Are blockchain networks capable in fixing crypto carbon credits? To most people cryptocurrency is an apparition, especially among the conservation circles.
Cryptocurrencies impact the environment with a lot of carbon emissions but a few people within the crypto industry say that the blockchain technology itself can fix this issue.
This growing sect of crypto users claim that crypto by itself is the solution to the climate crisis.
They say that blockchain technology has the ability to lock carbon in it and prevent it from being emitted into the atmosphere.
One of the most effective ways in which this carbon emission goal can be achieved is by purchasing carbon credits.
These are certificates that represent the carbon dioxide that is prevented from being released in the atmosphere by conservation, removal, or in some other way.
Few people believe that this is one of the most realistic solutions to the climate issues of the planet but there are others who feel that this makes the situation even worse saying that it gives the polluters a free hand to release more carbon than they would have otherwise.
The issues surrounding crypto carbon credits can be resolved when companies vow to become carbon neutral, a few people believe.
However, whether or not blockchain technology can really fix crypto carbon credits is a matter of debate and therefore needs a much deeper understanding so that you can deduce for yourself how much it can be successful in its attempt.
This article will tell you whether it is just a feel-good moniker or is it really helpful in making this world a better place and continue to offer the benefits as it is.
Are Blockchain Networks Capable in Fixing Crypto Carbon Credits?
There is a growing number of people who believe that it is good that the new crypto projects are taking up carbon credits.
They believe that these on-chain carbon credits will add to the transparency and at the same time it will allow ease of access to the carbon credit market.
In the crypto circuit, everyone is aiming for higher profits and when they buy carbon credits the projects also increase the price of it.
However, the environmental scientists, carbon industry veterans, retail investors, and accountants have all found a way into the Regenerative Finance or ReFi movement of crypto.
Everyone involved in crypto is revealing a diverse view on how and to what extent they can leverage crypto to solve the significant climate crisis of today.
It is known to all that crypto consumes a lot of energy which impacts the environment.
It was always there but this specific aspect seems to have come into the limelight recently due to the growing concerns of the environmentalists.
Today, you will hardly find any news related to the cryptosphere that is not linked with the impacts of it on the atmosphere.
All of the headlines contain the same reference to the insane use of energy by crypto and the cost of mining major crypto coins such as Bitcoin and Ethereum.
Both these blockchain networks typically use the Proof of Work or PoW consensus mechanism which is exceptionally energy consuming.
This mechanism is required to keep the network secure via a large number of computers spread all over the world that compete with each other to solve a mathematical puzzle and validate a transaction before it is added to the chain.
This is a process called crypto mining wherein there can be only one winner per transaction who will be rewarded with a portion of the coin mined.
Crypto mining in particular consumes a lot of energy and therefore it is an appropriate aspect that will help you understand the issue with carbon emission and credits in a better way.
According to CBECI or the Cambridge Bitcoin Electricity Consumption Index, Bitcoin mining needs as much as 135 terawatt-hours of electricity every year.
This is more than the amount of electricity consumed by the gold mining industry or the entire country of Norway.
However, not all Bitcoin enthusiasts agree with this aspect.
They say that it is true that Bitcoin consumes a lot of energy but such simplistic comparisons can be extremely misleading.
This is because the mining sector now uses renewable sources which not only reduce operational cost but also lowers the impact of crypto on the environment.
Add to that, not all blockchain networks usually use the same amount of power as Bitcoin and Ethereum blockchain networks as of now.
Most of the other types of crypto coins use the Proof of Stake consensus mechanism or are in the process of moving into it.
The PoS consensus mechanism is much more energy efficient in comparison to the PoW consensus algorithm.
In fact, it can reduce the energy usage by about 99.95%.
The reputation of Bitcoin in particular is somewhat tarnished due to its high energy use and carbon emission.
It is mainly for this reason Elon Musk, the CEO of Tesla, has stopped accepting Bitcoin as a mode of payment.
The environmentalists are concerned about the use of fossil fuels which is why they criticize Bitcoin for using such a huge amount of energy for its PoW mining process. This is a valid point.
