Opinions expressed by Entrepreneur the contributors are theirs.
The 1997 Kyoto Protocol implemented the goal of the United Nations Framework Convention on Climate Change (UNFCCC). The intention was to reduce the occurrence of global warming. This would be done by reducing concentrations of greenhouse gases in the atmosphere to “a level that would prevent dangerous anthropogenic interference with the climate system”.
However, the past 25 years of progress (or lack thereof) is clearly highlighted in the IPCC’s Sixth Assessment Report on Climate Change Mitigation (released April 4, 2022). He is unequivocal in his conclusions: many impacts of climate change are now irreversible. The consolation is that some of the most serious impacts can still be avoided, if we can improve our performance.
Since the signing of the Kyoto Protocol in 1997, there have been attempts to mitigate climate impacts. These range from multilateral climate policy at the international level to very localized community group action. Solutions have had mixed success; they are often deployed slowly and piecemeal.
As we look forward to 2050 – our deadline for reaching net zero carbon emissions globally (relative to pre-industrial baseline) – it is clear that large-scale action must be the priority.
Mechanisms that leverage the market for climate action are of particular interest when the issue of scalability is central. The Voluntary Carbon Market (VCM) is one such solution. The VCM seeks to maximize the flow of funding to pro-climate projects around the world. This will be achieved using capital allocated by individuals and organizations that aim to financially offset their unavoidable carbon emissions.
The VCM issues carbon credits. These are tied to specific activities and projects that can demonstrably and verifiably mitigate carbon emissions or remove carbon from the atmosphere. When a carbon credit is allocated to an end consumer, the emissions are considered offset. They are taken off the market and the credit for the investment in the planet is given to the actor who bought it.
However, even with VCM’s goal of exploiting market mechanisms (arguably our most efficient means of allocating resources), the incentives for companies, governments and individuals to participate have remained misaligned with the economic realities. This is largely due to obvious market failures coupled with costly and opaque administrative requirements. According to McKinsey, the current market for carbon credits is fragmented and complex. There are questionable credit-selling practices and limited pricing data that “make it difficult for buyers to know they’re paying a fair price, and for suppliers to manage the risk they’re taking on.”
Growth continued in our global consumption of hydrocarbons for energy, manufacturing and materials. In turn, with global emissions continuing a strong upward trend, the VCM gaps are particularly acute in 2022.
Exploring new solutions that can unlock the market and allow it to evolve is now a top priority. Indeed, the Task Force on Scaling Voluntary Carbon Markets (TSVCM) was established in 2020 in recognition of the role VCM must play in scaling up climate action. And that the main obstacles that arise within this market must be overcome.
The TSVCM invited prominent figures from the financial sector, the climate space and academia to come together. They discussed the opportunities and challenges for the market, providing detailed reports and recommendations on how the market could be unlocked. The group has now focused on providing carbon credits, apparently leaving aside the issue of scale on the demand side of the market. So, another group of tech entrepreneurs have developed practical solutions to legitimately unlock barriers to scale.
This new group leverages a stack of Blockchain and Web3 technologies for the VCM. Blockchain solutions have already been recognized for the role they can play in enabling the emergence of new solutions that enable efficient market activity. For example, peer-to-peer energy trading trials in Cornwall, UK, or to facilitate cross-border trade between Singaporean and Australian authorities.
The transition from the traditional market to the Blockchain is achieved by filling verified and robust carbon credits. These are issued by major carbon registries like Verra and Gold Standard, and on the Polygon network (an energy-efficient proof-of-stake sidechain scaling solution for Ethereum).
This process integrates carbon credits into the Blockchain and exposes them to new transaction opportunities. Here they become easier to track, trade and permanently withdraw. All thanks to the decentralized, transparent and permissionless nature of transactions hosted on public Blockchains.
The TSVCM estimates that to provide the 1.5 degree pathway needed to avoid the worst effects of climate change, the volume of the VCM will need to increase 15 times by 2030. With a coordinated launch in October 2021, the bridging protocol of the carbon Toucan and digital organizations and other carbon-backed climate technologies in the green economy are incentivizing millions of tons of carbon credits to be chained.
Related: The Growth of Sustainable Investing
The impact of the entrepreneurs behind some of the most prominent organizations scaling VCM on blockchain is made possible by a number of blockchain-enabled solutions, including:
- Immutable public blockchains: once a carbon credit is linked to the blockchain, it can be traded by participants or burned and completely removed from the market, without the risk of double counting. Market operations are permissionless and data is traceable, opening up the market to higher levels of participation and control.
- Automated Market Makers (AMM): the creation of highly liquid pools that enable the transparent and efficient trading of assets on well-established decentralized exchanges such as Uniswap and SushiSwap. This overcomes a key hurdle within VCM associated with OTC trading and illiquid markets.
- Native carbon tokens: By wrapping carbon credits in blockchain-based tokens, carbon credits inherit the functionality of other decentralized finance (DeFi) tokens. This allows for the creation of new types of financial products that can interact with other innovations being developed in the space. For example, the C3 carbon bridge launched in March is based on the gauges initially developed by Curve.finance. These offer a new set of incentives to those who put carbon credits on the market, which could unlock a new phase of growth for this ecosystem.
- Tokenomics DeFi 2.0 inherited from OlympusDAO: Linkage and staking systems pioneered by OlympusDAO can be transposed to on-chain carbon markets. These can be used to allow users and holders of tokenized carbon credits to receive rewards for locking up and permanently removing their carbon from the market.
Related: Why is it time to invest in climate tech?
Projects and protocols working in the crypto-carbon space have a common goal: to prioritize investments in the planet above all else. This concept of focusing on positive activities that can have an impact that goes beyond just an individual’s investments is called Regenerative Finance (ReFi). Through the development of inclusive, transparent and sustainable solutions on the blockchain, we can begin to envision an era where technological climate solutions can significantly change the dial of investments in our planet.
This ecosystem is young, with real activity starting at the end of 2021. However, these projects have a multi-decade scope, just like the Paris Agreement itself. Based on the latest available science, to meet our long-term temperature goals, global GHG emissions needed to peak by 2020 and then drop to zero before the end of the century. Although we failed in the first goal, if the second is to be achieved, scalable innovations must be widely adopted now.
Related: How Blockchain Can Help Fight Climate Change
