No need for blockchain to tokenise carbon credits, say some market participants after registries halt process

CARBON registries have hit the brakes on an emerging movement to tokenise carbon credits, citing price volatility and reputational risks. Industry players are now debating how, if at all, the carbon market should adopt blockchain technology.

Proponents argue that creating a carbon registry on the blockchain allows for greater transparency and immutability. But others feel the issue of transparency is better fixed by strengthening existing practices.

Some market observers told The Business Times that putting credits on the blockchain is a white-elephant move at best. At worst, doing so could exacerbate problems with quality in voluntary carbon markets.

“I think the arguments (for tokenisation) are well known, but a lot of them assume carbon credits are commodities… In theory, you can track a lot of information with blockchain, but we have to make sure it’s what happens in practice as well,” said Steve Zwick, a senior media relations manager at carbon registry Verra. Verra runs the Verified Carbon Standard, the leading standard in the voluntary carbon market.

Carbon registries support the carbon trading market by tracking projects and issuing credits for verified emissions reductions or removals. When a buyer uses a credit to offset its own emissions, the registry retires the credit so it will not be resold.

Examples of registries include the Verified Carbon Standard Registry and the Gold Standard Registry, which also administer widely-used standards for verifying quality credits. There have been proposals for registries to deploy blockchain infrastructure and tokenise carbon credits. One such proposal, by an entity called Toucan, had started to tokenise carbon offsets from established registries, including Verra.

But Verra announced on May 25 that it would prohibit the tokenisation of retired credits. And Zwick told BT last week that the organisation has put all tokenisation proposals on hold.

Climate non-profit CarbonPlan in April published an analysis of the Toucan protocol, with the finding that 28 per cent of those credits came from projects that had experienced little or no recent demand in the conventional carbon market.

“If these credits aren’t finding buyers because they fail to meet buyers’ quality standards, then migrating those legacy credits to the blockchain doesn’t help increase climate ambition – it might even make things worse,” CarbonPlan researchers Grayson Badgley and Danny Cullenward wrote.

Their analysis also found that nearly all credits bridged via Toucan dated back to 2016 or before. Such “vintage credits” raise questions about additionality — whether purchased credits lead to the removal of carbon that would not have happened otherwise.

A study by the International Emissions Trading Association on the use of digital tools in carbon markets, meanwhile, noted that millions of carbon credits are now tied to newly minted digital tokens.

“These new products have created demand for older vintages of carbon credits from a new category of buyers, and triggered a temporary surge in the price of legacy carbon credits issued by independent standards,” it said.

Tackling transparency

Some market participants are sceptical about how blockchains can help.

“We don’t need the blockchain to make the market transparent,” Verra’s Zwick said, adding that documentation tracking the retirement of credits is already available in Verra’s registry. Verra is also digitising its operations to streamline project development and make it easier for secondary markets to access credits.

It will, nevertheless, launch a public consultation on tapping new technologies.

Sarah Leugers, chief strategy officer at Gold Standard, another carbon certification body, maintained that carbon markets have a “high degree of transparency on the supply side”.

“Project design documents, monitoring reports, and validation and verification reports (are) all publicly available on a transparent registry,” she told BT.

“While blockchain has an ability to increase transparency in when and how credits are transacted, know-your-customer checks should be part of the process, which is not always featured in some emerging use cases.”

Gold Standard on May 20 updated its terms of use to clarify that the creation of tokens, cryptocurrencies, or other digital instruments or assets is not permitted without its express written consent.

The organisation intends to outline its criteria for green-lighting such proposals after further consultation.

The American Carbon Registry on May 30 also updated its programme rules to ban tokenisation without explicit authorisation.

Badgley from CarbonPlan said the lack of transparency is “less a matter of technological barriers and more a question of culture and norms”.

“Today, there are minimal disclosure requirements governing the use of carbon offsets. In fact, the existing offset registries have tools that allow buyers to publicly disclose their use of carbon offsets. However, many buyers simply choose not to report credit retirements,” he said.

Incumbent offset registries could mandate greater detail about the users of credits, to enhance transparency, Badgley said.

“And while it is true that the blockchain might in theory enhance transparency, transactions involving carbon offsets on the blockchain have largely remained anonymous to date,” he said.

Arguments for the blockchain

The blockchain-backed carbon exchanges, however, emphasise that their processes are tidier or result in higher-quality markets.

Sun Jie Ling, marketing manager at Singapore-based AirCarbon Exchange, said transactions via smart contracts are public, allow instantaneous clearing, and eliminate settlement risk. The blockchain also ensures transactions are immutable.

She said AirCarbon tokenises only issued and unretired credits, and that each token represents a specific underlying carbon credit held in the exchange’s trust accounts.

Bai Bo, chief executive of MetaVerse Green Exchange, which is also based in Singapore, said his exchange works directly with national and regional governments with “real authority” — rather than with standards registries. He cited the exchange’s proof-of-concept with China and said it is working with other jurisdictions in the same vein.

Adrian Rimmer, a council member at JustCarbon, another blockchain-powered carbon marketplace, said the voluntary carbon market structure allows vested interests to block what is needed to achieve transparency.

When asked about the carbon footprint of transactions on the blockchain, Bai and Rimmer held out the offsets card. Bai said MetaVerse Green Exchange’s clients have an option to compensate for their carbon footprints by buying and retiring the exchanges’ proprietary tokens, while Rimmer said JustCarbon offsets its own carbon footprint “so that clients do not need to consider this issue when using it to offset their own”. *see clarification note

Sun said AirCarbon’s processes are based on the proof-of-stake protocol and “do not require energy-intensive mining”.

*Clarification note: An earlier version of the article said JustCarbon offers clients the option of offsetting their operational footprint. JustCarbon has clarified that it does not offer the option, but instead does so for its own platform.