Tokenised carbon credits to rejuvenate the global emissions market

Rarely a day goes by without reports of a major weather event and broken climatological records. Whether this involves bushfires in Australia, flash flooding in the Mediterranean, drought in Africa or hurricanes in the Caribbean, there is little doubt we need to take climate change seriously.

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Yet as governments around the world try to grasp the problem energy consumption remains high. It is challenging to stop and reverse trends that have been developing for decades.

"When carbon credits are tokenised they can be converted into tradable assets that are similar to traditional commodities. It takes advantage of blockchain technology so that the tokens can be issued, distributed and priced in a secure and transparent manner.”

While scientists look for answers big businesses are being encouraged to reduce carbon emissions through incentivisation. As this process unfolds further innovation in the blockchain and crypto industries will offer even more incentives to climate-focused corporations.

So how can tokenisation help to make carbon credits more attractive?

Existing carbon markets and credits

For many years governments and economists have been touting the value of carbon markets and trading to help countries fulfill their obligations under the 2015 Paris agreement. Article 6 of the agreement says countries can develop a carbon credit system to help initiate emission-cutting efforts and claim credits for doing so.

For developing countries this represents an opportunity to sell carbon credits to richer nations, allowing the more affluent to sponsor CO2 reduction and lower their emissions targets.

While the program has had some success, critics suggest it is not the most efficient way to handle the challenge. Many alternatives have been suggested since carbon credits were introduced in the late 1990s but perhaps the most forward-thinking involves tokenisation.

What are tokenised carbon credits?

Tokenisation is a process that converts the rights and benefits of a particular asset into a digital token that lives on the blockchain. Tokenised carbon credits can be used to enable carbon offsets by tokenising a specific amount of CO2 for an individual asset, such as a tract of forest land. The token will represent how much CO2 that plot can absorb and investors can then buy those tokens to support environmental initiatives. In addition to offsetting carbon emissions these tokens represent a way for individuals and organisations to help protect and develop forest areas from a financially attractive point of view.

When carbon credits are tokenised they can be converted into tradable assets similar to traditional commodities. Using blockchain technology tokens can be issued, distributed and priced in a secure and transparent manner.

There are several existing tokenised carbon credit programs including Universal Carbon. It claims to be the world’s first tradable carbon token issued on a public blockchain. The token can be purchased and held as an investment or ‘burned off’ to offset a carbon footprint.

Each token is backed one-to-one by a voluntary carbon unit traded on a registry such as Uphold. The registry provides a safe and convenient digital wallet allowing users to store and trade their tokens. Each token represents a one-year tonne of carbon emissions.

The voluntary carbon credit market is highly correlated to government policy actions and shifts in demand for alternatives. Such demands, coupled with energy supply shortages, lead to volatility.

The tokenisation process may also improve liquidity in certain carbon markets. It removes barriers to entry for those unable to gain licenses to trade on closed markets. A record of what project underlies each carbon credit and its transaction history can help address issues of transparency.

Trading on the exchange

AirCarbon Exchange uses distributed ledger technology to make carbon trading as frictionless as possible by allowing traders to access whole asset classes rather than individual projects. Each token issued is backed by a specific carbon credit held within the exchange trust.

One token issued by AirCarbon Exchange is the Global Nature+ which represents a carbon emissions unit produced by an ongoing, nature-based project. Each token has a denomination of one tonne of carbon dioxide equivalent (tCO2e). Tokens linked to renewable energy projects and home cooking innovations are also available.

The industry is also being pushed by decentralised finance technology (DeFi). These platforms seek to accelerate climate change efforts using digital currencies backed by real carbon assets. 

Toucan is an example of carbon assets in decentralised finance, linked to a digital token called BCT (Base Carbon Tonne). Toucan acts as an aggregator for crypto-carbon projects with distinctive values.

For example, Toucan links Web3 architecture to decarbonisation through its tokenised CO2 project. Each token represents a verified carbon credit which is semi-fungible with identifiable information encoded on-chain and can be deposited into the company’s carbon pool.

Expanding the market

Such tokenised carbon credits are becoming mainstream. ANZ and digital assets platform Zerocap recently issued an AUD-backed stablecoin (A$DC) used to purchase tokenised carbon credits through carbon trading platform Betacarbon. Each token in this situation represented a kilo of carbon captured.

ANZ first converted and minted a set amount of A$DC for the Victor Smorgon Group before sending them to digital asset fund manager and custodian Zerocap – which became the market-maker for the carbon credit transaction.

This demonstrated the ability for blockchain technology, secure custody and frictionless transactions to create a market for carbon credits. As the market expands and becomes more stable, investors will see token carbon credits as less volatile.

When used as a financial tool, tokenised carbon credits can also enhance liquidity within carbon markets and enable individuals, governments and corporations to see carbon as an investable asset.

The tokenisation process will also ensure carbon removal is accurately measured as the tokens verify carbon offsets. At present many of these tokenised carbon credits relate to carbon mitigation projects which have been the foundation of the carbon credit industry.

As organisations and individuals become more adept at trading tokenised carbon credits the industry may diversify into carbon removal technologies and other areas.

Through a blockchain-powered market investors may access these carbon credits more readily, leading to increased acceptance around the world.

Ryan McCall is CEO and co-founder at Zerocap, Australia’s leading crypto assets investment platform for Private and Institutional Clients.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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