Exploring the Intersection of Carbon Credits and NFTs
Saving the Planet One NFT at a Time: Investing in Carbon Credits
With the world facing immense threats from climate change, various measures have been in place to combat the problem. From individuals to corporations and nations, everyone is contributing to conserving the environment as much as possible.
Let us consider the case of industries and corporations — most of them utilize something known as carbon credits. These have been in use for over two decades, or precisely when the Kyoto Protocol went into effect. The Voluntary Carbon Market (VCM) formed has been through a lot ever since, and now it’s time for carbon credit NFTs to take a position. Let’s see how these can be used in a business context.
Table of Contents
— Carbon Credits: An Introduction — The Current State of NFTs — Carbon Credit NFTs: The Latest Entity to Combat Climate Change — The Working Mechanism — Carbon Credit NFT Marketplaces: An Underexplored Business Option — Benefits Offered by NFTs for Carbon Credits — Challenges Carbon Credit NFTs Pose and Possible Solutions — Major Carbon Credit NFT Marketplaces Right Now — What Does the Future HODL for these NFTs? — Final Thoughts: Are Carbon Credit NFTs a Go-to Business Option in 2023?
Carbon Credits: An Introduction
Carbon credits are tokens that form a mechanism to regulate the emission of carbon dioxide (CO2) and other greenhouse gases (GHG). These can be created by people who work on environmental conservation efforts and are sold to corporations across industries that emit these products. These credits come into play once a company reaches its emission limit for a particular duration.
Carbon credits help these companies to reduce their carbon footprints by gaining financial support for eco-conservation projects across the globe. These come with the option of secondary trading, too, as a company can sell the remaining credits to another for profit.
But, the carbon credits market has been voluntarily run ever since the Kyoto Protocol expired in 2005, and there have been cases of quality degradation, double counting, and other manipulations. Such events spoil the concept behind these credits, and that’s where Web3 technology can come into play, as we will see further in the blog. The below quote signifies how important carbon credits are to ensure optimal emissions and expenses by companies.
“ Carbon trading engages finance directors. It takes the issue of energy efficiency right to the top of the company.”
— Elliot Morley , Former Minister of State for Climate Change and the Environment of Government of the United Kingdom.
The below graph from Global Carbon Atlas shows the top nations generating CO2 emissions in metric tons as of 2021. The data can give enough insights into why carbon credits have an important place in fighting global climate change.
The Current State of NFTs
As we know, non-fungible tokens (NFTs) represent products on the blockchain ledger that cannot be modified by anyone. While these can be termed as descendants of cryptocurrencies (like Bitcoin and Ether), they have an impressive market of their own, whose cap is sitting at just over 765 billion dollars (according to Coinmarketcap.com) as of writing.
These tokens can support almost anything, including artwork, music, and even carbon credits — the subject of this blog. While people might be skeptical about an emerging innovation like NFTs, they have gained global recognition, as many enter this business space with the hope of making income and owning unique assets.
NFTs for utilities have taken off in 2023 as the Web3 community realized the hard truth of pumping projects with price speculation as their core goal during the crypto winter. Going by real-world use cases has been a trend that is emerging under the radar that is projected to become prevalent later this year.
Carbon Credit NFTs: The Latest Entity to Combat Climate Change
Carbon credit NFTs perform the same job as conventional carbon credits but with support from blockchain technology. These tokens contain information about the particular credits’ nature, their history of transactions, and ownership. A crucial piece of information included in such NFTs is how much CO2 emissions (CO2e) the conservation project behind the credit offsets.
The global voluntary carbon market can gain immensely using NFTs as they will increase the degree of transparency by streamlining the entire process using blockchains. Registration, credit issuance, market infrastructure, innovation, market participation, and credit demand are some essential elements when it comes to carbon credit NFTs.
The Working Mechanism
The process behind creating NFTs for carbon credits begins with one initiating a conservation project. It can be related to forest protection, afforestation, or perseverance of algae which all affect how much CO2 is converted into Oxygen.
After beginning the project, it is essential to get accredited by a VCM standards body like Verra or Gold Standard. They will ask for a project detail document (PDD) that outlines everything about the project, including the carbon offset estimate and long-term business plans.
