The crypto industry is causing a stir in the carbon markets.
In the past year or so, millions of carbon offset credits were tied to newly minted cryptocurrency tokens, resulting in their removal from circulation. The new, decentralized carbon market has been expanding at a remarkable speed.
The rise of the crypto carbon market has generated opportunities within the wider crypto market. Many traders take advantage of the impact of the crypto industry on carbon trading and speculate on the price movements in the crypto market.
To satisfy the increasing demand for crypto trading, multi-asset brokers such as Exness have not hesitated to expand their crypto product range. Exness’ growing crypto offerings currently consist of nearly 30 crypto products, including the popular Bitcoin and the up-and-coming Decentraland, Cardano and Tezos.
Established in the 1990s, the carbon market allows businesses to offset their greenhouse gas emissions by buying carbon credits linked to conservation projects. Carbon credits enable companies to potentially go over their emissions limit while still contributing to environmental protection.
For instance, when a mining firm purchases a carbon credit from a forest owner committed to deferring a harvest with the earnings, it can produce more emissions than its set limit allows.
Nevertheless, now that it has been nearly thirty years since the inception of carbon trading, many are questioning the effectiveness of the concept.
The carbon market is still largely unregulated, and studies have suggested that many projects tied to carbon credits have hardly benefited the environment.
Since there is a lack of transparency and the calculation of carbon credits is systematically flawed, miscalculations of greenhouse gas emissions and emissions saved are commonplace. Over-crediting has become a prominent issue.
Double counting is also a concerning problem. It is not uncommon for two parties, for example, the company offsetting the emissions and the host country of the associated green projects, to claim the same carbon credits. Double counting defeats the purpose of having a carbon market and disincentivizes governments to engage in long-term climate policies.
Crypto advocates believe that the blockchain is the solution to the flaws of the conventional carbon market. Their theory is that tokenization can enhance transparency within the unregulated carbon market and encourage organizations to adopt environmentally-friendly methods to do business.
To kickstart the tokenization process, existing carbon credits in the traditional market were sold and migrated onto the blockchain. The owners of these credits then received a token, which was tradable on cryptocurrency exchanges.
Toucan is one of the leading Defi firms contributing to the tokenization of carbon credits. The digital tokens they offer are called Base Carbon Tonne (BCT). The company argued that BCT tokens could construct a transparent carbon trading platform consisting of real-time pricing data and public transaction history, preventing issues like over-crediting and double counting.
As of the beginning of 2022, BCT tokens have been linked with more than 17 million carbon credits, representing a total value of over $90 million on crypto exchanges.
The tokenization of carbon credits gives crypto traders instant access to the carbon market without the need to hold an account in the underlying carbon credit program registry. It can potentially open up the carbon credit consumer market.
Yet, in order for the crypto carbon market to become a credible part of the mainstream carbon market, regulations must be put in place to guarantee that the qualities of tokenised carbon credits are identical to those of the underlying carbon credits.