International institutions have placed unprecedented emphasis on businesses, both at a company and industry level, to take responsibility for their operation’s impact on the climate and take immediate action to address the climate challenge. Many businesses have already taken this further, pledging to reach net zero emissions in coming years.
One way that companies may opt to lower their emissions is by carbon offsetting. This is the purchasing of carbon credits that represent a set amount of carbon being removed from the atmosphere through various sustainability projects.
As technology and sustainability become further intertwined, pioneering projects in the Web3 space have started to offer alternatives and enhancements to existing carbon trading infrastructure via blockchain carbon credits.
Mandatory Carbon Markets
The concept of carbon offsetting isn’t new. It arose in the late 1980’s as policy makers started to see the seriousness of climate change. Carbon offsetting markets are split into two categories – mandatory (compliance) markets, and voluntary markets.
Mandatory markets are set up in line with the , which was adopted in 1997 and ratified in 2005 to put into action the United Nations Framework Convention on Climate Change. Initiatives in the mandatory space include the European Union’s Emissions Trading Scheme (EU ETS), the Regional Greenhouse Gas Initiative (RGGI) in the Eastern US, and Australia’s Safeguard Mechanism legislation.
These are mandatory carbon offsetting regulatory bodies that regional businesses in certain polluting industries must engage with to offset their impact on the environment.
Companies purchase carbon credits on these mandatory markets which are used to meet whichever regulator’s rules they’re governed by, and by countries (mostly in the developed world) trying to meet their international emission reduction obligations.
It’s down to each regulator to determine the quality criteria that credits must meet to be considered ‘offset’, and the extent to which they can be used. Additionally, mandatory credit pricing is uniform across projects, determined by supply-demand economics, and each credit is subject to a levy to support adaptation in developing countries.
What is the Voluntary Carbon Market (VCM)?
To address a growing demand for carbon offsetting from organisations beyond simply remaining compliant within their region of operation, a voluntary carbon market (VCM) has emerged.
This external sector helps to direct private funds (from companies or individuals) towards innovative projects focused on restoring the atmosphere by removing or offsetting greenhouse gas emissions. Access to these voluntary carbon credit markets allows companies to gradually reduce their carbon emissions by proxy, without making dramatic changes to their operations straight away.
This makes carbon credits an attractive prospect for most companies trying to achieve carbon neutrality pledges without sacrificing operational efficiency as it can be simpler and more cost effective than a full systemic change.
At present, companies can purchase two different types of credits – avoidance credits which fund projects such as wind farms which prevent or avoid emissions, or removal credits which focus on removing existing emissions from the atmosphere through methods such as direct air capture.
However, the current VCM faces several significant challenges. Firstly, it’s been historically difficult to accurately measure the effectiveness of an offset. For example, a company might pay for a tonne of carbon to be removed from the atmosphere via direct air capture.
The project removing the carbon says that they’ve completed the task, but the company that bought that carbon credit has no visibility and can’t directly prove that’s the case. The lack of regulation and long quality verification time for new credits in the space has led to accusations of ‘phantom’ tokens that don’t affect any change.
Secondly, pricing data is sparse at best. It’s difficult for businesses entering the carbon credits market to determine whether they’re buying credits at a fair price. Equally, suppliers struggle to determine how much their carbon credits are supposed to be worth in real-world terms. This limited amount of data affects accounting within the market.
Web3 technologies and initiatives such as Regenerative Finance (ReFi) present an opportunity to mitigate and reverse the effects of climate change and social imbalance. Underneath this wider umbrella of positive change, blockchain technology has attributes that make it perfect for fixing a foundering VCM.
Current markets for carbon offsetting, whilst functional, could be majorly improved by introducing blockchain carbon credits into the mix.
Tokenising Carbon Credits on the Blockchain
Tokenisation of carbon credits via blockchain technology presents a solution to some of the issues that plague the current VCM. Blockchain technology is not only inherently transparent and secure, providing an immutable record of all transactions, it provides several other benefits including disintermediation, provenance, and accessibility.
Disintermediation and Accessibility
Currently, the VCM depends on intermediaries like traders and brokers to aid businesses in purchasing and selling carbon credits, which can come with high brokerage fees.
By using blockchain carbon credits, purchasers can trade directly on decentralised exchanges (DEX), where associated transaction and gas fees are determined by market forces and not by middlemen. When listed on a DEX, anyone with a Web3 wallet can potentially purchase these tokens, massively opening up the carbon credit market beyond large corporations and creating an opportunity to increase liquidity within the market.
While intermediary companies still exist within the space, the increased power of purchasers being able to go directly to a DEX helps to ensure that these entities actually add value. Rather than providing a one-dimensional service with a large markup attached, carbon offsetting projects within the space often offer their own blockchain carbon credits to incentivise use of their services, alongside the traditional educational services around carbon offsetting.