The standards body checks the document extensively and utilizes external auditors called Validation and Verification Body (VVB). If the PDD passes the requirements of both bodies, a number of carbon credits are sanctioned to the project based on its profile.
The project gains funding from external sources based on the credits it has received from the standards body. The resources collected can be used to scale the conservation project up using various methods.
Once the project is ready to work for the world, the sanctioned credits are generated as carbon credit NFTs that will be registered on a blockchain. The underlying metadata of the tokens will contain all information about the project, pricing, and histories of transactions and ownership.
These NFTs are then listed on a carbon credits NFT marketplace for sale. Using exclusive platforms for the process can help streamline the primary market sales, while secondary sales can be left independent.
After an organization purchases these carbon credit NFTs, the underlying smart contract will record the change in ownership and the price for which the credits were sold.
The new owners can now use the credits to compensate for the CO2 and GHG emissions they create. While doing so, these NFTs are burned to ensure no double spending occurs. If not used, these credits can be sold in secondary markets.
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Carbon Credit NFT Marketplaces: An Underexplored Business Option
A carbon credit NFT marketplace is a platform where people can create and trade carbon credit NFTs. Most platforms have provisions to sell these NFTs primarily (from projects) and secondarily (among organizations) to encourage transparent and straightforward trading practices backed by blockchain technology.
The NFT marketplace for carbon credits is a relatively unexplored Web3 business model, as the VCM is not as prevalent as the gaming or art market. Nevertheless, entrepreneurs can explore the possibility of using this model to gain a spot in the market while it is still unnoticed. But, working as a comprehensive carbon credits NFT provider will be challenging as multiple intermediaries are involved, as we had seen in the earlier section.
Benefits Offered by NFTs for Carbon Credits
NFTs for carbon credits can open up a plethora of opportunities for the relatively unregulated voluntary carbon market that has been operating with quite a few self-established standards. Still, for now, the system’s Web3 version incorporates such standards to aid the transition smoothly. The below subtopics speak about the benefits carbon credit NFTs provide to the world.
✔ Efficient Operations
Carbon credit NFT trading platforms can ensure the efficient operation of the global carbon market by getting rid of intermediaries. Since these platforms are decentralized, trades will occur directly between sellers and buyers, both primarily and secondarily. While intermediaries might be crucial in educating organizations about the VCM, they often charge hefty fees and indulge in activities such as price inflation.
✔ Open Markets
Bringing NFTs to an under-regulated market like VCM speeds up how the market operates. Companies can now purchase carbon credits without lengthy registration and even retire them within minutes, which usually takes much longer.
✔ Enhanced Liquidity
The carbon market has always met with concerns relating to illiquidity due to the mostly-opaque nature of trading. With a niche NFT marketplace selling carbon credits, liquidity is enhanced, as everything about the process is open for verification to everyone.
✔ Discovering Prices
Discovering prices has been one of the pain points in the carbon market, as most trades occur over-the-counter (OTC). With an NFT marketplace, the price history of NFT carbon credits can be viewed, giving a better understanding of the market trend for companies and conservation projects.
✔ Eliminating Double Counts
As one of the huge concerns in the VCM, double counting is a situation where multiple organizational sustainability initiatives claim to have used the same credit. With NFTs, such claims can be easily spotted, as each transaction (including retirement/burn) is registered on the blockchain.
✔ Creating New Demand Sources
Carbon credit NFTs can be integrated into the decentralized finance (DeFi) ecosystem as collateral in exchange for cryptocurrencies. They could be utilized inside metaverse worlds and Web3 gaming applications, opening a variety of opportunities for Web3 carbon credits apart from being a real-world utility.
✔ Better Financing for Conservation Projects
Creating carbon credit NFTs is usually a lengthy process, and conservation projects usually have to spend 2 to 5 years only to gain recognition as a valid credit provider. Usually, projects get financed through pre-purchasing agreements, which tend to be uncertain for many reasons. Such concerns can be eliminated using NFTs, as all information gets recorded on the blockchain ledger.
