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.