Use of Blockchain technology in carbon markets
The use of blockchain technology in carbon markets is a relatively new development, but it is beginning to be explored for its potential benefits. Tokenized carbon credits have emerged in Europe and the US, with platforms like Toucan, KlimaDAO, and Regen Network utilizing blockchain technology to facilitate secure and transparent trading of carbon credits. The UK is also developing a platform for the settlement of trades in the voluntary carbon market using distributed ledger technology.
One potential benefit of using blockchain technology in carbon markets is the creation of more market liquidity, making it easier to trade carbon credits and facilitating price discovery. This increased transparency could also help to increase trust in the carbon markets. However, there are also risks associated with using blockchain technology in this way, such as potential price volatility and the potential for double-counting credits if not properly constructed.
One issue that has arisen in the tokenization of carbon credits via blockchain technology is the potential energy consumption and environmental impact associated with the proof-of-work consensus mechanism used in some blockchain platforms. This has raised concerns about the credibility of project developers and certification standards bodies certifying carbon credits.
Another issue is the tokenization of retired credits, which has been prohibited by Verra as the act of retirement is widely understood to refer to the consumption of the credit’s environmental benefit. Verra has launched a consultation on a tokenization mechanism that would allow credits to be immobilized instead of retired when shifting the credit to a tokenized platform.
Overall, it is important for buyers to demonstrate transparency in their approach to carbon credits and differentiate actions that relate to the reduction of GHG emissions from those that aim to compensate for them. It is also important to track the implementation and effectiveness of projects and detect misleading claims regarding their environmental or financial benefits.
While blockchain technology has potential benefits in carbon markets, it is important to consider the risks and vulnerabilities associated with its use. As the carbon markets industry continues to evolve and grow, the role of blockchain and distributed ledger technology is likely to be an ongoing topic of discussion and exploration.