✔ Fractionalizing Carbon Credits
Using NFTs for carbon credits can help projects and companies to split credits into units lesser than 1 ton of CO2e. Such smaller unit credits can benefit small-scale enterprises that do not emit as much CO2 as larger corporations. Fractionalizing these tokens also opens up an active economy hosted by carbon credit NFT marketplaces.
Challenges Carbon Credit NFTs Pose and Possible Solutions
Verification
The biggest challenge with carbon credit NFTs is verifying the legitimacy of the carbon offsets they represent. The process of verifying the legitimacy of the offset projects can be complicated, and there is a risk of double-counting or misrepresentation of the carbon credits.
To address this challenge, there needs to be a transparent and reliable verification process that includes rigorous auditing, third-party verification, and certification of carbon credits. One solution is to establish an industry-standard verification framework that ensures the credibility and transparency of carbon offset projects.
Additionality
Another challenge is ensuring that the carbon credits being purchased through NFTs represent actual emissions reductions that would not have occurred without the offset project. For example, a conservation project based on a forested area that isn’t under threat would not have any impact on reducing carbon emissions.
To address this challenge, NFT issuers need to ensure that the offset projects they purchase carbon credits from are additional, meaning that they would not have occurred without the carbon credit revenue. This can be achieved through strict eligibility criteria and regular monitoring of the project’s performance.
Scalability
The scalability of carbon credit NFTs is also a challenge. To achieve meaningful emissions reductions, a large number of carbon credits would need to be purchased through NFTs, which can be challenging to achieve.
To address this challenge, NFT issuers can collaborate with carbon offset project developers to identify and invest in projects that have the potential to scale quickly. They can also work with governments to create policies that incentivize the purchase of carbon credits through NFTs.
Complexity
The complexity of carbon offset projects and the carbon credit market can also be a barrier to the adoption of carbon credit NFTs.
To address this challenge, NFT issuers can educate consumers about the benefits of carbon credit NFTs and simplify the purchasing process through easy-to-use marketplace platforms and clear communication.
Major Carbon Credit NFT Marketplaces Right Now
KlimaDAO is a top carbon credit NFT trading platform that works in cooperation with the Verra standard. The platform purchases verified credits from the standard body and converts them into NFTs, which can then be purchased by corporations and individuals as a measure to manage their carbon footprint.
Moss is a Brazilian company that operates its own carbon credits NFT marketplace. It creates its own NFTs by buying credits from a standard body such as Verra. Its NFTs focus on conservation projects based in the Amazon Rainforest, and the company even has its own land parcels inside the forest, which have been sold as NFTs.
Nori is an NFT marketplace for carbon credits that connects small-scale farmers and carbon credit buyers (such as corporations). Its operations concentrate on removed soil carbon that companies can purchase to offset the CO2 emissions they create. The platform operates on Polygon, making it visible across the Web3 ecosystem.
What Does the Future HODL for These NFTs?
With quite a few ventures moving into the unchartered Web3 domain of carbon credit NFTs, it is important that one should analyze thoroughly before jumping to conclusions. As far as the future of this domain is concerned, there is a bright scope only if enough education is offered to prospective investors on the underlying technologies and operations.
As Web3 technology evolves and becomes more mainstream, the next-gen thought leaders will have a better understanding of NFTs and crypto tokens that can help them to incorporate NFTs for carbon credits. Also, climate change’s impact has already become visible in many parts of the world, and fighting it could be taken to another level when these tokens are used properly.
Final Thoughts: Are Carbon Credit NFTs a Go-to Business Option in 2023?
We have comprehensively seen carbon credit NFTs, an emerging sector that could help us to delay climate change’s impact, if not avoid it. Since it is a niche market, there are lots of mutual lessons to be learned by both corporations and Web3 professionals before they can come to a feasible pact. Erstwhile, carbon credit NFT marketplaces can help link distant sectors together while grossing huge profits.
If you’re someone looking to push the VCM to become better, you could consider building an NFT marketplace for carbon credits. 2023 has been the year where NFTs focus on real-world utility, and what has more impact in the real world than managing carbon footprint?
Carbon Credit NFTs: An Increasingly Popular Real-world Use Case that You Should Know About! was originally published in CryptoStars on Medium, where people are continuing the conversation by highlighting and responding to this story.