Blockchain and crypto carbon credits

A new proposal to use the blockchain technology to combat climate change has just been launched, in line with ESG best practices (Environmental, Social, and Governance Corporate Responsibility). It consists of trading carbon credits by turning them into cryptographic tokens – what we might call cryptocarbons.

The goal is to give more transparency to this market and improve the quality of assets using technology, not only to give more security to transactions but also to identify, monitor, and evaluate credits generated.

The initiative came from the World Bank’s International Finance Corporation (IFC), in partnership with the companies Aspiration, Cultivation, and Chia. The first two are specialized in the development and financing of environmental projects and Chia, a technology company specialized in the cryptocurrency market.

Together, they launched the Carbon Opportunities Fund, a fund to attract investments in voluntary carbon markets and expand access to financing for sustainable projects certified by international organizations.

This is not the first attempt to use blockchain to tokenize carbon credits, turning them into a true globally traded commodity. Some financial technology companies have already emerged in the past year with offers to turn carbon offsets into digital tokens using blockchain.

But the investees were unsuccessful, largely due to the difficulty of guaranteeing the quality of the credits marketed. In addition, credit fulfills its function when it is effectively used to offset greenhouse gas emissions. After that, it is retired, that is, it goes out of circulation, and ceases to exist. But there is no guarantee that its use will be immediate: in certifiers, a company can buy credits to stock and use them to offset future issues. An investor can buy them and expect them to value and then sell them.

Although the blockchain ensures that the same credit is not used more than once, the fact that they cannot monitor it until final use has caused a yellow light to light up on the certifiers. In addition, environmentalists criticized the use of blockchain because of the large amount of energy consumed in its processing.

To ensure the quality, reliability, and liquidity of the credits traded, the partners of the Carbon Opportunities Fund have developed a system that works in an integrated manner with the records of entities that certify and account for climate compensation. They also announced that transactions will be exclusive of credits from carbon sequestration through tree planting.

The main argument is that the transparency of the platform, combined with the security of the blockchain, attracts companies and especially investors, who would thus help to value the environmental projects behind the compensation of greenhouse gas emissions. In this way, they also contribute to the democratization of the carbon credit market.

Compensation through carbon credits generated by third parties is, for countries and companies, one of the main alternatives to achieve the goal of zeroing their carbon footprint and contributing to limiting the effects of global warming.