Amid the concern over the environmental impact of crypto mining, the concept of green mining has come up.
This is actually referred to the use of renewable energy for crypto mining.
This is in vogue now and there has even been a Bitcoin Mining Council formed by a group of key Bitcoin miners to promote the use of such energy by the crypto mining industry.
In fact, there are lots of crypto miners, individuals and mining firms, who are looking for a cheaper and alternative source of energy.
Add to that, almost every Bitcoin mining operation in the United States and Canada are also looking to offset carbon emissions due to mining.
Green mining has of late become a trend for Bitcoin mining which is in fact considered to be energy agnostic.
The miners looking for the most profitable arrangement often find that the renewable energy system is inefficient to meet their energy requirements.
This means that they need to find better ways to exploit the system to mine their coins smoothly and more profitably.
For that they must set up a system to extract and transfer the waste gas from an oil patch which would have been flared off otherwise.
Or, they have to strike a deal with a wind or solar firm so that they get the excess energy generated by these firms for cheap to meet their mining energy requirements.
Now, the question is, even after all these efforts is it really worth fixing carbon emissions and climate change?
Well, even if it is, it will surely take some time to happen, irrespective of the net carbon footprint of crypto.
It is required by the crypto users at large to understand the ability of blockchain technology to help fix the carbon credits and save the world from ecological danger.
In the meantime, there are some significant changes happening within the crypto circuit that are helping in reducing the impact of crypto on the environment and fixing carbon credits.
One such is the ReFi movement that is creating a new and eco-friendly space for crypto.
Also, as said earlier, Bitcoin miners from all over the world are looking for cheaper alternative energy sources that are renewable as well.
Such a move has also resulted in reducing the carbon footprint of crypto mining.
Carbon Accounting Challenges
Carbon emission of crypto creates all sorts of issues not only to the environment but also within.
Just as calculating the amount of carbon emission is difficult, accounting for the same is also quite challenging.
The crypto advocates say that the climate crisis due to crypto can be resolved by making carbon into an article of trade.
However, it should align with the interests of the planet as well as the corporate bank accounts.
Purchasing carbon credits and then converting them into a popular token the crypto investors can be marketed as a means to preserve the world.
However, it is required to be cautious while buying and accounting carbon because several research reports suggest that a lot of them may not be as green as they are supposed to be.
There are lots of incidents that are documented as fraud, creative accounting, and double-counting which leave a major part of carbon credits untrustworthy.
One way to play safe is to buy only verified carbon credits from the market by any established carbon credit registry rather than any startup or an enterprising entrepreneur.
Another significant challenge of carbon accounting is the difficulty in quantifying the exact amount of carbon dioxide a company keeps out of or emits into the atmosphere.
Add to that, there are also poor quality credits that are capable of harming the environment actively by allowing companies offsetting their emissions superficially but in fact emitting more of it.
Carbon Market Transparency and Decentralized Finance
If you consider it at a higher level, the support for on-chain carbon is pretty straightforward.
When a credit is bridged onto a blockchain protocol it will first have to be ‘retired’ from the parent registry.
This will prevent double counting it as an offset. Then an NFT is to be issued to hold the data related to the particular offset project represented by it.
This NFT can be sold in any open market, or depending on the features, it can also be divided into tokenized carbon.
These carbon-based tokens can be traded just like any other crypto coin is traded on any Decentralized Exchange or DEX.
Typically, when a credit is retired on-chain it is actually locked away in the blockchain address which no one can access. This resembles burning.
When a carbon market is moved onto a blockchain voluntarily and each credit is tied publicly to metadata after attesting to its origin and quality, it facilitates the users who want to offset the carbon emissions.
They are allowed to have access to a more transparent, favorably priced, and extremely liquid offset market.
As it is, any market that is open, fair, and transparent is more efficient.
As for the watch dogs, this will allow them to back track claims of carbon neutrality to the source directly.
The carbon market is also opening up to the broader DeFi or Decentralized Finance ecosystem. This has also helped the users significantly.
Ideally, it should be very easy to buy or sell carbon credits in the market as it is in the case of buying or selling stocks.
