In this article, we delve into the concept of carbon credit tokens within the voluntary carbon market (VCM) and explore the associated liquidity challenges. The VCM allows the trade of carbon credits, each representing one ton of carbon dioxide equivalent (CO2e) that has been mitigated or prevented through climate projects following the regulations of voluntary carbon crediting systems like Verra or Gold Standard.
Climate projects vary widely, including renewable energy initiatives, forestry projects, methane capture initiatives, and energy efficiency programs. These projects contribute to the reduction of carbon emissions, fostering a sustainable and environmentally friendly ecosystem.
The Emergence of Carbon Tokens:
Traditionally, carbon credit brokers played a pivotal role in orchestrating large-scale transactions, acting as intermediaries to connect sellers with buyers. However, sellers often encountered difficulties due to the high commissions imposed by brokers, prompting a desire to operate independently. Sellers sought alternative avenues to access buyers (including making small purchases) directly through emerging marketplaces dedicated to carbon credit transactions.
Tokenization emerges as a transformative solution to the liquidity problem associated with carbon credits. Utilizing Distributed Ledger Technology (DLT), tokens enable seamless trading without brokers and the need for buyers to navigate complex carbon program registries, to pay fees.
Program-Specific Carbon Tokens Rules:
Because carbon programs have devised their own rules for implementing climate projects. some of them initially issue carbon credits in the form of tokens:
- REGEN Network and COOREST, offering holding and reselling options for carbon token buyers.
- Nori, in case of purchase adopting only immediate retirement for compensatory purposes.
Tokenization Challenges and Evolution:
Early attempts at tokenization featured one-way bridges. The early version of the Toucan Protocol is a good example of such an approach. Examples of tokens include MCO2, BCT, and NCT carbon tokens. The main drawback of the one-way bridge was limiting the buyer’s options to obtain a carbon credit from a carbon token.
Leading carbon standards initially prohibited such tokenization (Verra. Gold Standard. ACR. CAR), but the idea of a two-way bridge, allowing the conversion of carbon tokens back into carbon credits, gained traction. Flowcarbon’s Goodess token attempted to realize the two-way bridge mechanism. However, the lack of finalized rules from major standards has hindered its widespread adoption.
You can read more about tokenization in this article.
You can purchase carbon credit tokens directly from issuing programs, or choose from a large supply of tokenized credits via one-way bridge projects. While these tokens can be used for offsetting footprint, holding and reselling them lacks robust financial potential.
If you are looking for investment opportunities in the field of climate change, check out the page “Climate Investment through DeFi (ReFi)”. You can also visit the category “Climate Investments through DeFi (ReFi)” to get acquainted with a variety of investment opportunities in various projects and on various platforms.
More Information related to buying carbon credits through DeFi is available in the “Carbon Tokens” category