In this article, we will delve into the concept of carbon tokens, exploring what they are, how they are created, and their purpose in the realm of carbon markets and environmental conservation.
Within voluntary carbon markets, carbon credits vary widely depending on the type of climate project they originate from. Informally, stakeholders categorize credits based on the processes involved:
- Nature-based projects, including afforestation, reforestation, and regenerative agriculture.
- Technological projects, such as renewable energy and energy efficiency initiatives.
Carbon credits are also classified based on the results of climate projects:
- Avoidance of greenhouse gas emissions.
- Reduction of greenhouse gas emissions.
- Removal of greenhouse gas emissions.
Voluntary climate projects typically provide social and ecological benefits in addition to their climate-friendly effects.
Brokers and exchanges typically facilitate transactions between sellers and buyers, earning significant commissions due to the large scale of carbon credit deals. Additionally, fees are paid to the registries of carbon credits for each transaction.
Over time, sellers have sought to bypass intermediaries and directly access buyers through online market mechanisms, aiming to reduce transaction costs. Sellers also aim to cater to buyers interested in making smaller purchases, which was previously challenging due to intermediary preferences for larger deals.
The creation of digital representations of carbon credits for listing on online marketplaces or direct transfer between wallets has emerged as a solution to these challenges.
In the early stages of tokenization, a one-way bridge approach was commonly employed. This involved retiring carbon credits from standards like the Verified Carbon Standard before creating their representation as carbon tokens. One example of this approach is the early version of the Toucan Protocol. Tokens such as MCO2, BCT, and NCT were created using this method.
However, the primary drawback of the one-way bridge was that carbon tokens circulated in the market after the corresponding carbon credits had been retired, essentially rendering their environmental value already utilized. Consequently, buyers were unable to obtain a carbon credit from a carbon token. Moreover, leading carbon standards did not include provisions for tokenization in their rules.
After some time, major carbon standards like Verra, Gold Standard, ACR, and Climate Action Reserve directly prohibited this activity. At the same time they also recognized the potential benefits of enhancing liquidity for carbon credits through tokenization and even initiated efforts to formulate their own rules for the tokenization process, which have not been finalized yet.
Then, the concept of a two-way bridge emerged, where carbon credits are stored in a guarantee account before the issuance of carbon tokens, allowing for the reversal of tokens back into credits. Flowcarbon’s Goodess token exemplifies this two-way bridge mechanism. However, due to the lack of rules from major standards, such initiatives remain on hold.
Meanwhile, some smaller carbon programs have developed their own rules for directly issuing carbon tokens as a result of climate projects, without the need for carbon credits. Some of these programs offer options for holding and reselling carbon tokens, such as REGEN Network and COOREST, while others, like Nori, only allow for the immediate retirement of carbon tokens for compensatory purposes upon purchase.
The most widespread initiatives of carbon tokenization are analyzed in this blog from the point of view of investment attractiveness. You can check them via this link.