What is Blockchain-Powered Carbon Trading?
Before delving into blockchain-powered carbon trading, one must first understand the mechanisms behind carbon credit. Carbon credits, also known as carbon offsets, is a tradable permit or certificate which allows the owner of the credit to emit a specified level of carbon dioxide or other greenhouse gases. One credit can be traded for one ton of carbon dioxide or equivalent in other greenhouse gases.
On the blockchain, a number of prominent crypto projects such as KlimaDAO have started the construction of digitised carbon credits to be traded publicly. To put credits on the blockchain, crypto firms first retire them from carbon credit registries. Subsequently, the firms will issue tradable digital tokens which are removed from the market when purchased by buyers to offset their carbon footprint.
Impact of the Blockchain-Powered Carbon Trading
In an interview conducted by TechCrunch, Bai, the executive chairman and co-founder of Metaverse Green Exchange (MVGX), discussed the merits of the blockchain infrastructure to provide an immutable documentation of the creation and ownership of the carbon credit. Furthermore, the integration of blockchain technology with carbon trading will resolve double-counting of emission cuts, which commonly occurs when two entities claim the same carbon removal reduction.
Blockchain-Powered Carbon Trading and Its Controversies
One of the biggest arguments against the trading mechanism questions the effectiveness and legitimacy of the system, which allows entities to claim carbon neutrality without making a consequential effort to reduce emissions in the first place. While companies purchase and retire carbon credits to offset their greenhouse footprints, they can snap up and retire the credits when prices are high, enabling them to pollute for cheaper than they would have otherwise. Investors are also allowed to buy and hold onto the credits without retiring them, in anticipation of rising prices so that they can sell them for a profit.
Tokenizing carbon credits is a complicated operation which can confuse buyers due to the lack of transparency on pricing, which makes it difficult for corporations to determine the actual costs to offset their emissions.
Prospects of Blockchain-Powered Carbon Trading
Owing to the novelty of the process, there have been evident portrayals of cynicism and approval from both ends of the spectrum. Despite this, international governmental bodies and institutions are thrusting ahead to advocate the use of the blockchain solutions for carbon markets.
In early November this year, Indonesia signalled its commitment to steer the blockchain towards a greener direction through the partnership between the Indonesia Stock Exchange (IDX) with MVGX. MVGX seeks to provide an end-to-end Carbon-as-a-Service solution which includes tokenizing carbon credits with its Carbon Neutrality Token (CNT) on the Ethereum blockchain. The proposed collaboration focuses on the construction of IDX’s personalised carbon registry and exchange with blockchain as the infrastructure layer.
Additionally, World Bank’s International Finance Corporation (IFC) division, announced its plan in August to back a blockchain-enabled platform to register for carbon removal projects with the aim to attract more support from institutional investors for climate-friendly projects in emerging markets.