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Monday, 18 April 2022

Crypto-based carbon offsetting: Don’t believe the hype

Crypto carbon credits: What are they, and can they do any good? Eagle-eyed readers will remember that we yesterday noted a Financial Times piece on the boom in carbon-linked crypto tokens — and the doubts harbored by analysts on whether they do what they say on the tin. Which got us thinking: How exactly do these things work, and is there an environmental and financial case to be made for them?

A refresher on carbon credits: Your bog-standard carbon credit is a tradeable certificate that represents a certain amount of carbon emitted into the atmosphere. It can work in several ways, but the essential idea is to put a price on carbon, setting up a market where firms are rewarded for cutting their emissions and have to pay if they want to bump them up.

Crypto-based carbon credit schemes look to bring that market to the blockchain. They tap into both the retail craze for digital tokens and big firms’ desire to offset their polluting, in hopes of both raising the price of carbon and directing funds to emissions-reduction projects. Crypto carbon schemes fall under the broad umbrella of regenerative finance (ReFi), which you can think of as the social justice movement’s answer to decentralized finance (DeFi).

Carbon offsetting is plagued by its own issues. Add in the murky world of crypto, and we may be heading nowhere good: Plain old carbon credits already face their fair share of criticism, with research suggesting that they are typically less ecologically sound than advertised and face widespread issues with double counting and fraud. Crypto trading has faced a similar set of issues, chief among them a lack of regulation that has lent itself to fraud.

Unless one can fix the other: Some crypto carbon advocates insist that the transparency built into the blockchain can clean up the carbon market, since the price of credits in every transaction is public (though not who bought them), and carbon could in theory be “locked on the blockchain” forever.

Some crypto carbon offsetting schemes look iffy from the off: Canadian carbon-capture firm Delta CleanTech was swiftly accused of greenwashing after it last month announced a blockchain carbon credit initiative that it claimed was in partnership with First Nations communities. The scheme would see Fortune 500 companies buy credits from indigineous Canadian communities — but the company was able to give no specifics on how that would benefit the environment or the communities it claimed to serve.

Others start with the best of intentions… Within months of its launch, crypto platform Toucan accounted for more than a quarter of all purchases of carbon credits verified by Verra, the world’s largest verifier of carbon offsets, Bloomberg reports. The aim of Toucan’s developers was to allow retail investors to “sweep the floor”: in other words, buy up low-quality carbon credits issued for projects that weren’t really helping reduce emissions, thereby driving up market prices and leaving only impactful credits available for big polluters to buy.

…But then quickly backfire: Analysts say Toucan is exacerbating the issue it set out to solve. Rather than getting rid of cheap credits, its users are driving demand for them. The fresh demand is incentivizing bad actors to sell more useless tokens — particularly for so-called “zombie” projects that are decades old, don’t need funds, and don’t make an impact.

Green NFTs are also facing accountability issues: UK-based initiative Save Planet Earth has sold over 1k limited edition carbon credit NFTs at an average price of USD 1.8k — with one token going for USD 70k. The firm hopes to channel crypto enthusiasm to plant over 1 bn trees in Pakistan, Sri Lanka and the Maldives that could then be turned into carbon credits. But there’s no evidence the company has secured any agreements with governments and landowners in the countries where it hopes to plant, a Climate Home investigation found.

Cleaning up this messy market will take some serious regulation: For crypto carbon trading to have any significant positive impact, the market needs standardization and oversight. The good news is that both the carbon trade and the crypto world are nascent sectors with promising signs of regulation in the pipeline. As central banks move to issue their own digital currencies, and governments seek to create a framework to fairly price and trade carbon assets, crypto carbon credits could develop into a useful tool of the green economy. Until then, though, it’s the Wild West out there.

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