From Carbon Offsets On-chain to the Sustainability Landscape in Blockchain
In the recently passed COP27 conference, a group of Web3 companies convened by ConsenSys and Allinfra announced the formation of Ethereum Climate Platform (ECP), which aims to mitigate GHG (Greenhouse Gases) equivalent emissions created by Ethereum-based blockchains dated back in 2015 and promote the sustainable development of the industry.
This is not the first time blockchain cross-pathed with sustainability, nor the first time crypto was called into attention with its carbon footprints. With the doubling down efforts of many companies to commit to and execute their net zero strategies, the blockchain industry is also self-evolving into a less carbon intensive presence, and facilitating the tracking, reduction and mitigation of GHG emissions in line with the Paris Agreement.
One notable use case of blockchain technology in mitigating GHG emissions through on-chain carbon offsets. This article will provide an in-depth walk-through of the basics of carbon offsets, tokenization on-chain, and the mapping of the industry.
1. What are carbon offsets?
An effective net zero strategy of an organization or an individual entity usually involves a few steps:
1) Calculate the total emissions in CO2 or GHGs as comprehensively as possible
2) Reduce emissions across the value chain (usually Scope 1 and 2)
3) Increase the use of renewable energy for unavoidable emissions
4) Offset emissions through carbon offsets
Purchasing carbon offsets, in layman terms, simply means paying for emissions elsewhere, through verified carbon credits. One carbon credit corresponds to one metric ton of reduced or removed CO2 or GHG equivalent. A credit can be traded freely or retired. Once a credit is used as an offset, it becomes a retired credit and is no longer tradable. According to a McKinsey report, in 2020 the buyers retired a total of 95 million tons of CO2 equivalent; this number has doubled since 2017.
The sheer amount of carbon credit market can be divided into the CER (certified emissions reduction) market, and VER (voluntary emissions reduction) market.
The former deals with carbon credits that were created within a government-approved framework like EU Emissions Trading System (EUETS) and the Capt-and-Trade Program in California.The latter is also referred to as VCM (voluntary carbon market) and the carbon credits are generated by non government-verified third-party organizations or projects (think of a NGO preserving the Amazon forest for decades).
2. Deep Dive into VCM: progress, standards, and participants
VCM is getting increasing policy support from international organizations as COP26 called for more frequent reviews of NDC (Nationally Determined Contributions) and voluntary contribution to offset emissions in Article 6.
The total market size of VCM has more than doubled from 2020 to 2021 and reached an all-time high of over 1 billion USD. This leads to the next important question: who has a say in deciding the criteria for this billion dollar market?
So far there are dozens of institutions and organizations trying to provide streamlined criteria for the largely fragmented and unregulated industry, including but not limited to Climate Action Reserve, VERRA, The Gold Standard, and American Carbon Registry. The most renowned ones are VERRA and The Gold Standard.
VERRA’ Verified Carbon Standard Program is the most used standard in the industry. VERRA has issued 1B+ verified carbon units from 1900+ VCS projects around the world up to date. More than 88 countries are using VERRA standards in projects (Source: VERRA website). Despite its ban on tokenization of certain carbon credits (mostly historical ones) in May, VERRA initiated a consultation on “anti-fraud measures” for the use of blockchain technology on carbon credit tokenization in August, indicating more stringent but regulated moves towards standardizing crypto carbon.
Due to the nature of VCM, there are far more diverse players in this industry compared to the CER (certified emissions reduction) market.
On the two ends of the spectrum are project developers and credit buyers. Project developers are usually private companies, public institutions and NGOs who work on carbon removal processes, carbon capture and storage, and low carbon solutions. Credit buyers can be environmentally conscientious individuals, big companies who have committed Net Zero Goals, or even government agencies.
On top of the verification institutions we discussed previously, we also have all sorts of intermediaries like brokers, energy/commodity traders and investment firms. Like in traditional finance, there are also spot trading platforms like AirCarbon Exchange, and future contracts trading like CME Group.
3. Tokenization of Carbon Offsets
One thing that many individuals struggle with when it comes to purchasing carbon offsets is the limited liquidity and transparency in the VCM market. The financial instruments deployed in this field are only a tiny subset of the full suite of financial products that are available in the market, let alone the inconvenience of purchasing and keeping carbon credits as a record in the first place.
Tokenization is not the panacea, but the crypto world has figured out how to deploy on-chain tradable assets as a solution. Tokenized carbon credits represent carbon credits that have been retired from the registry, which translates into one metric tonne of carbon verifiably avoided. By bringing it on-chain, tokenized carbon credits brings more liquidity and financial possibility with increasing transparency and accuracy (minimizing double counting problem).
Many players in the industry are actively participating in the carbon market through tokenized credits. In 2021, Toucan, a bridge protocol that brings carbon credit on-chain, was the biggest user of VERRA registry, almost doubling the number of credits of Delta Airlines. Amber Group bought 250,000 tons worth of carbon offsets in MCO2 tokens, the native tokens for Moss.Earth in October 2021.
Life cycle of a carbon credit on-chain
On the other hand, there has been criticism on tokenization of carbon credits as it sweeps under the ruh the “zombie” carbon projects, akin to the 2008 MBS crisis. After the revelation, projects like KlimaDAO reworked on its token profiles to address the questionable component. Since both crypto and VCM are highly unregulated, there is still a long way to go and mistakes to be made.