However, there is one significant challenge when you are dealing in a legacy carbon market.
It is that, in this market not all credits from different projects are interchangeable directly.
Not each carbon is the same because there are significant differences in the ways in which these are created. It can be a reduction-based project of a wind farm or an air-capture project.
Also, some projects may be more effective and capable of keeping out carbon from the atmosphere than some other types of projects.
All these differences will quite naturally affect the price of the credit.
Typically, the fragmentation of the carbon credit market has given rise to a legacy system.
This is a system in which companies and even most governments are required to buy credits in two different ways.
Either they can buy it directly from the project developers who they have a partnership with or through a complex broker agreement instead of from an open marketplace.
Even if the open marketplace is based on blockchain, the tokenized carbon that represents a particular project typically is difficult to trade.
If there is not a number of other tokenized carbon available in the market, it will be pretty hard, if not impossible, to find a buyer or seller of a particular carbon credit, as the case may be.
This means that, in plain and simple terms, the tokenized carbon credits lack liquidity in general.
When a variation of the standard tool of DeFi called the liquidity pool is used, liquidity is added to an illiquid carbon market.
By adding the tokenized carbon credits in a pool with similar types of projects the users can receive a new token for locking up their credit in the pool.
The good thing about this new token is that it represents a part of the entire pool of various projects instead of one particular offsetting project.
This makes it very easy for the user to trade such index-like fungible tokens.
The Black Hole
It is not worth creating a liquid carbon market infrastructure if the people are not convinced enough to hand over their carbon credits.
Therefore, it is required to establish the legitimacy of credits because when they make it to the chain they are already retired.
It is required to fund the carbon black hole so that the on-chain carbon ecosystem is injected by the much required CO2.
Apart from providing crypto carbon market liquidity it is also needed to be set up on the basic principle of carbon accounting which is – the higher the carbon price, the better it is the environment.
Here the logic behind this high price is pretty straightforward.
When the price of carbon is more, it will be costlier to offset its emission and therefore the companies and governments will be polluting less.
As a result of the costly carbon credits the people will have more motivation to start removal or emission reduction processes.
However, the price to be fixed for carbon cannot be easy because different climate economists suggest different rates for it.
For example, according to a poll result conducted on nearly 30 climate economists by Reuter, the average minimum price of a metric ton of carbon dioxide should be $100 if the goal of the Paris Agreement to reach net-zero emissions by 2050 is to be achieved.
On the other hand, the average price of carbon on a global scale according to the IMF or the International Monetary Fund should be as low as $3.
However, this price can be manipulated using game theory mechanics.
When the level is high, people should be incentivized so that they lock up more carbon in their treasuries in order to remove as much of it off the market as possible.
As a result, there will be fewer carbon credits in circulation which will automatically raise the overall price of carbon.
This is called the ‘liquidity engine’ strategy.
The good thing about this approach is that even if the treasury does not grow at a desired rate, it will still absorb a large amount of carbon credits.
Even if the price of carbon does not increase, it will at least be able to help the rookie crypto carbon ecosystem to attract tens of thousands of investors which will give it the much required liquidity.
However, such an objective of sucking up offsets into the carbon black hole may seem controversial and in that case inverse bonding may be very helpful if the community of the specific project approves an ascendancy proposal.
This feature will allow the treasury to theoretically sell back the credits to the market if the price of the token falls below a specific KLIMA token price falls below a specific threshold.
However, you should keep in mind that sometimes the black hole itself may become the biggest emanatory of carbon, especially when you accept low quality carbon.
The system will put them back automatically into the marketplace.
This will result in a decrease in the price of the credits which is in contradiction to the objective of the whole thing.
The quality of the carbon credits is also an important aspect to consider apart from the pricing of it or its anonymity.
There is no point in bridging huge amounts of carbon credits from projects that are created by using fraudulent methods in the first place.
There may be a lot of credit still sitting in the registry that may be completely bunk because everyone will know about it because it is locked in a distributed ledger and there will be no trader interested to deal with it.
Ideally, you should avoid anything that is ‘blocklisted.’ This will save you from tokenizing them in the future to no avail.
