Carbon Credits

As the world pushes towards a greener and more sustainable future, carbon offset projects have emerged as a crucial tool in mitigating climate change. By leveraging cutting-edge technology, these initiatives can drive greater efficiency, accuracy, and accessibility in the carbon market. According to Refinitiv, the global compliance market for carbon credits is massive, amounting to a total market size is US$261 billion.

Let’s go a bit deeper into carbon credits before exploring their synergies with Web 3.0.

Carbon credits represent one metric ton of carbon dioxide equivalent (CO2e) that has been removed or prevented from entering the atmosphere. The concept of carbon credits is based on the principle of cap-and-trade, which is a market-based approach to reducing emissions. The idea is to set a cap on the total amount of emissions that a country, region, or company can produce, and then allow them to trade emission permits among themselves. This creates a financial incentive for companies to reduce their emissions, as they can then sell their unused permits (carbon offsets) to others who need them. Carbon credits are generated through a variety of projects, including renewable energy projects, forest conservation, energy efficiency programs, etc.

The Taskforce on Scaling Voluntary Carbon Markets (TSVCM) estimates that the market for voluntary carbon credits could be worth upward of $50 billion in 2030. Voluntary carbon credits provide companies and organizations a method of offsetting carbon emissions on a voluntary basis. Historical data shows that in 2020 buyers retired carbon credits for twice as much as in 2017.

We have established that the carbon credit and offset market is expanding rapidly. Just like any other industry, exponential increase in demand gives rise to fragmentation thus leading to increased complexity. The following 4 topics discuss methods of reducing fragmentation and increasing ease of trading credits.

1. Blockchain-based carbon credits

   Blockchain technology can revolutionize carbon credit markets by increasing transparency and reducing transaction costs. A study by the World Bank found that blockchain-enabled carbon markets could reduce transaction fees by up to 35%, making it more cost-effective for businesses to offset their emissions. Furthermore, a transparent ledger ensures accurate tracking of carbon credits and prevents double counting or fraudulent transactions, leading to a more reliable and trustworthy carbon market.

2. IoT and AI integration

   The integration of IoT devices and AI can significantly enhance the accuracy and efficiency of emissions monitoring and validation. IoT sensors can collect real-time data on emissions, while AI algorithms can analyze and predict trends, enabling better decision-making and more precise carbon credit issuance. A study by the International Telecommunication Union estimates that AI could contribute to reducing greenhouse gas emissions by up to 1.4 GtCO2e (gigaton of CO2 equivalent) per year by 2030.

3. Tokenization

   Fractional ownership of tokenized carbon credits allows individuals and organizations to invest in and trade carbon offsets, increasing liquidity and promoting price discovery. According to a report by the Global Digital Finance, tokenized carbon credits could reduce the barriers to entry for small and medium-sized enterprises (SMEs), enabling them to play a more significant role in global carbon offset efforts.

4. Carbon offset tokens in DeFi

   Integrating carbon offset tokens within DeFi platforms can encourage users to compensate for their carbon footprint, driving wider adoption of carbon offset initiatives. By offering incentives such as lower transaction fees or higher yields for users who hold or invest in carbon offset tokens, DeFi platforms can promote sustainable practices while still delivering attractive returns.

By employing these innovative strategies, carbon offset projects can leverage technology to maximize their impact, paving the way for a greener, more sustainable future.