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What is carbon credit?
A carbon credit is a permit or certificate enabling the emission of one tone of carbon dioxide (CO2) or the equivalent of another greenhouse gas (GHG). Carbon Credits are a mainstay of carbon trading systems, used to reduce greenhouse gas emissions and manage climate change.
An organization or project creates a carbon credit by reducing or avoiding the emission of GHG compared to a baseline. You can generate carbon credits from projects like restoring forests, installing renewable energy, or making energy conservation investments.
Each credit verifies a ton of CO₂ reduction. If cutting GHG emissions is difficult or expensive, companies, governments, or individuals can purchase credits to offset their emissions. They can stay under emission limits or become ‘carbon neutral’.
Carbon credits based on blockchain technology are those that use blockchain technology to more transparently and efficiently track, verify, and trade carbon credits.
Some of the challenges that are present in the traditional markets for having carbon credits, such as transparency, verification, and traceability can be solved by integration of carbon credits with blockchain. Here’s how it works and its benefits:
Key Aspects of Blockchain-based Carbon Credits
1. Transparent Tracking and Verification:
While blockchain doesn’t eliminate the concept of carbon credits, it does enable a transparent, immutable ledger through which each carbon credit can be tokenized and tracked from the point of issuance through to the point of retirement.
This guarantees the credit’s integrity, as each transaction and credit history gets publicly posted and goes unalterable. Dropping the need for intermediaries, blockchain platforms can automatically verify credits, which makes the verification process faster and cheaper.
2. Tokenization of Carbon Credits:
Each credit, or proven emission reduction, is tokenized into a digitized asset on the blockchain. The advantage of this tokenization is that it made buying, selling, and transferring of credits between and across borders and platforms simple.
By tokenizing carbon credits companies or people can buy a fraction of credits, making the buying experience possible for smaller buyers.
3. Decentralization and Interoperability:
More participants can join the carbon trading space and create more of them down more barriers. Interoperability solutions that allow for tokenized credits to be traded across different blockchains and markets have been some of these blockchains that make the trading process more fluid and global.
4. Smart Contracts for Automated Processes:
Blockchain smart contracts can also automate basic processes like issuing, transferring, and retiring credits. Let’s say, for instance, a smart contract can automatically retire a credit as soon as it’s used to offset emissions, which lessens the risk of double counting.
5. Avoiding Double Counting and Greenwashing:
Through its transparency, blockchain helps to prevent double counting (a credit might be sold or claimed multiple times) and reduce the risk of greenwashing (credits might be inaccurately claimed to represent more reduction than they do).
Examples of blockchain-based carbon credit initiatives
Carbon credits being tokenized on the blockchain are provided by Toucan Protocol and Moss, which provide decentralized carbon credit solutions.
Two big players in the carbon credit business – Verra and Gold Standard – are taking a look at blockchain-based verification and integration to enhance the credibility and efficiency of their carbon credit offerings.
1. Toucan Protocol
Overview: Toucan Protocol is a decentralized platform built on the Ethereum blockchain whose goal is to bring traditional carbon credits to the blockchain to increase transparency and efficiency in the carbon market. By enabling the creation, trading, and retirement of tokenized carbon credits, primarily, in the voluntary carbon market.
How It Works:
Tokenization of Carbon Credits: Toucan creates a ‘bridge’ from verified carbon credits on traditional registries (e.g. Verra) onto the blockchain. Each carbon credit is transformed into a Base Carbon Tonne (BCT), a digital asset measuring one ton of carbon offset.
Carbon Pools: BCTs can then be tokenized and deposited into ‘carbon pools,’ collections of tokenized credits that users can trade, retire, or consume within. It also has other carbon tokens, such as Nature Carbon Tonne (NCT) that are focused on nature-based credits.
Smart Contracts: Issuing, transferring, and retiring carbon credits are all automating key functions that were often risky, like double counting, and can help improve accountability.
2. Moss
Overview: Carbon credit tokenization is the focus of Brazilian company Moss, which is involved in conserving the Amazon rainforest. MCO2 tokens are a type of carbon credit representing one metric ton of CO₂ avoided by conservation projects in the Amazon, and Moss has created them.
How It Works:
MCO2 Token: Stores each MCO2 token like carbon credits from verified conservation projects aimed at protecting Biodiversity, and preserving the Amazon forest. Individuals or companies who seek to offset their carbon footprints can buy, sell, or retire the tokens.
Partnerships and Integrations: MCO2 is then integrated as one of the tokens within such programs by Moss partnering with e-commerce, airlines, and other companies. As an example, airline passengers can pay with MCO2 tokens to offset the emissions from their flight.
Conservation Efforts: Moss monetizes carbon credits from Amazon preservation, channeling the funds into local conservation initiatives that preserve biodiversity and support local communities.
3. Verra
Overview: The Verified Carbon Standard (VCS) is a standard administered by Verra, a non-profit organization, for certifying carbon offset projects that are the largest and most widely used standard in the world.
It helps support a range of different projects from reforestation to renewable energy and methane capture, working on the framework for measuring and verifying emission reductions.
Key Programs and Features:
Verified Carbon Standard (VCS): A Verra program certifying GHG reduction projects. Verified Carbon Units (VCUs) are generated by each verified project, where one VCU = one ton CO₂ reduced or removed.
Project Categories: VCS includes REDD+, agriculture, waste management, and clean energy project types. Nature-based solutions and emerging technologies are supported by Verra.
Co-benefits: VCS primarily reduces carbon, but Verra has spawned additional standards such as the Climate, Community & Biodiversity (CCB) Standards to ensure projects also help meet development goals (such as biodiversity and local community benefits).
Blockchain Integration: Blockchain offers an opportunity for Verra to make credits more traceable and transparent; free them from counting twice; and make credits easier to track within digital carbon marketplaces.
4. Gold Standard
Overview: Established in 2003 along with other NGOs, Gold Standard seeks to develop high-quality carbon credits and verify climate and sustainable development benefits delivered. Gold Standard credits represent both environmental and social impacts, corresponding closely to the United Nations’ Sustainable Development Goals (SDGs).
Key Programs and Features:
Gold Standard for the Global Goals: Projects that cut GHG emissions and also advance sustainable development, such as the provision of clean water, health initiatives, or renewable energy, are certified under this program.
Sustainable Development: The gold standard is known for its strong conviction to transcend carbon reduction through co-benefit. Positive social and environmental impacts, for instance, including better health, gender equality, and biodiversity, must be presented by projects.
Certification and Methodologies: Third-party verification is also required for Verra’s projects; Gold Standard is no different. For cookstoves, water purification, reforestation, and renewable energy, they have methodologies.
Blockchain and Transparency: One other interesting idea in supply chain management comes from Gold Standard, who are also investigating blockchain to enhance traceability and avoid double-counting, but are very determined not to compromise their strict human rights and community standards.
Challenges and Limitations
While blockchain offers advantages, it also has challenges:
- Energy Consumption: Also, blockchains like some Proof of Work coins have high energy consumption, which goes against carbon credit goals to be environmentally friendly. But newer blockchains with such energy-efficient protocols as Proof of stake are more sustainable.
- Regulatory Uncertainty: As both carbon credit markets and blockchain technologies mature, emerging regulatory landscapes become equally as complex. Implementation can become even more complex in compliance markets.
- Scalability: As a promising tool for voluntary markets, however, carbon credits based on blockchain may come up short in larger, compliance-based markets that require more embracing of regulatory acceptance.