It is much better and more profitable to launch something that has a higher quality credit. It will be much easier to trade with them because the buyers or sellers will be more interested to have quality credits for more profit.
It is just like backing the currency you take out as a loan with collateral.
The higher and greater the value of the collateral, the safer will be the loan and higher will be the loan amount.
However, it is the forte of a professional expert of the carbon market to recognize the quality issues with carbon.
Still, it is an essential thing to do if you really want to have much, much wider acceptance criteria.
This will also leave you with lots of options when it is not possible for you to have adequate liquidity.
Trusting the Trustless
When you want to use the blockchain networks to fix crypto carbon credits you will need to find trust in the trustless, which the blockchain network really is.
For this you will need to face and overcome one significant challenge that is typically faced by a novel liquid market for carbon credits to compete successfully with the global carbon market.
It is determining the real quality of the carbon credits underlying. And, this is in no way a small feat to achieve.
For this you can follow the footsteps of some of the most successful investors who typically focus on shifting towards a few particular projects.
For this you will need to differentiate between a carbon offsets and a carbon credit in the first place.
A carbon credit corresponds to the right to give out a metric ton of carbon dioxide.
If you do not have any idea about how much carbon dioxide it is, be informed that it is the same amount of carbon dioxide emitted by any average car when it is driven from New York to Las Vegas.
In most cases, these carbon credits are a part of the cap-and-trade system.
This involves a limit or cap on the amount of carbon dioxide that is allowed to be emitted by a company as well as a market system in which the company can buy, sell or trade the credit.
Carbon offsets, on the other hand, refers to the same amount of carbon emission as carbon credits but a carbon offset typically is used for supporting directly toward the use of more justifiable energy much unlike carbon credits.
Carbon offsets are normally used by the customers when they are unable to trim down their carbon emissions.
This enables them to pay so that they can have an equal quantity of emission reduced someplace else.
A company, for example a heating oil company, may put forward a carbon offset program but the customers may not receive any sustainable energy or fuel directly.
They will still have to purchase fossil fuels and when they do so for a particular amount the company will then buy an equal number of carbon offsets from a program of sustainable energy.
Now, when you add carbon credits to the blockchain it may result in higher efficiency and will also improve on-chain transparency.
However, the success of carbon credits on-chain will depend on the improvements of the current off-chain systems that are used to produce and authenticate offset projects.
All these mean that the development cycles of the carbon projects must be improved and accelerated so that the carbon value chain is not screwed. This will need a proper infrastructure to deliver it at a large scale.
There is also a concept called meta-registry in the carbon-bridge ecosystem.
According to this idea anyone is allowed to include a carbon credit to a blockchain.
This innovative meta-registry approach would hypothetically lead to the creation of a novel class of offsetting projects.
This is opposed to the concept of getting the voluntary carbon credits by only a handful of establishment gatekeepers.
However, the current verification methods are too limited for that.
The meta-registry approach will guarantee credit quality and would also label credits with tags that can be issued only by any trusted entities on-chain who are also the auditing entities essentially.
The idea of meta-registry approach is pretty ambitious which reflects a great prospective vision but it is surely not an easy thing to accomplish. Guaranteeing quality of carbon credits is much more difficult than people think it to be.
This is because it cannot be done by simply reading a quality-meter.
There are lots of factors to take into account such as:
- The setting up process of the project
- Whether or not the stakeholders were engaged
- Whether or not any proper safeguard followed and more.
It is needless to say that a meta-registry is more effective and productive because it will make the best use of the collaborative profits of Web 3 which is the future decentralized internet.
No doubt there are a few specific issues faced that are pretty difficult to solve with blockchain technology.
One such issue is that carbon credits always need trust in someone, such as the novel group of crypto-native verifiers, in order to change the carbon credit system.
Otherwise, it is very difficult for the meta-registry to be successful.
In other words, this eventually means that it has to rely on the similar type of defective verification methods that currently exists off-chain.
However, on-chain carbon should not be claimed, as some of the skeptics do, as a gift that can be used to exploit the environmental fears of the people and the world just to make personal profits.