That said, tokenization does address the key pain points in VCM by providing a high degree of traceability, public record, connectivity with other technologies and stronger demand signals all in one place. As the cheesy line goes, “technology is neutral.” It merely provides options and what determines its effects is how people use it.
4. Industry Mapping of Sustainability in Blockchain
On top of tokenization of carbon credits, the ReFi (regenerative finance) space comprises many different verticals that share the same goal of using capital and traditional forms of finance to create non-distinctive but sustainable changes in the world.
Tokenized carbon credit marketplaces
This sub-vertical has the most players, from Moss (projects are sourced mainly from Amazonian forest) to Regen Network (not only carbon offsets but also ecological assets). Many players also have NFT collections on the platform to represent the ownership of forest land or carbon offsets.
The current challenge, as previously mentioned, is the quality of projects bundled into the tokens that are made available through retirement of carbon offsets on verification platforms like VERRA.
Some commendable attempts to address the quality concern includes Nori, a tokenized carbon credit market place that focuses 100% on carbon removal projects (plant trees, soil restorat8iob, etc), which argubly have higher value than carbon avoidance projects (conservation, preventing the trees from being cut, etc).
Tokenized carbon credit infrastructure
Tokenization infrastructure is the fundamental enabler of ReFi space. Bridge protocols like Flowcarbon and Toucan bring off-chain registry-based carbon offsets on-chain and mint the qualified ones into ERC-20 tokens. Toucan’s new primary token NCT is an ERC-20 token running on Polygon and Celo, and is backed 1:1 with a nature-based carbon token (TCO2) held in the carbon pool.
Carbon-neutral chains
A lot of layer-1 and layer-2 blockchain nowadays list carbon-neutrality as one of its top goals, such as Wax.io, Polygon and Algorand. There are also a few particular carbon-neutral chains in the space that act as the ecosystem hub for various ReFi projects. The most notable one is Celo.
Celo is a carbon negative and mobile-first EVM-compatible layer-1 chain with a mission to build a regenerative digital economy. Climate has been central to the Celo blockchain since its original whitepaper envisioned adding natural capital assets to back a financial system. The blockchain was launched on Earth Day in 2020 and the ecosystem’s inaugural governance proposal allocated 0.1% of block rewards to the on-chain Carbon Offsetting Fund. With an emphasis on real world use cases, the Celo ecosystem launched the Climate Collective and the Alliance for Prosperity, two leading crypto ESG coalitions in the space.
Carbon accounting and blockchain
The benefits of blockchain technology in carbon accounting is recognized by numerous financial and academic institutions. It helps with a more transparent and traceable carbon accounting (especially in supply chain management) through avoiding double accounting and ensuring an immutable and permissioness record of carbon emissions.
One example is Carbonbase, a Hong Kong based startup that deploys blockchain-backed technologies to calculate, track, trade and offset carbon emissions.
X2Earn, Collectives and DAOs
Other players in the industry include DeFi protocols like KlimaDAO, which adds liquidity to the carbon credit market and makes token swaps accessible for tokenized credits. DAOs such as Gitcoin and ReFiDAO lead sustainability efforts in the crypto space through its ReFi Grant Rounds and their collaboration with UNICEF.
5. Is ReFi the future?
With ever-increasing tension on the sustainability concerns of blockchain technology, incorporating ESG into financial objectives is the undisputable next-step for everyone in the industry.
Lessons from traditional carbon-neutral strategy settings teaches us the importance of deploying carbon reduction tools to achieve emission baseline, as well as the power of cross-alliance cooperation. We have therefore interviewed some leaders in the space on their views of the industry.
Nikhil Raghuveera, Head of Strategy and Innovation at the Celo Foundation, is bullish on the space even in the bear market. “Cryptocurrency and blockchain technology at its basic fundamental allows us to solve mass-coordination problems. We see ReFi as a mechanism to redirect capital, protect and restore the environment, and empower people and communities. Irrespective of market prices, real problems around the world remain to be solved and we see web3 founders pushing forward on this work.”
Gitcoin, the leading developer DAO with emphasis on public goods funding, is also a big believer in the future of the ReFi space and has hosted multiple grant rounds for combating climate change. Azeem Khan, Partnerships Lead at GitcoinDAO, believes that “I’m honestly really excited about the next 18–36 months in this space. We’ve gotten rid of all the people who were here just to make profits. Those fake web3 experts on LinkedIn all transitied to AI experts for their new grift. And we’re left with the true believers, none of which are talking about what the price of things are anymore, and instead of the impact the technology can create in the longer term. The next stage of all this is when it gets really interesting. And useful!”
Jeff Ren, Head of Investment at OKG and member of APAC TNC Leadership Council, says, “We’re proud to see our portfolio companies like Wax.io take the lead in the space to achieve net zero goal. Our partnerships with organizations like Gitcoin have broadened our reach to the projects who are turbocharging the positive impact with blockchain technology. This space needs more capital and institutional adoption to support and stand behind Web3 startup founders who are hitting the double bottom lines.”
This article is written by Paige Xu (OKX Ventures Investment Manager), Veronica Zhao (OKX Ventures Investment Manager), and Samuel Gu (Core Contributor at 8DAO), with key contribution from Azeem Khan (Partnerships Lead at GitcoinDAO) and Nikhil Raghuveera (Head of Strategy and Innovation at the Celo Foundation).
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