⏩ COP27: Accelerating tokenized carbon markets?
Prospects for ReFi and tokenisation of carbon markets after COP27
This article was originally published on ECOTA (European Carbon Offset Token Association) medium page.
The voluntary carbon market (VCM) is going through a regeneration this year. From introducing tokenized carbon credits to the public debates it triggered around using blockchain in carbon markets. The genie is out of the bottle, and tokenized carbon credits seem here to stay. COP27 in Sharm El Sheikh, Egypt, might have been the catalyst. The article discusses a few important outcomes of COP27 affecting the VCM and the use of blockchain in carbon markets.
At COP26 last year, nation-states signed Article 6 of the Paris agreement, which includes the transfer of emission reduction between countries. For some countries, it is a way to reach their emission reduction targets, also known as Nationally Determined Contribution (NDC).
When implemented, the scheme could act as a catalyst for project host countries to finance climate projects while paving the way for international climate collaboration. However, the scheme’s rules, expected to be published at this year’s COP27, may only be finalized in the coming years. A supervisory body was created to follow through on this until early next year.
The most significant achievement of COP27 is the loss and damage fund. The fund is intended for developing countries to mitigate the impact of climate change, such as more severe droughts, floods, and other disasters.
One expert from the Climate Crisis Advisory Group argued that the fund is an opportunity for an innovative funding source to open up the funnel of financiers and donors. The fund is expected to invest between US$150-US$300 billion annually by 2030 in climate adaptation and resilience projects. More details of who should pay for the fund and the distribution of resources will be discussed at the next year’s COP.
Another development worth mentioning from this year’s conference is the launch of the African Carbon market, which intends to spur the growth of carbon credit production while creating green jobs in Africa.
Overall, these are great news for the VCM. A new wave of investments and resources will go to the market, creating a positive network effect. The big question is, how can we ensure these funds significantly affect climate mitigation, and how will the tokenization of carbon credits fit into the picture?
Source: COP27 official twitter
🪙 What’s new? Tokenization of the carbon market
Let’s start first with the basics: tokenizing carbon credits means bringing them onto the blockchain, so it is stored in a decentralized ledger that is open and transparent. Digital tokens in the form of NFTs (Non-fungible tokens) are minted as the digital twins of traditional carbon credits.
At this year’s COP, the use of blockchain and decentralized ledger technology for carbon credits and other natural assets was seriously discussed in various panels. Some of the major announcements and developments on the use of blockchain and emerging technologies in carbon markets include:
Climate Chain Coalition, a network of organizations working on digital solutions for climate action, released a report on blockchain and emerging technologies at COP 27.
IFC hosted a panel on how tokenized carbons credits are catalyzing the voluntary carbon market. IFC recently launched an investment platform to raise private capital to source, tokenize, and sell high-quality, verified carbon credits. The platform is partnering with Cultivo, Aspiration, and Chia network.
Launching of the Ethereum Climate Platform, a cross-partnership between big tech companies (e.g. Microsoft), Web3 projects (e.g. Celo, Consensys), and the Gold Standard carbon registry, to fund innovative climate projects and offset the emissions of the Ethereum network before the merge.
Various side events hosted by leading Web3 projects such as Flowcarbon (on-chain carbon credits provider), HBAR Foundation, Climate Coin, Filecoin, and many more.
Another interesting reflection of COP27 is that tokenizing carbon credits may just be a starting point, as the idea of tokenizing other nature-based assets was also discussed in COP27. Michael Sheren, former Bank of England advisor and G20 co-chairman, stated, “We are considering putting prices on water, trees, and biodiversity. How do we start tokenizing? How do we start building systems that create not only value but transfer that value around the world?”
Source: IFC Youtube channel: COP27 | Catalyzing the carbon credit market
✨ 2023 outlook: Regeneration of the carbon market
2022 seems like the inception of a broader trend called ReFi (regenerative finance). ReFi can be described as a movement that aims to reorient economic growth in line with environmental benefits. Money is recognized as a tool to solve misaligned incentives while addressing systemic challenges.
While Regen Network Development is one of the first and foremost initiatives behind ReFi, Toucan Protocol and KlimaDAO brought momentum to the market. The pooling of carbon credits allows for the generation of fungible assets, with web3 opening up new opportunities to create demand for carbon credits, not only for the use case retirement but also as an asset.
2023 could be an even more exciting year, with more projects emerging to revive the carbon market, both on the demand and supply side. The coming year will see increasing private and public monies pouring into carbon markets. Regarding innovation, we will also see much more applications of blockchain and tokenomics for solving the climate problem. Here are some of the things to look out for next year:
Climate funding: Other than the loss and damage fund from COP27, there are much more things happening in climate financing. Switzerland and Ghana signed the first Internationally Transferred Mitigation Outcome (ITMO) under Paris Agreement article 6.2. With this, sustainable rice farming in Ghana will help Switzerland lower its national emissions while giving Ghanaian farmers an extra revenue stream. From the G20, it was agreed that Indonesia would receive 20 Billion dollars to curb coal and move towards cleaner energy.
Carbon registry: Earlier this year, Verra, one of the largest carbon registries, suspended the tokenization of retired carbon credits. It is still in the process to review the tokenization of carbon credits in a public consultation, focusing on Know-Your-Customer (KYC) aspects. Another major registry, Gold Standard, is currently also undertaking a public consultation. The results and decisions taken by these registries will hugely impact the adoption of blockchain in the carbon market and shape the future of carbon markets.
ReFi projects: Tokenized carbon is becoming a base layer for entrepreneurs to build on top of it and create impactful solutions such as NFT collections, carbon as collateral, DAOs, staking (lock/ deposit), and many more. In 2023, we might see more creative use cases of tokenized carbon and other natural assets.
Source: Coincentral
🗒️ Conclusion
We are at an exciting time with climate tech developments meeting blockchain technology to solve systemic challenges. Overall, COP27 sends some important signals, generally open for discussing the adoption of blockchain in carbon markets. However, some obstacles still need to be removed for the VCM to scale. With the main rules of Article 6 to be agreed upon in the forthcoming COP, the emerging ReFi landscape will have more time to mature, potentially leading to a greater convergence to be discussed under Article 6 in the coming years.
With the right alignment of all stakeholders, the right incentives, and the right technologies, we can create a more sustainable future with more transparency and efficiency in the carbon markets. This will help drive Climate Action commitments and support the development of a net-zero economy.
At ECOTA, we believe that collaboration between countries, companies, and investors to adopt promising technology such as blockchain is key to bringing carbon projects to the next level. If you want to learn about the tokenization of carbon credits, follow us on Linked-In and join our subsequent panel discussion “Carbon markets after COP27: Emerging, Growing and Maturing?” on the 19th of December this month. Get your free ticket now by signing up here. Together with experts from the ECOTA, we will elaborate on the main developments of the VCM this year, outcomes of COP27, and any hurdles to scale carbon markets. In this context, our panelists will also discuss potential trends and carbon market developments in 2023.
About ECOTA
The European Carbon Offset Tokenization Association (ECOTA) is a think tank that aims to overcome challenges in the field of technological enabled decarbonization to find token-based solutions for a faster route to a net-zero Europe. Check out our page here.
Thanks for reading this article and enjoy the weather ☀️.
Superb article on tokenisation of carbon.