The nexus of voluntary carbon markets & blockchain: what you need to know

Increasing interest in effective global climate action in recent years has brought the voluntary carbon market to the fore. At its base, the voluntary carbon market is a mechanism to try and bring negative externalities - namely, the release of carbon emissions into the atmosphere - into the global market.

The voluntary carbon market works by allowing organizations that have verifiably avoided or removed carbon emissions to then sell those carbon credits - each representing one metric tonne of carbon - to organizations that have emitted carbon. This mechanism incentivizes carbon reduction or removal (often taking place in the Global South) by making it a profitable endeavor, while allowing companies (often in the Global North) to compensate for - or offset - their carbon impact.

But with all the new attention on the carbon market space, many of its challenges have come to light. Specifically, bottlenecks include verification taking too long, market fragmentation, lack of standardization, financing barriers, intermediaries taking a lot of value, limited availability of quality supply, and opaque pricing information.

To solve some of these problems, one unlikely group has begun to step forward: blockchain entrepreneurs.

Several companies are exploring the use of blockchain technology in the voluntary carbon market, including exchanges, marketplaces, measurement and verification providers, and more.

These companies have different approaches to using blockchain technology: some focus on creating blockchain-based registries for carbon credits, others create blockchain-based marketplaces for buying and selling carbon credits, and others still tackle decentralized data collection methods for the monitoring, verification and reporting that happens before a carbon credit can be issued.

Yet blockchain technology's application in the voluntary carbon market is still a subject of debate. While many see blockchain as a powerful tool that can address some of the voluntary carbon market’s most pressing challenges, others argue that blockchain technology is a solution looking for a problem in the voluntary carbon market.

Critics dismiss blockchain technology as a scam, conflating it with cryptocurrency. However, the two are not synonymous, and blockchain technology has various applications beyond cryptocurrency. Decentralization creates security, making it difficult for hackers to alter a chain, and the more people on a blockchain network, the more secure it is.

Another common myth is that blockchain technology consumes a lot of electricity and has a negative environmental impact. While this is true for some blockchain designs that use the Proof-of-Work consensus mechanism, it does not apply to all blockchain designs. The Proof-of-Stake consensus mechanism consumes much less energy.

But the reality is that well-designed blockchain solutions can help the voluntary carbon market address its challenges by enhancing transparency, traceability, and accountability, reducing transaction costs and risks, and building trust between buyers and sellers. Blockchain-based solutions can also help ensure the integrity of carbon credits using immutable and transparent ledgers, decentralized verification, and smart contracts.

Increasingly, even participants in the legacy carbon markets are beginning to see the benefits of blockchain technology for the industry. For example, Gold Standard, the second largest carbon issuer in the world, recently announced steps to move toward allowing its carbon credits to be digitalized on the blockchain.

In sum, the potential for blockchain technology to enhance the efficiency, transparency, and trustworthiness of the voluntary carbon market is significant. It is crucial for stakeholders to collaborate in leveraging this potential to create a more sustainable carbon market ecosystem - the carbon market of the future.

illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

Photo by Pierre Borthiry - Peiobty on Unsplash​