It is nonetheless proved by several different projects that blockchain technology typically has a positive effect on the carbon market.
Over the years, this particular technology has proved its mettle so much that several industry players and sectors started to take it very seriously.
However, in spite of all its capabilities and uniqueness, the blockchain carbon market cannot solve the ever-growing climate crisis on its own.
This is because the restrictions of Regenerative Finance or ReFi come down to the limitations of the crypto space on the whole.
It is trying to fix the flaws in the climate accounting systems just as DeFi is trying to revamp the inefficient, and perhaps corrupt, traditional finance system.
However, there is one thing that is significantly common in both these specific types of movements which is that they harbinger the typically trustless nature of blockchain networks.
They typically take away the power of the handful of established gatekeepers and vest it on the users.
This not only enhances the transparency on the blockchain but also improves its accessibility for one and all.
Therefore, there is no denial of the fact that both these movements have been significantly successful.
Yet, both these systems have found confines rendering their visions on the whole without having to rely on the more traditional arrangements of centralization and trust.
A majority of the supporters of ReFi realize these limits as well as that of cryptocurrencies in protecting the climate from the effects of carbon emission.
However, they are still very optimistic about the outcome.
A carbon credit, which is often confused with carbon offsets, is a project that trims down emissions or removes carbon dioxide from the atmosphere.
This can be anything from installing solar and wind farms, preserving forests, capturing methane gas and more.
As a general rule, one carbon credit refers to one metric ton of carbon dioxide that is saved from being emitted into the atmosphere.
When you purchase one carbon credit you will be allowed to emit only that much guilt free, and sometimes tax free, carbon into the air.
You can buy carbon credits from a carbon marketplace, one that was created way back in 1997 with the Kyoto Protocol.
According to this protocol, several countries signed on an international treaty to commit to offset carbon emissions to reach the set limits by the United Nations Framework Convention on Climate Change or the UNFCCC.
After that, registration and sale of carbon credits have been regulated by several international organizations.
However, of late, a voluntary carbon market has come up in order to help the eco-conscious companies as well as the crypto mining groups in particular.
This marketplace allows them to offset carbon emissions further than what is necessary by any government.
Finally it is time to look at what renewable energy actually means and how exactly it relates to ‘green crypto mining.’
Over the years, there has been a lot of heated discussion on the impacts caused by crypto mining in particular to the world.
However, amid such debates the crypto miners continued to shake the opinion that Bitcoin is killing the planet.
Since extensive use of energy for crypto mining was and still is the main issue, the miners started to look for alternative and renewable energy that is cheap, available in abundance and will be able to meet their energy needs.
It is for a long time that the Bitcoin miners embraced renewable energy sources which have also proved to be a profitable move as well.
The hydropower resources in several countries such as British Columbia and Quebec have enticed the crypto miners for a long time.
There are even a few specific miners who have built their own infrastructure to tap in electricity.
Then there is Texas that has seen a lot of crypto miners flock here especially after China banned crypto mining in their country in September 2021.
The deregulated power grids of the state make it one of the most favored destinations for the crypto miners.
It is because they can get electricity comparatively at a much cheaper rate from the providers who are looking for such reliable customers who will buy power in huge amounts and at a consistent rate.
It makes it easier for them to sell off the surplus energy generated by their systems.
With such increased inclination of the crypto mining companies to use renewable energy, the impact of the environment due to carbon emission has significantly reduced.
And, there are others who are trying to offset carbon by locking them on the blockchain which is also helping a lot in saving the environment from the harms of carbon emission.
However, there are lots of miners who are still apprehensive about using renewable energy, which does have some specific limitations.
Unless these companies also join the bandwagon, achieving a zero-emission crypto space will not be possible any time soon.
It is good that the blockchain technology is playing its part significantly well to do away with the issues of carbon on the environment in the interim by locking them on-chain.
So, the blockchain networks are quite capable of fixing crypto carbon credits provided it is done in the right way.
There are lots of things to consider for it, and thanks to this article, you have come to know about all those important things that will lead you to success.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.