Tokenisation is bringing efficiency to carbon markets and helping climate initiatives in the process.

What are carbon credit platforms?
Carbon credits are purchased by polluting companies to offset their carbon dioxide emissions and move them closer to carbon neutrality. The money used to acquire carbon credits is then used to fund various environmental and sustainable development initiatives across the globe that help avoid or remove CO2 in the fight against climate change.

Simplistically, a company that emits one tonne of excess CO2 (or equivalent greenhouse gas emissions) would buy a carbon credit to remove an equivalent amount of CO2 from the atmosphere. This could involve, for example, funding the protection of mangrove swamps in Central America, which in turn creates local jobs and sources of revenue for indigenous populations.

In that regard, carbon credit platforms facilitate the funding of global conservation projects that might otherwise struggle to do so by bringing together one party that has surplus carbon capacity (the seller) with a party that has deficit carbon capacity (the buyer).

One of the prevailing criticisms levied upon companies leveraging the voluntary carbon market is that it can be construed as greenwashing. Rather than make sufficient efforts to reduce their carbon emissions, they simply go straight to a carbon credit platform and achieve their alleged “carbon neutrality”, completely side-stepping the core issue.

Platforms such as the UN Carbon Offset Platform issue carbon credits as individual units known as Certified Emission Reductions (CERs), which individuals or organisations can purchase to support action on climate change. The price of these carbon credits is determined by project developers based on what their objectives are to fulfilling the project’s intentions.

Size of carbon credit market
Between 2022 and 2027 the global carbon credit trading platform market is expected to grow from an estimated $67 billion to $200 billion. As these platforms scale in size it will present greater opportunities for corporates, NGOs and local communities to work more effectively in protecting vulnerable ecosystems.

The Taskforce on Scaling Voluntary Carbon Markets, sponsored by the Institute of International Finance, estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. It is estimated that the market for carbon credits could be worth close to $50 billion by 2030.

Two types of carbon credit markets exist today:

  1. The certified emission reduction (CER) market trades credits created through a government-regulated framework.
  2. The voluntary carbon market (VCM) issues credits to fund carbon reduction programmes. As these credits aren’t issued by government-approved entities, companies cannot use them to offset their greenhouse gas emissions; hence the term ‘voluntary’.

Voluntary carbon credits provide a mechanism for companies to finance climate-action projects that would not otherwise get off the ground. These projects can have additional benefits such as biodiversity protection, pollution prevention, public-health improvements and job creation.

At present, the biggest carbon credit trading platforms include Nasdaq, Inc., AirCarbon Exchange (ACX) in Singapore, Carbon Trade Exchange (CTX) in the UK and Xpansiv in the US.

As corporations work towards decarbonisation, investing in high quality carbon credits can help mitigate unavoidable and hard-to-abate emissions today as part of a comprehensive strategy towards achieving larger, long-term net zero goals.

Cloverly provides calculating, purchasing, and marketplace solutions for high-quality carbon removals and offsets. It is used by 200+ enterprises worldwide in financial services, technology, ESG/carbon accounting, supply chain, e-commerce, and more.

Organisations can engage with Cloverly to navigate the voluntary carbon market and help mitigate climate change in several different ways: integrate the API with an ecommerce site, embed Cloverly into other GTM or operational processes, or purchase offsets directly from Cloverly’s high quality carbon credit inventory, either from the Cloverly marketplace or through a custom portfolio.

The potential for tokenisation
Tokenised carbon, in simple terms, is the digital representation of real-world carbon credits on the blockchain. Each carbon credit is transferred onto the blockchain using “Carbon Bridges”, which are connected to traditional registries like Verra and Gold Standard.

The potential for tokenisation of carbon credits, as noted earlier, is enormous. While the VCM was worth $2 billion in 2022 and accessed primarily by corporations, blockchain could open the market up to anyone who holds a crypto wallet; hence the $50 billion forecast by 2050. Moreover, it could revolutionise the liquidity of carbon credits and lead to far greater transparency and price discovery, helping everyone reach their net zero goal faster.

Most of today’s blockchain-based projects currently operate outside of VCM platforms, but given the nature of smart contracts and the immutability of blockchain, it should be possible to develop accreditation and verification of carbon credits, and link different carbon markets to transmit value using multiple blockchains. Indeed, not all carbon credits are created equal. Within the VCM, they remain highly heterogeneous depending on the underlying conservation project or region where it is being conducted.

Tokenisation of carbon credits could help facilitate a common taxonomy and make it far more efficient for buyers and sellers to find the right credits that meet their own idiosyncratic needs. Part of this process would involve establishing clear criteria relating to quality, which codifies within the smart contract that the carbon credit being traded represents a genuine emissions reduction. However, tokenisation does not explicitly solve the quality issue.

Some believe that labelling is critical and that carbon credits should be thought of less like gold and more like diamonds, which are valued using various criteria such clarity, colour, number of carats. Similarly, information on geography, origin, type, vintage, co-benefits, and status of mitigation activities are some attributes that make carbon offsets a differentiated product.

Only those carbon credits that originate from the same project and vintage (year of issue) are regarded as fungible tokens.

Cloverly has created a proprietary library of global carbon projects. It vets the quality of every project through in-house climate science expertise and a proprietary risk and quality assessment methodology. This vetting process, combined with independent third party ratings, provides Cloverly customers with a wide selection of high-quality spot and forward-purchase projects across five continents and 15+ project types.

Cloverly has relationship with hundreds of developers and insight into over 7,000 sources of credits.

Although it doesn’t yet provide tokenisation, Cloverly is continuously considering ways to evolve the platform to either expand or refine the value to the various stakeholders. The firm says, “Tokenisation remains an active conversation, but, like with any potential new feature, it will be evaluated against Cloverly’s stringent quality standards and ability to integrate easily with any logistics and operational mechanisms.”

Universal Carbon claims to be the world’s first tradable carbon token issued on a public blockchain, where each token is backed one-to-one by a voluntary carbon unit traded on a registry such as Uphold; this provides a secure digital wallet solution for end users to store and trade carbon credits. Some platforms are using blockchain purely for ecosystem restoration. Veritree, for example, offers a wide selection of reforestation projects for companies to chose from, spanning Kenya, Madagascar and Indonesia. Others, like Toucan, have been developed to bring carbon credits to Web3, where users can buy unified reference tokens known as “TCO2”.

With so much innovation being applied to carbon credit markets, there now exists a rich panoply of options for companies and NGOs to pursue climate action programmes.

Corporations have the potential to deliver critical funding for carbon removal projects. They also want to directly engage with the communities tied to their products and supply chains. NGOs often serve as valuable connective tissue between organisations, elevating insight from communities and raising awareness for new initiatives.

Technology will play a critical role in bringing efficiency to the efforts of all stakeholders by creating mechanisms like the carbon markets that create a bilateral flow of capital and information. Doing so will help to further increase the climate impact.

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“Technology will play a critical role in bringing efficiency to carbon markets.”

Andrew Carrier
Chief Marketing Officer
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