Madrid, 10th of November 2022. Achieving a world with zero emissions by 2050 in which citizens also participate in climate action is causing various initiatives to turn to blockchain technology (the basis of cryptocurrencies) to buy carbon credits, put them “on chain” and then sell them under the promise of greater transparency and traceability to achieve the desired climate neutrality. But at what price?

Global Factor, a group specialised in climate solutions and voluntary carbon markets, has presented its new report “Blockchain, carbon cryptocurrencies and climate change”, in which it analyses different initiatives founded with the aim of offering easy access to offsetting emissions at an international level, such as FlowCarbon, Toucan, Moss, Climate Trade, JustCarbon and AirCarbon, among others.

These initiatives are based on carbon credits that have already been issued by an official standard (Verra, Gold Standard, etc.), which put them “on chain” and generate, in most cases, fungible exchangeable tokens (carbon cryptocurrencies). These tokens are then traded on the various cryptocurrency exchange platforms (exchanges) like any other cryptocurrency, and can be sold, exchanged, or used to offset the carbon footprint.

These initiatives seek to decentralise voluntary carbon markets, currently restricted to a limited number of players, providing greater accessibility, transparency (prices and commissions), and traceability of transactions (purchase and use – offsetting – of credits). Furthermore, in addition to reducing transaction times and costs through automation, initiatives that create exchangeable carbon cryptocurrencies seek to provide greater liquidity to the carbon assets of the different standards.

How reliable are these new blockchain initiatives?

The report shows that, for the moment, they are far from being a reliable means of offsetting. Global Factor has contacted and purchased carbon credits from the different initiatives, which has allowed them to analyse the way they work and demonstrate certain doubts about their environmental legitimacy and the value they bring to the market.

Firstly, through these platforms, transparency is lost in terms of not knowing what you are buying, as the tokens are generic and you do not know where they come from, and it is not possible to choose the project you want to buy. Once the tokens have been purchased, if you want to use them to Offset, some initiatives give you the option of choosing the project, but in the vast majority of cases you must be satisfied with knowing some general characteristics (standard, typology, age). Therefore, unlike today’s official and standardised voluntary markets, the buyer does not get clarity on what he or she is buying and through which project he or she is offsetting his emissions.

More important, when offsetting you do not receive any kind of certification. At best, you receive a certificate from the initiative itself, which has nothing to do with the official certificate from the registry, with a link to the blockchain transaction (a code of about 70 characters) with no information other than the numbers and letters that appear. The risks are obvious.

As for traceability, although the information is public, the whole process is far from being transparent and traceable. The technology is difficult to understand, and the unintelligible code language generates more questions rather than resolving doubts. If the user cannot know if their payment has really been linked to an emission reduction project, it is also impossible to know what the climate impact of their contribution and donation has really been, or if it is simply a scam.

On the positive side, it has certainly succeeded in bringing more liquidity into the system. However, at the same time, junk credits have been tokenised that no longer had any value on the market, because nobody wanted them given their questionable environmental value, and yet they have found a second life thanks to these initiatives and the ignorance of the people who buy carbon cryptocurrencies, who do not know what they are buying. Anything goes.

For all these reasons, the application of blockchain in the field of voluntary carbon markets has been seriously questioned in recent months, so much so that the registries themselves, such as VERRA or the American Carbon Registry, have banned the tokenisation of credits withdrawn from their standards, confirming the risk of fraud, money laundering and greater price volatility.

A radical question is, in fact, “can there be a voluntary carbon credit market with environmental legitimacy and fully decentralised?” Kepa Solaun, CEO of Global Factor, answers: “Organisations that have offset their emissions so far do so through a series of standards because they consider that a certain “centrality” is necessary. In other words, there needs to be an authority or institution that analyses projects in detail, reviews calculations and controls the process of issuing and cancelling certificates. Otherwise, there is an increased risk to the quality of offsets because the underlying project is not assessed, or even if there is a project at all”, explains Solaun.

Due to its characteristics, blockchain technology has the potential to add value to voluntary carbon markets, mainly to make transactions more transparent and traceable, avoiding questions about double counting, etc. However, it is questionable whether it is necessary to resort to blockchain and the volatility of cryptocurrencies, or whether there may be other types of digital solutions that are simpler and more understandable to the general public. “Most of these initiatives have emerged in the last two years, and the road they have travelled has been full of mistakes, failures and scandals. One has to question whether this is the best way to address the areas of improvement in voluntary markets, and certainly to address the new shortcomings that these initiatives have created,” says Rocío Dañino, climate neutrality expert at Global Factor and co-author of the report.

It will soon become clear which path is predominant and whether these instruments can deliver on these aspirations. In the meantime, it is hard not to think that the crypto craze and the tendency to portray blockchain transactions as modern and futuristic explain much of the attraction of investors and part of the public for these clearing instruments. It remains to be seen whether this perception will recover from the collapse of cryptocurrencies this year and how this may affect the use of blockchain to offset emissions without undermining the environmental safeguards of the current system.

For more information, please do not hesitate to contact:

Maider Baranda

(+34) 94 424 05 63

Source: Global Factor

Global Factor is an international group with 18 years of experience, specialised in offering global, original, and innovative solutions in the fields of climate change adaptation and mitigation, carbon footprint, sustainability, circular economy, renewable energies, climate neutrality and carbon markets. Global Factor has an interdisciplinary team with a presence in 8 countries and has participated in more than 2,000 projects for more than 700 public and private clients, international organisations and non-profit entities in 51 different countries.