Sunday, March 19, 2023 12:54 PM
Blockchain technology is being used to help create a more transparent and efficient carbon credit market. The demand for carbon credits has increased dramatically with the growing focus on mitigating climate change and reducing carbon emissions.
However, the current carbon credit market is fragmented and lacks clarity, 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 US$2,407.8 billion by 2027, growing at a CAGR of 30.7% between 2020 and 2027.
The last time the world saw a significant decrease in carbon emissions was during the global Covid-19 pandemic lockdown. Emissions in 2021 increased to 36.3 gigatonnes. Global energy-related carbon dioxide emissions rose 6% in 2021 to 36.3 billion tonnes, their 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 expected to exceed $500 billion by 2050
Source: Bloomberg
Two carbon credit markets exist: voluntary and compliance – the latter being enforced by global governments.
The value of the global carbon credit market reached $850 billion in 2021 (an increase of 164% compared to 2020) and the current major players in the compliance market are Europe, the United States and China. Notably, the risks and challenges in the compliance carbon credit market are primarily related to policy changes and geopolitical mistakes and 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 (measurement, reporting and verification), potential for fraud, and low quality carbon offset credits. Considering that blockchain-based platforms offer greater transparency, and therefore greater trust, it is no surprise that blockchains are increasingly used in this market.
UK Blockchain carbon offset platform Carbonplace has raised $45m and uses Distributed Ledger Technology (DLT) to provide a carbon credit settlement network, ensuring the simultaneous transfer of credit and carbon ownership. payment.
In addition, by transforming credits into tokens, the International Finance Corporation (IFC) division of the World Bank seeks to create a fund and thus encourage more capital to trade carbon credits. Thereafter, as carbon credits are transformed into digital assets on the Chai blockchain, they will be tracked by the
World Bank Climate Warehouse.
Nevertheless, although there are many other players in the industry, the adoption of blockchain (as a solution to different carbon credit problems) has its limits.
Blockchains are little more than Excel spreadsheets on steroids – holding and allowing data to be shared cryptographically.
Blockchains cannot determine the veracity of emission reductions associated with carbon credits. They are also unable to verify credit sellers’ claims about credit longevity, though one company looking to address such challenges is Sunified, as it records energy creation every 30 seconds.
Thus, offering evidence that the electrons were generated via wind or solar turbines. Sunified’s blockchain-powered platform also keeps a record of the time and place where and when the power was created. Another example is a company called [email protected], which uses NFTs to record the planting of trees, creating a token for each tree planted (geolocated and monitored using satellites) – this information being vital when it is planted. is about having the ability to receive carbon credits.
In Australia, a company called TYMLEZ offers organizations a step-by-step breakdown of how to create a tokenized carbon credit using its blockchain-powered platform.
However, it is possible for zombie projects to find their way to blockchains. This is accompanied by the migration of carbon offset ledgers using blockchains.
One of the largest registers of conventional carbon credits is held by an organization called Verra and it has enabled carbon credits to be transferred on a blockchain via the Toucan protocol, creating Base Carbon Tokens (BCTs). Unfortunately, as CarbonPlan.org explains, two issues have been identified:
“…a continuation of what we call ‘zombie’ projects that were dormant until the economic incentive to generate BCTs arrived, a striking finding that almost all bridging loans come from projects that have been shut out of the main segments of the conventional clearing market due to quality issues.
The concern is that there are a number of projects that are unable to attract buyers to the voluntary carbon market due to their dubious claims about whether they actually have a positive carbon reduction impact. Once these projects are converted to BTC, there is a market that doubts that BTC will actually have the same beneficial impact to help reduce the impact of carbon emissions. So, once again, the thorny issue of trust arises.
As a result, some feel that the creation of digital carbon credits using blockchains has done more harm than good, as some carbon credits represent questionable emission reductions at best. However, many of these issues could have been avoided if more thorough due diligence had been conducted on projects licensed to use the Toucon protocol.
Yet concerns about BTCs that use blockchain technology have not stopped all organizations from adopting blockchain carbon solutions. Indonesia has encouraged blockchain-powered carbon trading by signing a deal with Singaporean digital exchange startup, Metaverse Green Exchange. And another application can be seen in the partnership between WWF and BCG Digital Ventures which, among many functions, “helps individuals and businesses avoid illegal, environmentally harmful, or unethical goods.” Additionally, McKinsey felt that “global demand for carbon credits could increase 15 times or more by 2030 and up to 100 by 2050. Overall, the carbon credit market could be worth more than $50 billion in 2030.”
Meanwhile, voluntary carbon crediting is an important source of funding for projects designed to reduce carbon emissions and also helps companies looking for ways to improve their ESG credentials and meet their climate change commitments.
Paul Brody, Global Blockchain Leader at EY, believes: “In a blockchain-based ecosystem, you can have a very liquid digital interaction, where you can choose from a dozen different providers, and you can evaluate them all on a numerical basis.”
Therefore, what is required are agreed global standards as to which projects are eligible to receive carbon credits based on their impact on reducing carbon emissions. Essentially, the carbon credit market needs greater transparency in order to generate greater trust and thus create an active market of buyers and sellers of carbon credits.
In theory at least, blockchain technology offers a promising solution, but regardless of the technology used, the success of any new carbon credit trading platform/market will undoubtedly depend on the quality of the data used.
