Blockchain and Carbon Markets
Carbon Markets
Carbon markets are systems that put a price on carbon emissions, aiming to create financial incentives for businesses and individuals to reduce their greenhouse gas emissions. The idea is to assign a monetary value to each ton of carbon dioxide emitted into the atmosphere. Companies that have been devoted to energy-saving transformations or technologically ‘greener’ upgrades will produce fewer emissions than their allocated limits and can earn “carbon credits”. These credits can be sold to those who exceed their limits, which in turn allows the reduction of emissions to become a tradable commodity. However, the market for carbon credits is fraught with issues: lack of standardisation, additionality concerns, potential overestimation of impact, double counting fraud and more.
The Role of Blockchain
Blockchain can play a crucial role in addressing these issues by bringing transparency, traceability and efficiency to the process of tracking carbon emissions and managing carbon credits. Every blockchain has a consensus mechanism that ensures:
The network is decentralised, with no central control
Validator nodes are motivated to behave honestly
Verified blocks are immutable, tamper-proof
Smart contracts are a key feature of blockchain as they automate business processes on the blockchain. They securely store large amounts of data about a product, such as carbon credits or other climate-positive activity, and transform them into tradable units. This process enables a faster, more transparent exchange of information within the network.
Blockchain can also interact with other systems to facilitate interactions with less dependency on intermediaries. Every user has a blockchain digital signature which puts a “fingerprint” on each interaction with the chain, enhancing trust and reducing the risk of fraud. This type of technology can revolutionise data exchanges and bring a new level of trust to industries such as carbon markets.
Verra
Verra is a prominent organisation known for its establishment and management of emission reduction standards, seamlessly integrating blockchain technology into carbon offset registries. A key example of this integration is Verra’s recent transformative step to adopt the Toucan protocol to create Base Carbon Tokens (BCTs) on the blockchain as shown in the flowchart below.
Source: Toucan, 2023
Yet, this transition has not occurred without its challenges. In May 2022, Verra made a pivotal announcement that it would ban the conversion of retired Verra credits into crypto tokens, a fundamental mechanism of the Toucan protocol. Since, Verra has only tokenised active Verra credits, a strategic move to grant them enhanced control and oversight over credit flows in new markets.
Toucan’s response to this shift carries a tone of cautious optimism. The organisation identified three key areas for continued collaboration: improved market experience, market expansion and deeper liquidity. This perspective underscores the potential synergy between Verra and Toucan, as they work together to navigate the changing landscape of carbon credits and blockchain technology.
Amidst the broader challenges facing the integration of blockchain technology into carbon markets, some projects struggle to attract buyers within the voluntary carbon marketplace due to questionable emission reduction claims. The shift to BCTs raises concerns about whether these tokens truly deliver the same carbon impact. There are also uncertainties related to whether the transition to this new framework ensures an equivalent positive impact on carbon mitigation. Such doubts within the market underscore the very benefit of blockchain - the assurance of trust.
The move towards blockchain-enabled carbon credits has sparked much debate on its actual impact, with detractors arguing that the introduction of this technology into the carbon landscape only exacerbates existing problems. Yet, more robust due diligence on projects leveraging the Toucan protocol could have the potential to avert these issues. Blockchain holds immense promise in this market, but effective implementation relies on responsible project selection and rigorous oversight mechanisms.
Conclusion
The integration of blockchain technology into carbon markets holds remarkable potential to revolutionise the world of ESG, promoting accountability and inclusivity in global efforts to combat climate change. By enhancing transparency, traceability, and efficiency in emissions trading, blockchain can instil trust and credibility in carbon reduction strategies. As we confront pressing environmental challenges, the convergence between blockchain and carbon markets presents a potential pathway towards sustainability.
Looking ahead, there are major uncertainties related to how blockchain-based carbon markets can be scaled to accommodate the various needs and complexities of different industries and regions. Additionally, there are uncertainties related to the potential legal and regulatory hurdles that might arise with the widespread adoption of blockchain in carbon markets. As we navigate this critical juncture, the global response to these issues will play a key role in shaping the ongoing development of effective and sustainable solutions for the future.