Carbon credits and the role of blockchain
Bloomberg NEF (BNEF) believes the Voluntary Carbon Credit market could reach $1 trillion by 2037 and has published its ‘Long-Term Carbon Offsets Outlook’, reporting in it that: “Plagued by media and investor criticism, the offset market failed to grow in 2022 Companies bought just 155 million offsets, down 4% from 2021, due to fears of reputational risk from purchasing low-quality credits.” BNEF believes that there are three scenarios facing the carbon credit markets:
· voluntary market scenario - the market would be valued at $15 billion annually
by 2030, up from estimates of $2 billion today. However, there have been accusations of greenwashing in buying carbon credits from nature-based projects that have questionable environmental impact; REDD+ projects, in particular, are still under criticism after analysis claiming they produce “ghost credits”.
Voluntary Carbon Credits Retirement
Source: AlliedOffsets
· removal scenario - carbon offset prices would soar above $250/ton with the annual
market reaching nearly $1 trillion.
Carbon offset prices under a bifurcation scenario
Source: Bloomberg NEF
· bifurcation (two types of markets scenario) - carbon market splits into two markets
smaller branch for the less liquid high-quality carbon credits and the other branch being a nature-based solutions in Oceania, Africa and North America. The second branch larger market for low-quality credits from energy generation and nature-based solutions in Latin America and Asia. Where prices peak at $38/ton in 2039 before dropping to $32/ton in 2050.
So, why the need for new ways to trade carbon credits? Notably, Bloomberg NEF’s Long-Term Carbon Offsets Outlook foresees demand for carbon offsets reaching 1.2 billion metric tons of carbon dioxide 2030 and 5.38 in 2050 - almost 35 times more than today. Given these volumes, the existing over-the-counter (OTC) trading places are “insufficient and inefficient means of transacting credits”. This helps to explain, therefore, why we are witnessing regulated digital platforms, such as Swarm in Germany, looking to offer carbon credit trading and Archax (a UK-regulated digital exchange) looking to work with Climate Investment Corp. Furthermore, bearing in mind the dramatic rise in demand for carbon credits and for the world to wean itself off fossil fuels, there is a huge drive for renewables. China has committed that it proposes to have 33% of electricity generated in 2025 to come from renewables. China’s solar prowess is staggering with a colossal 430 GW solar capacity (as of April 2023), making the country the largest producer of solar energy in the world. To put this in context, it is estimated that 750,000 houses in the UK typically use a gigawatt an hour.
Huanghe Hydropower Hainan Solar Park, China
Source: Ornate solar
One of the world’s most ambitious renewable energy projects is in the Sahara which is set have 12 million solar panels and 530 wind turbines covering 650 square miles, requiring the laying of the world’s longest high-voltage submarine cables for 2,300 miles from Moroccan in the sea past the coastlines of Portugal, Spain and France to southwest England; it could provide 8 percent of the UK’s electricity. And the cost of this proposed 10,500-megawatt Xlinks project is expected to be $22 billion - half for the solar and wind energy farms and half for the cables. Meanwhile, AAPowerLink is another solar project that will lay a 5,000km cable to carry solar-generated electricity from Darwin in Northern Australia so as to supply up to 15% of Singapore’s electricity demand. Utilizing blockchain technology can improve the transparency of the global carbon credits market whilst crypto-mining has the potential to boost the business case for renewable microgrids through its decentralized, off-peak demand. There are many examples of companies using blockchain technology to either bring greater transparency and/or create tokenized carbon certified assets in the renewables sector. One company that is using blockchain technology to geolocate and track the amount of energy being created in almost real time is Sunified. Using chips that can be attached to solar panels or other renewable generators, Sunified is not only able to help improve the efficiency of renewable facilities but harness’s the transparency of blockchain technology so creating an immutable record of electricity that has been generated and also the associated carbon credits. As the diagram below illustrates, this is vital since lack of transparency is a major factor hindering investors.
Biggest risks associated with investing in VCCs
Source: Sylvera
Tokenovate and GMEX ZERO13 are other examples of using blockchain technology by offering the world’s first smart legal contract for voluntary carbon credit derivatives trades using International Swaps Derivatives Association (ISDA) definitions. Some of the advantages of using blockchain-powered platforms compared to the existing platforms are summarised in the image below.
Traditional VCC V blockchain-powered platforms
Source: Senken
Five other companies that are also using blockchain technology in the carbon credit and removal industry include:
· KlimaDAO - bought and retired 17.3 million tonnes of carbon offsets.
· Toucan protocol - a bridging protocol tokenizing carbon credits into tokens, known as ‘Tokenized CO2’ and these represent retired but not claimed carbon offsets. Toucan has been used by more than 50 climate projects, and helped 20million+ tonnes of CO2.
· Moss - another protocol similar to Toucan that has been used to send $30million to help the Amazon, avoiding 230,000 tonnes of CO2 and preserving 150+million trees.
· Nori - a carbon removal marketplace that focuses on coordinating transactions between small farm-based suppliers and carbon credit buyers. Nori and Bayer (the pharmaceutical firm) have signed an agreement worth $14.4million for 400,000 acres of farmland.
· Devvio - a blockchain-powered ESG platform.
Treedefi a platform through which trees are planted to create carbon credits and also which sells NFTs is an example of digital assets that can be traded and which are engaged with carbon credits. Save Planet Earth’s (SPE/SPEC) aim is to plant a billion trees and help develop and fund projects involved in renewable energy, afforestation, soil regeneration and recycling; it also aims to improve marine climate management.
Main differences between on-chain and off-chain carbon markets
Source: Senken
As the world strives for a more sustainable future and tackles the challenges posed by climate change, blockchain's integration into carbon credit trading symbolizes a progressive step towards global cooperation and environmentally-conscious economic practices. Whilst hurdles remain, the potential positive impact on both the environment and financial systems cannot be ignored. The marriage of blockchain's capabilities with the imperative of carbon credit trading signifies a promising evolution in the intersection of finance, technology and environmental responsibility.
Footnote: As an aside, Tokenovate and GMEX’s ZERO 13 are using 2022 ISDA Verified Carbon Credit Transactions Definitions, thus demonstrating how blockchain is targeting the derivatives market (estimated to be as big as $1.2quadrillion). Derivatives are by far the biggest asset class globally and many are traded opaquely via OTC platforms and are almost exclusively the preserve of institutions. In the same way we have seen institutional private equity managers such as KKR digitising their funds, so how long will it be before we see blockchain-powered assets offering exposure to derivatives being available for smaller investors to diversify their portfolios?