The carbon market has been grappling with concerns regarding transparency and accountability, largely because it can be challenging to ascertain the authenticity and standard of carbon credits. The global endeavor to decrease emissions and tackle climate change has resulted in the emergence of novel technologies and solutions — blockchain being one of the technologies garnering substantial interest in recent times.
Contrary to popular beliefs, blockchain technology is not only relevant to the cryptocurrency industry, but also across various sectors for increasing transparency, efficiency and optimization of workflows/processes. Last year, the International Finance Corp (IFC) revealed that it was backing a blockchain-enabled platform to trade carbon offsets, in an effort to attract more support from institutional investors for climate-friendly projects in emerging markets.
What is Blockchain Technology?WWhat is blockchain technology?
“In the fast-growing carbon markets, blockchains represent the next generation of climate solutions being created to enable more real-world functionality. It provides a decentralized, secure, and transparent digital ledger that allows for the secure transfer of information and assets. It is seen to be playing a critical role in increasing accountability in the carbon offset market, including increased transparency and traceability in the supply chain, the creation of a standardized platform for carbon credit trading, and the ability to facilitate the tracking and verification of carbon reductions,” said Pavel Bordioug, Vice President, Technology, CarbonTerra.
CarbonTerra in collaboration with Atlas Xchange recently launched the blockchain-based AtlasX carbon credits on the Celo blockchain as a first step in the company’s vision to support carbon neutrality in the global food supply chains. The industry-first smart contracts allow for the core information regarding the offsets to be stored on-chain, and ensures that the offset information is transparent and immutable, allowing for best-in-class traceability.
The innovative technology allows for information behind each AtlasX carbon credit generated to be stored on the blockchain, enabling transparency and traceability, right down to the square meter of land where the offset was generated.
“The Atlas Carbon Credit methodology is the next clear evolution of the carbon registry. It allows the highest possible standards to be enforced for carbon credits through the transparency of the entire creation process. Now when you buy a carbon credit through the simple click of a mouse you can see exactly where the carbon credit was produced and an up-to-date report verifying that the carbon is still stored,” explained Bordioug.
The transparency provided by blockchain technology will help accelerate decarbonization of the agriculture industry, which is responsible for 25-30% of global emissions from food systems. The figure, however, is 9-10% for Canada.
Advantages of blockchain in carbon market
It is widely accepted that the use of blockchain technology will boost a generation of good quality carbon offsets than more traditional methods, by making the process faster and more transparent. By creating an immutable record of all transactions, blockchain allows buyers to verify the origin and legitimacy of the offsets generated, while also increasing efficiency and reducing costs. This becomes particularly significant in a market where low-quality credits are becoming a major issue.
Following are some obvious benefits of blockchain technology in carbon market:
Transparency and traceability
Blockchain technology enhances transparency and traceability in the supply chain by establishing an unalterable record of all transactions. This enables purchasers to verify the origin and authenticity of carbon credits throughout their lifecycle, from creation to retirement.
The technology creates an immutable record of transactions, which cannot be altered or deleted. Again, this can help to prevent fraud and ensure that carbon credits and offsets are legitimate and not double-counted.
The decentralized nature of blockchain technology can help to reduce the risk of fraud and corruption. The records are public and there is no single point of failure or control. This can increase trust in the carbon market and reduce the risk of market manipulation.
Smart contracts, which are self-executing contracts with the terms of the agreement directly written into code, can automate the process of carbon credit issuance, transfer, and retirement. This can increase efficiency and reduce costs.
The technology can also facilitate the development of a standardized platform for trading of carbon credits. This enhances the ease for both buyers and sellers, decreasing transaction costs and boosting market liquidity. The settlement and delivery processes can become more efficient, mitigating the risk of fraudulent activities and enhancing the market’s overall efficiency.
Verify emission reductions
Blockchains also can aid in tracking and verifying carbon reductions, again something crucial for credibility of the sector. Smart contracts can be utilized to automatically verify emissions reductions and ensure they adhere to prescribed standards.
Examples of blockchain technology in carbon markets
Though still a novel and upcoming technology, several companies and organizations are already using blockchain technology in carbon markets. Apart from the recent endeavor from CarbonTerra, here are some other prominent examples:
Poseidon Foundation: A London-based non-profit organization, the Poseidon Foundation, launched the world’s first retail platform that connects consumers to their own carbon footprint way back in 2018. The platform integrates carbon markets into transactions at the point-of-sale, giving retailers and their customers the opportunity to support forestry conservation projects around the world when they buy and sell everyday items, and in turn support action on climate change.
