The Role of Blockchain in Enhancing the Transparency of Carbon Offsets

Can blockchain enhance transparency by tokenizing credits and empowering data access?

Anton Jidkov


5 mins

Blockchain technology, the backbone of the third generation of the internet (Web3), seems to be navigating through the 'trough of disillusionment' phase of the Gartner hype curve. This period follows the excitement initiated by the Bitcoin whitepaper, which ushered in a wave of new companies, investment, and innovation. As we stand now, the defining use case for blockchain is yet to be discovered amidst the sea of skeptics. However, there has been a significant increase in initiatives to integrate this revolutionary technology into the carbon market, promising to alleviate some of its most persistent challenges.

Overcoming Challenges through Blockchain

A major issue plaguing the carbon offset market is the lack of transparency, leading to numerous integrity concerns. Registries, which are responsible for the issuance of credits, control the dissemination and visibility of information. This control significantly restricts the speed and transparency of carbon credit sales, retirements, and trading, resulting in an operational bottleneck.

To tackle this challenge, blockchain presents an appealing solution through tokenisation. Considering that each carbon credit corresponds to one tonne of CO2e removed or avoided, tokenizing these credits for open trading emerges as a feasible solution. The process could involve either transferring credits from registries onto the blockchain or circumventing the existing registries entirely, thereby decentralizing the entire process.

Major players in this field such as KlimaDao, Moss, CarbonPlace, and others, are striving to bring this concept to fruition. FlowCarbon's successful $70 million fundraising in 2022 spotlighted this emerging market. However, the diverse quality, appeal, and pricing of projects complicate matters. Efforts to 'sweep the floor' ironically highlighted low-quality credits, further eroding trust in the VCM.

Nevertheless, registries seem to be taking blockchain technology seriously. Verra, for instance, requested a halt to the tokenization of retired carbon credits and initiated a public consultation on crypto instruments and tokens, acknowledging their potential role in transforming the carbon market. Similarly, Gold Standard has shown cautious support for tokenized credits, indicating plans to further explore creating digital assets representing their credits.

Enhancing Carbon Credit Traceability with Blockchain

The journey of a carbon credit is intricate, involving multiple stakeholders in its development, verification, issuance, and monitoring. Blockchain's ability to establish smart contracts can notably enhance the traceability of a carbon credit's life cycle, thereby improving transparency and accountability.

Innovators in this space, like the Open Forest Protocol, employ blockchain-based Measurement, Reporting, and Verification (MRV) systems to gather and independently monitor ongoing projects in a transparent and traceable manner.

Furthermore, a significant amount of data before and after issuance remains hidden within registries, underscoring the need for improved data access. In response, the World Bank launched the Climate Action Data Trust initiative, based on the Chia network. This initiative provides a blockchain-based infrastructure that connects registries and allows public access to information, thereby increasing transparency, reducing the risk of double-counting, and strengthening the overall integrity of the carbon markets.

What next?

Blockchain technology holds immense potential for its application in the carbon offset market. Its ability to enhance transparency and integrity could indeed serve as a catalyst in the market's evolution, guiding us towards a more sustainable future. To foster widespread adoption of blockchain, web3 carbon credit solutions are increasingly focusing on tackling demand-side issues by partnering with high-quality carbon credit suppliers that prioritize transparency.

Even though the application of blockchain for carbon offsets is still in its infancy, it signifies an exciting period of exploration and innovation ahead, with the hope that challenges will metamorphose into opportunities and groundbreaking solutions.

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