Crypto assets, an abbreviation for cryptocurrency assets, along with other associated products and services, have grown rapidly over the years. Yet, they are also becoming more challenging and increasingly intertwined with greenhouse gas emissions and pollution as an industry.
According to The White House, an estimated global electronic usage of 120 to 240 billion kilowatts per hour for crypto assets was observed as of August 2022. This amount can also be measurable with the total annual electricity consumed by a country like Australia. Requiring a considerable amount of electricity usage, the growth of crypto assets could hinder national efforts to commit to net-zero carbon pollution.
To increase climate finance or the companies’ environmental, social, and governance (ESG) effort to improve environmental justice, crypto firms have become interested in liquidising the carbon market to attract investors that are caught up in the non-fungible token (NFT) craze.
Trading on two different markets – regulatory compliance and voluntary, the carbon markets comprise two categories – carbon credit and carbon offset.
Like any other solution, both carbon credit and carbon offset function as a market-based solution for environmental accountability, whereby companies are encouraged to reduce or remove GHG emissions.
Carbon Credit and Carbon Offset
Despite the terms being used interchangeably and having the same fundamental unit traded – one tonne of carbon emissions into the atmosphere, carbon credits should not be mistaken as a carbon offset. To illustrate, one tonne of carbon emission is equivalent to growing about 46 trees.
Carbon Credit, also known as carbon allowance, is traded on the regulatory compliance market. Like a cap-and-trade program, the carbon credit acts as a government permit and represents the company’s right to emit a limited amount of set and purchased GHG emissions. To be effective, carbon credit should be retired on the blockchain network to offset their GHG emission; otherwise known as having consumed the carbon credit bought, rather than reselling it on the blockchain network. By reselling it on the blockchain network, companies purchasing it are permitted to emit the same amount of GHG. This action only meant a further increase of the GHG emissions in the atmosphere without any removal.
Carbon Offset, also known as carbon removal or offset credits, is traded on the voluntary market. The carbon offset is the purchase, or rather the funding, of a project’s commitment that will remove a tonne of carbon emission by producing renewable energy for use or even preserving the forest. With that, companies purchasing these carbon offsets which are tokenised are displayed to have reduced or removed the GHG emissions that they have emitted into the atmosphere.
Despite the benefits and growth, there are critics that suggest a threat to the integrity, credibility and quality of the crypto carbon market. In reality, the tokenised crypto carbon offset is not properly regulated and evaluated to quantify the amount of quality carbon offset. There are definitely more chances of greenwashing and fraudulent schemes. If the crypto carbon market is to continue to stay and contribute to the efforts of the wider carbon market, it has to be subjected to regulation and evaluation.
Whilst the crypto carbon market remains uncertain, it is still a part of the suite of tools and technologies that can get companies to commit and comply to a net zero carbon pollution within the next few years. Other than these solutions, companies should also look into other ways of commitment to contribute to climate change.