AirCarbon Exchange: The Singapore-based digital exchange which is focused on eliminating market friction in a carbon constrained economy, uses blockchain technology to provide a transparent and secure platform for trading carbon credits. The Exchange has a traditional trading architecture and uses distributed ledger technology to securitize carbon credits into digital receipts representing a clear line of ownership between the carbon credits held in the Trust. According to the Exchange, just like in traditional commodity exchanges, owners of the contracts can request physical delivery of the underlying carbon credits.
Climatecoin: CLIMATECOIN Foundation launched the blockchain-based cryptocurrency on the Carbon Trade Exchange (CTX) in 2017 in an effort to help individuals take part in the emerging crypto market while also assisting in the fight against climate change. Each token is “stapled” to a carbon credit, and climatecoin owners can use the tokens to purchase carbon credits. According to a Medium post from the company, money from the token sale will be invested into environmental businesses, making climatecoin the “first carbon-zero cryptocurrency in the world.”
CarbonX: The CarbonXHub from CarbonX is a blockchain ledger capturing IoT GHG data for reporting, management and conversion to a carbon commodity. CarbonX was launched by blockchain specialist firm ConsenSys as the world’s first peer-to-peer personal carbon trading company in 2017 in joint venture along with a co-founding group that includes Don and Alex Tapscott, the co-authors of the best-selling book, Blockchain Revolution: How the Technology Behind Bitcoin Is Changing Money, Business, and the World.
Veridiumlabs: Veridium’s partnership with IBM is a platform built on the STELLAR Blockchain, to sell carbon offset tokens. VeridiumLabs automates the corporate carbon credit accounting and offsetting process across global supply chains, and uses blockchain to verify the authenticity of carbon credits and ensure that they meet established standards.
IBM: IBM has partnered with several companies to develop blockchain-based solutions for carbon markets. For example, as earlier discussed, it’s partnership with Veridium to create the blockchain-based marketplace. Among others, IMB has partnered with Energy-Blockchain Labs to develop a blockchain-based carbon credit trading platform in China. The green asset management platform based on the open source allows enterprises to generate carbon assets more efficiently, helping to build a green, low-carbon and environment friendly future.
Future of blockchain technology in carbon market
Even with all the controversies around the carbon market, they remain the essential “net” in net zero to balance carbon accounts between emissions and reductions, the World Economic Forum had recently underlined.
But for that to happen, there is an increasing need for transparency and accountability in the carbon market, which makes blockchain an attractive solution in this sector. As more organizations become aware of the benefits of using blockchain technology for carbon offset trading, the technology and its use will also mature.
Increased standardization: As the carbon market grows and matures, we can expect to see more standardization in the industry. Blockchain technology can play a key role in this by providing a secure and standardized platform for trading carbon credits.
Integration with other technologies: Blockchain technology can be integrated with other emerging technologies, such as the Internet of Things (IoT) and artificial intelligence (AI), to create even more advanced solutions for the carbon market. For example, IoT sensors can be used to track carbon emissions in real-time, and AI can be used to analyze this data to optimize carbon reduction strategies.
“Carbon markets have strong potential to unlock finance to achieve climate goals, and they could save an estimated $250 billion per year in implementing climate actions by 2030,” the World Bank highlighted in a recent blog, while underlining that transparency and accountability were critical to a well-functioning carbon market.
The blockchain carbon market is a relatively new and rapidly evolving industry, so it is difficult to estimate its exact worth. However, it is clear that the market has enormous potential.
According to the latest research report released by Extrapolate, the global Voluntary Carbon Offsets Market is estimated to generate revenue of USD 2655.75 million by 2028 from $535.60 million in 2021, registering a staggering CAGR of 25.70% during the projection period.
If harnessed in the right way, blockchain has significant potential to enable a shift to cleaner, and more resource-preserving, decentralized solutions, unlocking natural capital and empowering communities, the PWC said while releasing the joint report with World Economic Forum called Building Block(chain)s for a Better Planet.
As the world continues to work towards reducing carbon emissions and addressing climate change, blockchain technology will likely play an increasingly important role in carbon markets.