokens, all the crypto hype sold them like hotcakes, even though they weren’t necessarily a bargain.

“There is plenty of room to exaggerate how much your crypto efforts actually help the environment,” says Grayson Badgley, lead author of the CarbonPlan analysis. “It’s just moving that inventory [of credits] from one register to the next will not suddenly make these carbon offsets better.”

The backlash to the exaggeration was swift. The carbon registry decided to stop turning credits into tokens, pending “public consultation” on how to improve the process. To try to solve some of the problems, Toucan introduced a new token called the Nature Carbon Tonne with tighter restrictions on what kind of offset projects can be included. The critical analysis, they say, proved that blockchain is a tool that can improve the offset market through greater transparency.

“If you can see everything that’s going on, it’s a lot easier to critique things and to fix things,” says Toucan COO Robert Schmitt. “The only reason CarbonPlan was able to do this analysis is because it’s on the chain. They could never have done this in the traditional market.”

Roadblocks ahead

Neumann’s new venture, Flowcarbon, is trying something similar to Toucan with its Goddess Nature tokens. But it tries to avoid some of the problems Toucan ran into by examining offset credits more thoroughly before turning them into tokens. The tokens will be based on newer carbon credits that meet “market-recognized standards,” Flowcarbon says.

Its promises appear to have reassured investors. Flowcarbon raised $70 million in venture capital in May.

Flowcarbon says it plans to officially launch GNT “soon,” and refutes a July date The Wall Street Journal report that said the launch was on hold after crashing crypto prices. “[GNT] will trade at one transparent price for everyone in a liquid, transparent market. This clear and consistent pricing data is essential for investors to fund new carbon reduction and removal projects that generate credits, Flowcarbon CEO and co-founder Dana Gibber said in an email to The Verge.

You see, despite all the documented problems with offsets, they have continued to gain popularity as a way for companies to be able to say they are reducing their impact on the environment. Offset fans are holding out hope that markets can still improve with techno-fixes that have ranged from monitoring offset projects with satellites to ensure they’re doing what they’re supposed to do — to blockchains bringing increased transparency to markets. That gives new outfits like Flowcarbon motivation to make carbon credits easier to buy and sell by turning them into tokens.

But experts doubt that increased liquidity is a good thing, given the poor quality of many carbon offset credits. “Given that you can’t trust the credit quality, companies would ideally do their due diligence and really look for projects and project developers that they trust and that they want to support,” says Haya.

The need to vet credits leads to another reason why blockchains have been unable to solve problems at the core of carbon offset markets. Digital currency economist Alex de Vries calls it “The Oracle Problem”. Blockchains, by their very nature being a decentralized ledger, are – at their best – intended to eliminate the need to rely on a large institution such as a bank to keep accurate records of assets. But filtering out low-quality carbon credits still relies on a trusted intermediary such as the traditional offset registry. They may need to carry out audits to confirm that trees have actually been planted and that no one is double-counting emission reductions, explains de Vries.

Otherwise, de Vries says: “If you put garbage on the blockchain, it’s still garbage. Blockchain doesn’t fix that. It’s a misunderstanding.”