The fragile state of the global climate is very real. But in case anyone is still in doubt about the existential risks involved, the Intergovernmental Panel on Climate Change (IPCC), made up of the world’s leading climate scientists, just delivered a “final warning” in its latest report: act now or it’s too late.
The climate crisis is a complex problem that requires a multi-pronged response. One area that can undoubtedly help is the Voluntary Carbon Market (VCM). A mechanism designed to help companies (even some of the worst offenders) offset their hard-to-eradicate greenhouse gas emissions, the VCM achieved a record $2bn traded credits in 2021. As more and more aggressive net zero targets get set, new entrants are flocking to participate in the VCM. Current projections suggest the market could reach $50bn in 2030.
While increased demand for carbon offset activities is fundamentally positive, its speed of growth risks denting its legitimacy. Credit verification delays, challenges related to market entry, excessive intermediary mark-ups, opaque pricing and double-counting – all teething issues that need fixing to build much-needed trust – are stopping buyers and sellers from entering the VCM.
But there is a solution that could help the VCM function more effectively – and that is blockchain. Blockchain often attracts negative headlines of its own because of its role in the cryptocurrency market. But as a game-changing technical solution, blockchain has what it takes to settle the risks of an overheating VCM. Here are five ways blockchain will help the VCM retain its legitimacy, unlocking its planet-saving potential.
- Accurate and accelerated verification: The rapidly-expanding VCM will only maintain its momentum if carbon units being traded are verified legitimate and quickly made available to potential buyers. Current estimates suggest verification delays could cost project developers $2.6bn and waste 4.8 gigatonnes in unused credits by 2030. This roughly equates to the combined carbon footprint of the population of California from now until 2030. On-chain MRV (measurement, reporting and verification), where project developers log data directly onto the blockchain, is a tech solution designed to accelerate verification. Real world MRV providers include Open Forest Protocol and Fix 6 in combination with an on-chain registry like BioCarbon Registry.
- Breaking down finance barriers for new entrants: Carbon credit developers are clamouring to enter the VCM, but legacy players dominate. Often, new and small project developers struggle to get financing, instead relying on intermediaries to sell their credits. As a result, communities that should be thriving from frontline carbon capture initiatives are seeing revenues siphoned off. But blockchain’s financing mechanisms hold the key. Forward purchase agreements built on blockchain such as the Ivy Protocol and Solid World DAO can provide crucial financing for early-stage projects. Putting carbon credits on blockchain also makes them programmable, with royalty schemes coded into smart contracts providing recurring incomes for project developers.
- Controlling excessive broker mark-ups: Right now, too much value in the fast-growing VCM is lost to intermediaries. Investors and brokers made up one-third of the average credit price in 2021. This effectively froze project developers out of an eye-watering $650m in carbon market value. By 2030, without change, middlemen would be sucking more than $16 billion per year out of the system. However, blockchain’s unavoidable transparency would leave market distortion with nowhere to hide. In a blockchain-driven ecosystem, buyers and sellers can get real-time pricing information, showing how much their project is worth with fair prices. What’s more, in a blockchain-enabled VCM market, carbon buyers and sellers are in direct contact with each other, eliminating the need for intermediaries.
- Simplified transactions: Limited liquidity and complex transactions are further obstacles to an effective VCM. But blockchain’s answer is instantaneous on-chain transactions: carbon exchanges with a few secure clicks, no lengthy offline contracts and a decreased counterparty risk. In addition, a record of the transaction stays on-chain for everyone to see, simplifying carbon accounting and reducing the possibility of greenwashing claims.
- Helping prevent fraud: The idea of manipulating the VCM for private gain has led to challenges like double counting, where a single emission reduction counts towards more than one goal or pledge. But blockchains are public databases that can’t be secretly tampered with. So every carbon credit can be traced to its origin, preventing fake twins. The World Bank is exploring the benefits of blockchain in building trust in the carbon markets: its Climate Action Data (CAD) Trust uses blockchain to register carbon removal projects in one decentralised database.
To some extent, these challenges are about removing friction from the VCM – creating seamless processes that unblock the logjam between buyers and sellers. But there is also a real sense in which blockchain can democratise the VCM, placing more power in the hands of project developers. Instead of the VCM simply becoming a mechanism for large investors and brokers to make money, blockchain could unleash a wave of creative carbon capture initiatives that redirect revenue back to the projects and communities that need them the most.
About the Author
Ryan Gledhill is CEO and co-founder of carbon credits marketplace Thallo. He is a technologist and serial startup entrepreneur who believes that innovation is key to the world’s most difficult challenges, Ryan has taken a number of startups from inception all the way through to successful eight-ﬁgure exits. Notable projects include a successful 2017 ICO with FunFair and guiding Ivno (a prominent initiative within R3’s Corda ecosystem) through multiple raises and an exit. Now considered an industry thought leader within the wider world of blockchain and cryptocurrency, Ryan has presented at LA Blockchain Summit STS 2021; CordaCon 2019 & 2020; and FIX 2020.
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