Carbon credits, also known as carbon offsets, are permits that represent one ton of carbon dioxide removed from the atmosphere. They can be purchased by individuals or, more commonly, companies who are looking to make up for the carbon emissions that come from industrial production, delivery, vehicles, or travel.
Carbon credits act as transparent, measurable, and result-based ways to combat carbon emissions through activities such as protecting and restoring irrecoverable natural carbon sinks, like forests or marine ecosystems.
While a relatively new concept, the idea of carbon offsetting has really taken off in recent years. This is likely a result of the European Climate Law, which legally supports the goals set out in the European Green Deal, those being for Europe’s economy and society to become climate-neutral by 2050.
By 2020 more than 110 countries had committed to a net zero emissions target by 2050, and China, the largest emitter by 2060. The UNFCCC Paris Agreement also committed 196 countries globally to limit climate change to “below 2°C”, limiting warming to around 1.5°C.
While these are significant steps toward curbing global carbon emissions and ensuring governments, private companies, and individuals alike play their part in our fight against climate change, improvements need to be made to ensure the longevity and success of the carbon credit market.
The current carbon credit market is intrinsically flawed
The carbon credit market has the ability to lower greenhouse gas emissions and thus rapidly slow the effects of global warming, allowing companies who would otherwise do nothing to combat their emissions through positive impact. However, even in all of its glory, the industry is – like many others – peppered with flaws.
One such flaw is double counting. Double counting is when a carbon credit is claimed by more than one entity, even though only 1 tonne of carbon dioxide, represented by that credit, has been removed from or avoided being released into the atmosphere.
Double counting gives a misleading impression of the level of emissions reductions and removals that have actually been achieved, making it hard to track the true rate at which carbon offsetting is happening. This puts the environmental value of carbon credits at risk, and casts a shadow of doubt over the carbon industry as a whole.
Carbon reductions can also be tricky to accurately predict, with many carbon credit providers overcalculating the number of carbon credits that can be generated by a project.
One of the key challenges of the carbon offset market is building a credible and transparent ecosystem that would engage multiple projects and allow individuals and businesses to offset their carbon footprint and responsibly meet their climate-change goals.
Tokenisation as the solution to market growth
These current overarching flaws in the carbon credit market create heightened scepticism around the real value carbon offsetting can offer. In January of this year, The Guardian, Zeit, and SourceMaterial conducted a nine-month investigation of the leading certifier Verra and found more than 90 percent of its rainforest offset credits do not represent genuine carbon reductions. This incident has led to a string of more questions and doubts about the legitimacy of the space.
As we look to accelerate the adoption of carbon credits, users will require more transparency within the industry – and one way to achieve this is by integrating blockchain technology. One use case in particular that can go a long way towards solving prominent issues in the space, such as double counting, overcalculating the number of carbon credits that are capable of being generated by a project and not performing proper retirement procedures, is asset tokenisation.
Asset tokenisation is the process by which an issuer creates digital tokens on a distributed ledger or blockchain, representing either digital or physical assets. Tokenising carbon credits and issuing them to users in the form of NFTs enables these credits to be displayed in a decentralised ledger that users can track, thus ensuring transparency and traceability.
NFT technology within the carbon credit industry means once a carbon credit is retired, the NFT will be burned and sent to an invalid address, ultimately eliminating it from circulation. The NFT burn transacts as a public, irreversible, and permanent transaction on the blockchain ledger.
As all transactions between platform participants are recorded on a distributed ledger, integrating blockchain technology into the carbon market will ensure that carbon credit transactions are almost impossible to tamper with, which helps prevent fraud and double counting.
Predictions for 2023
Every emerging market is subject to regulatory downfalls due to the unpredictable nature of business models that rely on emerging technologies. The carbon market is no exception. In particular, the lack of an accepted and consistent methodology to define and calculate carbon assets and liabilities is leading to a push for more progressive regulation in the space.
The EU’s recent Corporate Sustainability Reporting Directive (CSRD), will require nearly 50,000 companies to report sustainability information in more detail than ever before, as well as require them to be prepared for regular audits. The carbon market is still in its infancy and so it is important to remember that, while useful, regulation such as this is only the first link in a long chain of advancements to come.
In tandem with tougher regulations come harsher punishments. The more heavily regulated this space becomes, the more penalties companies that fail to meet carbon emissions targets will face. As a result, it is becoming increasingly important for businesses to measure and report their carbon emissions accurately. Blockchain provides an opportunity to do this simply and responsibly.
The essence of carbon trading is to assess, store, trade, and manage carbon emissions. Blockchain’s decentralsed database ensures just that, alongside providing ultimate transparency to curb and counteract fraud.
Radical change is required to reach net zero – including eliminating emissions in critical sectors and ramping up the removal of emissions from the atmosphere. The carbon credit market offers the opportunity to provide businesses and individuals with the means to make a difference without changing their daily lives. If merged with existing processes, blockchain holds a unique value that has the potential to reshape the carbon market for the better.
Read the orginal article: https://siliconcanals.com/news/startups/kai/guestblog/carbon-credit-market/
