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The 1997 Kyoto Protocol implemented the United Nations Framework Convention on Climate Change (UNFCCC) target. The intent was to reduce the onset of global warming. This would be done by reducing the concentrations of greenhouse gases in the atmosphere to “a level that would prevent dangerous anthropogenic interference with the climate system”.
However, progress over the past 25 years (or lack thereof) is brought into sharp focus in the IPCC’s Sixth Assessment Report on Climate Change Mitigation (released April 4, 2022). It is unequivocal in its conclusions: many of the effects of climate change are now irreversible. The consolation is that some of the most serious consequences can still be avoided, if we can improve our performance.
Since the signing of the Kyoto Protocol in 1997, efforts have been made to mitigate its impact on the climate. These ranged from multilateral climate policy at the international level to highly localized action by community groups. Solutions have had varying degrees of success; they are often deployed slowly and piecemeal.
As we look to 2050 – our deadline for achieving net zero carbon emissions at the global level (against the pre-industrial baseline) – it is clear that action at scale must be the priority.
Mechanisms leveraging the market for climate action are of particular importance when the issue of scalability is central. The Voluntary Carbon Market (VCM) is one such solution. The VCM aims to maximize the flow of funds to pro-climate projects around the world. This is achieved by leveraging capital allocated by individuals and organizations seeking to financially offset their unavoidable carbon emissions.
The VCM issues CO2 credits. These are linked to specific activities and projects that can demonstrably and demonstrably reduce carbon emissions or remove carbon from the atmosphere. When a carbon credit is awarded to an end consumer, the emissions are considered offset. They are taken off the market and the credit for the investment in the planet is assigned to the actor who bought it.
But even with the VCM’s goal of tapping market mechanisms (perhaps our most efficient way of allocating resources), the incentives for companies, governments and individuals to participate have remained inconsistent with economic realities. This is largely due to clear market failures associated with expensive and opaque administrative requirements. According to McKinsey, the current carbon credit market is fragmented and complex. There are questionable credit sales practices and limited pricing data that “make it challenging for buyers to know if they’re paying a fair price, and for suppliers to manage the risk they’re taking.”
Growth in our global use of hydrocarbons for energy, manufacturing and materials has continued. In turn, while global emissions continue to show a steep upward trend, the shortcomings of the VCM are particularly acute in 2022.
Exploring new solutions that can unlock and scale the market is now a top priority. Indeed, the Taskforce on Scaling Voluntary Carbon Markets (TSVCM) was established in 2020 in recognition of the role the VCM should play in scaling up climate action. And that the main barriers that manifest themselves within that market must be tackled.
The TSVCM invited leading figures from the financial sector, the climate space and academia to come together. They discussed the opportunities and challenges for the market and provided detailed reports and recommendations on how to unlock the market. The group has now shifted its focus to the supply of carbon credits, seemingly eschewing the question of scale on the demand side of the market. So another group of technology entrepreneurs has developed practical solutions to legitimately unlock the barriers to scaling.
This new group uses a stack of Blockchain and Web3 technologies for the VCM. Blockchain solutions have already been recognized for the role they can play in the emergence of new solutions that enable efficient market activity. For example, peer-to-peer energy trade trials in Cornwall, UK or to facilitate cross-border trade between Singaporean and Australian authorities.
The transition from the traditional market to the Blockchain is achieved by bridging verified and robust carbon credits. These are issued by leading carbon registrars such as Verra and Gold Standard, and progress to the Polygon Network (an energy-efficient proof-of-stake side-chain scaling solution for Ethereum).
This process integrates carbon credits with the Blockchain and exposes them to new opportunities to transact. Here they become easier to follow, exchange and retire permanently. All thanks to the decentralized, transparent and permissionless nature of transactions hosted on public Blockchains.
The TSVCM estimates that the volume of the VCM will need to grow by as much as 15 times by 2030 to achieve the 1.5-degree pathway needed to avert the worst effects of climate change. Toucan and carbon-backed digital and other climate technology organizations in the green economy are encouraging millions of tons of carbon credits to be brought into the chain.
Related: The growth of sustainable investing
The impact of the entrepreneurs behind some of the most prominent organizations scaling the VCM on the blockchain is enabled by a number of blockchain-enabled solutions, including:
- Immutable, public blockchains: Once a carbon credit is bridged on the blockchain, it can be redeemed by participants or burned completely and removed from the market, without the risk of double counting. Market transactions are unauthorized and data is traceable, opening the market to greater levels of participation and control.
- Automated Market Makers (AMMs): Creating highly liquid pools that enable the transparent and efficient exchange of assets on established decentralized exchanges such as Uniswap and SushiSwap. This overcomes a major barrier within the VCM associated with over-the-counter trading and illiquid markets.
- Native Carbon Tokens: By packaging carbon credits into blockchain-based tokens, the carbon credits inherit the functionality of other Decentralized Finance (DeFi) tokens. This allows the creation of new types of financial products that can interact with other innovations being developed within the space. For example, the C3 carbon bridge launched in March uses the meters first developed by Curve.finance. These offer a new set of incentives to those bringing carbon credits to market, which could open up a new phase of growth for this ecosystem.
- DeFi 2.0 tokenomics inherited from OlympusDAO: The bonding and expansion systems developed by OlympusDAO can be converted to on-chain carbon markets. These can be used to enable users and holders of tokenized carbon credits to receive rewards for locking and permanently removing their carbon from the market.
Related: Why Now is the Time to Invest in Climate Technology
The projects and protocols operating within the crypto-carbon space have a common goal: to prioritize investments in the planet above all else. This concept of focusing on positive activities that can have an impact beyond just an individual’s investments is called Regenerative Finance (ReFi). By developing inclusive, transparent and sustainable solutions on the blockchain, we can begin to envision an era where technology-enabled climate solutions can meaningfully change the investment in our planet.
This ecosystem is young, with real activity starting at the end of 2021. However, these projects span several decades, as does the Paris Agreement itself. Based on the most recent science available, achieving our long-term temperature goals required global greenhouse gas emissions to peak by 2020 and then be cut to zero before the end of the century. While we failed to meet the first goal, scalable innovations now need to be widely adopted to achieve the second.
Related: How Blockchain Can Help Tackle Climate Change
