The Carbon Market and NFTs Remain Some of the Least Well Understood Concepts in Business; Now Innovators are Trying to Combine the Two

Web3 promises much in terms of innovation and accountability, but with regulation failing to keep up with cryptocurrency and NFT practices, it may be some time before tokenised carbon offsets play their role in the pursuit of net zero.

Published

September 7, 2022

A storied past for Web3 concepts’ green credentials makes its presence on the carbon offset barricades a surprise

In contrast to widely used traditional money, Cryptocurrencies are digital and are not printed on paper, made of plastic, or even metal. Because they are produced using powerful computers all around the world, cryptocurrency, whilst virtual, consumes a lot of electricity. High-powered computers compete against one another in a process known as "mining" for bitcoins, an energy-intensive process that frequently uses fossil fuels, mainly coal, which generates huge greenhouse gas emissions. According to estimates for 2021 by the University of Cambridge & the International Energy Agency, the "mining" of bitcoin, a popular cryptocurrency, consumed almost the same amount of energy each year as the Netherlands did in 2019. Dr Pete Howsen, a senior lecturer at Northumbria University, said of Ethereum (another cryptocurrency), "Ethereum uses more energy than the Netherlands. Over 100 TWh per year. The blockchain has a carbon footprint larger than Singapore’s, around 50-60 million tonnes of CO2 per year, nearly twice as polluting as Europe’s biggest coal-fired power plant (Belcatow, Poland)".[ii] The carbon intensive nature of cryptocurrency is a source of widespread criticism; many suggest that those engaged in the technology should purchase carbon offsets to counteract their climate impact. It would seem these calls were heeded as cryptocurrency platforms were up there with airlines, oil companies and carmakers as the largest procurers of offsets in 2021[iii].

Source: Unsplash

The call for offsets, however, is not without issue itself. The Tony Blair Institute for Global Change outlined five themes for issues facing the field of carbon offsets:

Limited transparency- Pricing is ambiguous; occasionally, offsets are double-counted or sold twice.
Flawed accounting- For instance, it is frequently impossible to validate counterfactual baselines used to gauge future emission reductions.
Human rights concerns- Indigenous people have been forcibly ejected as a result of several forest conservation operations.
Lack of a standard framework- This is necessary to distinguish between offsets of high quality and those of lower quality. For instance, there is a huge difference between a less significant programme that stops tree-felling in a distant rural area of Malawi and permanent carbon removal achieved by high-risk investment in direct air capture (DAC).
Lack of regulation in the global voluntary offsets market- Due to the abundance of competing private registries on the market, the aforementioned problems are exacerbated.[iv]

Making cryptocurrency & NFTs work for the climate

A tech start-up and a British oil exploration business worked together on a scheme to permanently store unexplored fossil fuel deposits in Greenland last year. The plan was straightforward: Greenland Gas and Oil, an energy corporation, would refrain from extracting oil from a region of the east coast where it held exploration permits. Through a collaboration with the digital start-up Carbonbase, which focuses on mitigating carbon emissions, it would instead make money by keeping the oil in the ground.[v] The cooperation sought to market NFTs (non-fungible tokens), which are digital collectables accompanied by ownership certificates and related to the uncharted territory. The oil would remain underground, and part of the proceeds would be utilised to reimburse the energy firm. However, after months of talks, the collaboration encountered issues. Carbonbase and Greenland Gas and Oil disagreed with the joint venture's organisational details. Additionally, Carbonbase learned that Greenland had never effectively produced any oil, which they claimed undercut the entire premise. According to Max Song, creator of Carbonbase, pursuing the initiative "would have wrecked our public reputation" and appeared to be "greenwashing.".[vi]

Whilst this example of an attempt to tokenise carbon offsets was a failure, that doesn’t mean there isn’t a place for NFTs and Cryptocurrency in the zero-carbon world. The specific quality of NFTs and cryptocurrency that is of interest, particularly for carbon offsets, is the technology which sits behind crypto: blockchain. IBM defines blockchain as ‘a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. An asset can be tangible (a house, car, cash, land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.’.[vii] Blockchain, as an auditable system of record, can promote standards and accountability, resulting in a cost-effective and sustainable manner of streamlining operations to track, measure, and manage environmental impact data across the Scope 1, 2, and 3 categories – crucial for firms to manage their value chain responsibly.[viii] A realistic short-term strategy is to elevate carbon offsetting methods by adding transparency, honesty, and real-time understanding to the equation as businesses work to implement comprehensive change to cut emissions.

Source: Bankrate

Several businesses, including Toucan, JustCarbon, and Moss.Earth have introduced carbon tokens. Corporate investors have taken notice of the tokens: SkyBridge Capital, an alternative investment company, run by Anthony Scaramucci, purchased over 40,000 of Moss.tokens Earth's last year in order to offset the "historic carbon footprint" of its bitcoin holdings.[ix] Co-founder of JustCarbon Adrian Rimmer claims that the traditional offset market is "terrible" and that the design of carbon tokens is simpler for non-expert buyers to understand. He claims, “It requires an unfeasibly large amount of knowledge.”[x]

Accountability can grow by using the blockchain, but the starting point has to be right

Cryptocurrency traders frequently seek older, less expensive offsets to acquire and tokenise in order to satisfy their desire for profit from the carbon offset market, capitalising on the two unregulated marketplaces of digital assets and carbon offsets. According to carbon experts, the "junk" credits that cryptocurrency traders recently purchased in bulk had previously been dormant for years.[xi] Concerns that these outdated credits, many of which were created before 2010, may not actually represent the carbon savings they promised had discouraged potential buyers.

Climate scientists are alarmed by this activity on a broader scale expressing that real progress in offsets is down to improving quality before even considering new methods of trading the offsets themselves. Carbon Market Watch's Gilles Dufrasne, a policy officer, expressed worry that the new approach would lead to the "laundering" of subpar offsets. He warned that users might overlook or be unaware that the underlying units were "junk" if they wished to use tokenised credits to offset their emissions.[xii] On the contrary, Tokenized credits, according to their proponents, are more consistent than standard offsets, which can be produced by a wide range of projects and are challenging to evaluate.

Some worry that the focus is on cryptocurrencies before the environment, citing the energy-intensive nature of some facets of the cryptocurrency world.

Eli Mitchell-Larson, a researcher at Oxford Net Zero, said: "All of this screams light on climate, heavy on blockchain." The complexity of the systems, he said, “may obfuscate the key question [for anyone buying offsets]: did you unequivocally remove or reduce a tonne of carbon?”[xiii]

Increased accountability and accessibility of carbon offsets is certainly possible by utilising blockchain and NFT-style carbon credits, but presently the regulation is not at a point where offset efficacy can be assured. This is the prevailing problem across the web3 world as policymakers race to catch up with the boom in cryptocurrencies and NFTs, but catch up they almost undoubtedly will, and when they do, it may change the world of carbon offsets.