Carbon Token Introduction
In this article, we are talking about the tokenization of carbon credits from voluntary standards like Verra or Gold Standard. When such carbon credits are tokenized, their information and functionality are transferred to a blockchain. Alternatively, carbon credits can be issued directly on the blockchain, where all their attributes are publicly viewable. In both cases, one carbon credit is equivalent to one carbon token.
After tokenization, carbon tokens can be transferred, sold, retired, or they can be held in secure on-chain accounts. The functionality of carbon credits depends on the smart contracts used, which are coded in and programmed to behave in various ways.
Carbon tokens can be specified by the following characteristics:
- Backed by a real-world asset (carbon credit)
- The price is related to the price of the underlying carbon asset, especially if the token can be reversed to the original credit it represents
- Can be fungible (changeable to another identical carbon token) or non-fungible (unique due to different carbon standards, methodologies, vintages)
Tasks to Solve for Carbon Tokens
Complexity and High Cost of the Traditional Trading Procedure
The traditional procedure for trading carbon credits of voluntary standards is quite complex and expensive. For opening and maintaining accounts participants must undergo a KYC (know your customer) and an AML (anti-money laundering) procedures, pay fees. At the same time carbon credits can’t be freely bought due to the lengthy process of finding sellers, negotiating prices. and dealing with paperwork, That`s why the main buyers of carbon credits are large companies while small and medium-sized purchases are not yet widespread.
Proposed Solution: After being transferred to the blockchain, the movement of carbon tokens between different blockchain addresses does not require the transfer of carbon credits in a traditional registry, which means no account registration and transaction costs.
Inaccessible Registry Data
Carbon credits are issued by carbon standards and stored in their registry. It’s impossible to track issued credits. This creates possibility for double-counting, where the same carbon credits are used by different parties.
Proposed Solution: Carbon tokens can be tracked on the blockchain at any moment and can only be held in one digital wallet at a time.
Opaque Pricing
Price information is often hidden as intermediaries aim to maximize profits. Additionally, buyers may avoid disclosing their spending due to potential scandals within the carbon market.
Proposed Solution: By leveraging the nature of blockchain technology, marketplaces can be created where carbon tokens can be traded 24/7 from anywhere globally. Prices will be determined publicly by supply and demand.
Metric Ton Minimum Unit
Such a division is not always convenient when it is planned to compensate for the individual carbon footprint of a particular service or purchase, which is much less than a metric ton
Proposed Solution: Carbon tokens can be divided into units smaller than one metric ton.
Approaches of Carbon Tokenization
One-Way Bridge
This mechanism provides for the movement of carbon credits into tokens and does not involve the reverse process.
In some cases the carbon credit owner offsets credits held in the standard registry (without specifying the beneficiary). The tokenizer receives retirement information and issues the same number of carbon tokens for selling, holding, transfer, and retirement. Interaction with the standard registry from the tokenizer side is not required. A similar system was implemented by the Toucan Protocol for Verified Carbon Standard credits. Examples of issued tokens using this approach include Base Carbon Tonne (BCT) and Nature Carbon Tonne (NCT).
Another type of one-way bridge redeems carbon credits after repaying the tokens backed by them. At the same time, the possibility of obtaining credits from tokens is not provided, as was implemented by MOSS in the case of MCO2.
Two-Way Bridge (Custodial)
The tokenizer locks the client’s carbon credits as custodial holdings and issues carbon tokens in return. A similar system was implemented by Flowcarbon, which issued the Goddess Nature Token and by Toucan Protocol with a CHAR.
This is called a two-way bridge because it allows converting a carbon token back to a traditional carbon credit through a reversal process. This requires the issuing entity to destroy the digital representation (token) of the credit on the blockchain in exchange for returning the original, tradable carbon credit to the owner.
Retiring a carbon token is similar to the reversal process. After you retired carbon tokens on-chain, the tokenizer then retires the relevant carbon credit in the standard carbon registry. The token is removed from circulation and cannot be used again.
Issuing Naturally as Carbon Tokens
Some carbon standards have developed their own rules for directly issuing carbon credits on the blockchain as tokens, such as REGEN Network, Tero Carbon, Carbify and Coorest.
The Future of Tokenized Carbon Credits
Initially, major carbon standards like Verra, Gold Standard, ACR, and Climate Action Reserve opposed the tokenization of their carbon credits by third parties. However, they recognized the potential benefits of enhanced liquidity and initiated efforts to formulate their own tokenization rules (not yet finalized).
Through experience, Standards and carbon market participants have come to an understanding of the general principles for future universal tokenization principles:
- Reliability of standards: Only carbon credits issued in accordance with internationally recognized or national standards should be used for tokenization.
- Control by the Standard: Exclusive powers of the Standards to allow or prohibit the tokenization of carbon credits, their withdrawal from circulation. The Standard has the infrastructure for registering and tracking such carbon credits and their tokens.
- Tokens should only be issued for carbon credits in circulation.
- Consumer protection / Transparency / Know your customer (KYC) / Anti-money laundering (AML): Token issuers must undergo KYC and AML checks in accordance with the standards.
- Guarantees for the investor: In cases where tokenization does not imply a direct link to the underlying carbon asset, it is necessary to ensure that digital climate assets meet the goals, needs and risk tolerance of clients, meet their knowledge and experience. Especially relevant for Decentralized Autonomous Organizations
- Sustainability: Any digital technology used should be inclusive, open, sustainable, safe, and have a low carbon footprint.
- IT security: protection from cyber threats.
- Publicity of token accounting: Tokenized carbon credits must be issued and registered or stored on conditional deposit in a public registry associated with the Standard.
- Statements of carbon neutrality are permitted only after the retirement of tokens and related carbon credits in the registry.
Carbon Token Purchase
The most widespread carbon tokens are analyzed in this blog from the point of view of investment attractiveness. You can explore them in Carbon tokens category or choose a specific project from the table bellow.
Be prepared that you will not find ready-made recipes for making money on carbon tokens available on the market. Perhaps such recipes just haven’t been created yet. At a minimum, you will be able to gather information to evaluate the carbon token that interests you and avoid financial losses on it.
Blockchain carbon credit | One-way bridge | Two-way bridge |
---|---|---|
Coorest | MCO2 Token | Goddess Nature Token |
Regen Registry | Nature Carbon Tonne | CORC token |
Tero Carbon | Base Carbon Tonne |