Using blockchain carbon credits can be an efficient and cost-effective alternative to off-chain carbon credit trading. Smart contracts help to remove human error or interference – sellers can validate their credits much more rapidly, and the blockchain consensus mechanisms allow for trades to be verified and settled quickly and automatically.
A major issue within the current VCM is the lack of transparency and variable quality of carbon credits. The VCM is less regulated than its compliance market counterpart, and therefore perceived to be much more open to vague and often unsubstantiated carbon offsets.
Sceptics in the media and governmental circles have accused some large corporations from several industries – from fast fashion to the automotive industry – of ‘greenwashing’. Amongst other things, greenwashing includes misleading consumers with claims that their product manufacturing emissions are being completely compensated without providing details of how that’s being done.
When applying Web3 technology to the VCM, carbon credits can be represented by fungible tokens – one credit representing one tonne of carbon, for example. These tokens can easily be tracked and transferred on the blockchain while also providing verifiable evidence of their origins.
This gives increased visibility to regulators and concerned individuals so they can confirm that the blockchain carbon credits and claims being made by corporations are genuinely being offset and how that’s being done in detail. And on the other hand, it gives corporations that are genuinely trying to reach their net zero targets infallible evidence that they’re making efforts to get there.
Not only does tokenising carbon credits simplify a complex system of trading using a single, distributed network, blockchain’s inherent transparency also serves to eliminate the double counting of credits. Double counting is where more than one sustainability claim is attributed to a single credit and claimed by more than one individual or organisation. This does nothing to help protect the environment and damages the credibility of the market.
Blockchain carbon credits can have a unique and immutable record of ownership secured on the network which is updated when the offset is sold or retired. This can be verified by all participants, and any fraudulent activity (such as double counting) can be flagged instantly.
NFTs in Carbon Offsetting
NFTs have a unique, individual token ID which gives them a different utility to their fungible token counterparts, as NFTs can’t be traded in a like-for-like fashion. This creates a new asset class within the tradeable carbon market.
MintCarbon provides a marketplace for eco-projects to mint and sell NFTs as a fundraising mechanism. Using the service, individuals or corporations can purchase these NFTs, the proceeds of which goes to funding the project’s environmental efforts.
These NFTs can be traded on external marketplaces such as OpenSea, providing financial incentives for the purchaser, and via in-built smart contracts, can send a proportion of each sale’s revenue back to the project as an ongoing stream of funding.
These are often dynamic NFTs (NFTs that can have their metadata updated over time via blockchain oracles) built on the ERC-1155 standard.
This semi-fungible token can be periodically updated with all the relevant information – how much CO2 the environmental project is removing from the atmosphere, ownership credentials and so on – and can produce an immutable certificate of carbon offset ownership with a dynamic audit trail contained within the dNFTs metadata.
This helps to improve the quality of carbon offsetting claims, as any fungible or non-fungible tokens can be directly tied back to the action or the project that they represent and give companies proof that they’re meeting their ESG goals.
Innovators in the Blockchain Carbon Market
KlimaDAO, a leader in the blockchain carbon market, are an organisation with a mission-driven focus on facilitating the removal of carbon from the atmosphere. Describing their activities as ‘DeFi that defies climate change’, the decentralised autonomous organisation (DAO) aim to impact climate change, one tonne of carbon at a time.
The DAO offers opportunities to climate conscious Web3 wallet holders to join a congregation of likeminded individuals by purchasing the organisation’s native token, KLIMA. KLIMA is backed by real-world carbon assets, so when an individual purchases this token via a decentralised exchange, they’re funding the removal of a quantified amount of CO2 from the atmosphere through associated eco-projects.
Another innovative project in the Web3 fight against climate change is ReSeed – a provider of ‘farm fresh carbon credits’. This project is focused on farmers in developing countries such as Brazil, financing and incentivising them to engage in regenerative farming practices.
Not only do ReSeed help to reverse climate change with this work, the project also pay the farmers quickly and equitably for the carbon credits they create through their regenerative farming are sold.
How Protokol Can Help
At Protokol, we are experts in Web3 and blockchain technology. Through our consulting and development services we deliver custom Web3 solutions, bespoke products, and intuitive dApps.
Whether you’re trying to tokenise your sustainability project, looking to create a DAO that brings together a community of likeminded individuals to help reverse climate change, or you’re a DeFi / ReFi project trying to scale up your carbon credit offering on the blockchain, Protokol are here to help.
We offer a full-suite of tokenisation services and custom blockchain solutions that can enable your business to achieve its CSR and ESG goals, whether that be a net-zero pledge, the utilisation of blockchain carbon credits or implementing digital product passports.