Startups want to use blockchain technology to improve the carbon-credit markets. Here's why big names in the climate industry are warming up to the idea.
- Startups including Toucan and Topl are building blockchain tools for issuing carbon credits.
- Blockchains, they have said, make the climate data behind the credits more transparent.
- After initial resistance, climate organizations such as Gold Standard are exploring the technology.
Carbon credits are supposed to be a straightforward way for companies to help bankroll projects that help preserve the environment in exchange for their own not-so-climate-friendly activity. In practice, though, carbon markets are far from transparent, and it's an open question whether the credits are effective at all.
Several companies, including Toucan, Return, Topl, and Open Forest Protocol, are now aiming to improve the transparency and reliability of carbon credits by coupling climate initiatives with blockchain technology. Lately, even some big, established names in the industry are beginning to explore the idea.
The need for greater transparency in carbon markets
Companies buy carbon credits to offset the amount of greenhouse-gas emissions their business activity generates. Those funds go toward environmental initiatives, including reforestation projects. As companies produce emissions, those projects, in theory, are supposed to reduce their impact.
But it's not clear if those projects do, in fact, meaningfully reduce carbon emissions. In January, The Guardian published an investigation that found 90% of the rainforest-carbon credits that Verra, one of the largest nonprofits in the industry, issued were worthless because the projects they were tied to did not meaningfully reduce carbon emissions. Verra has contested The Guardian's report, but Verra has also announced that it will introduce a new methodology for its carbon-credit standard.
Even before the results of that investigation, scientists and technologists in the climate industry had long bemoaned the challenges of bringing quality climate initiatives to voluntary-carbon markets. Some have cited the prohibitive costs for smaller, locally based initiatives to gain verification with an organization such as Verra or Gold Standard. Others have pointed to the need to establish more rigorous vetting standards, which they believe collaboration among various groups — including companies, nonprofits, and local residents — could best help accomplish.
"It's a fundamental issue in the space," Erin Murphy, the chief growth officer of Topl, which has developed a blockchain specifically designed for climate-related applications, said. "We want to see more competition, more scientific rigor in this space."
Before joining Topl, Murphy worked in development aid and fair-trade fashion, where she gained an interest in using technology to trace the provenance of materials and verify their green bona fides.
The potential benefits of credits on the blockchain
That's where blockchain technology comes in, Murphy and other proponents said. Crypto, of course, has faced an onslaught of criticism following the failure of companies including FTX, BlockFi, and Celsius. But some in the climate industry believe blockchain technology itself — outside of speculation on particular currencies — can provide greater transparency to the carbon-credit markets by bringing together various groups to evaluate a project's merits, incentivizing their participation, and clearly laying out the criteria used to generate a particular credit.
The blockchain-based system, they said, can also guard against the same credit being issued to more than one company — an issue known as double-counting. And as several blockchains — most notably ethereum — have sought to reduce their energy consumption, the technology has become more palatable to those conscious of their carbon footprints.
Aureus Earth, which is developing financial tools to encourage reduced carbon emissions in the construction and real-estate industries, turned to blockchain technology to boost its data-collection process' rigor, Salmeron Barnes, the company's cofounder and managing director, told Insider.
"The decentralized verification capability, and the promise of new low-emissions blockchain offerings, are what attracted AE to create a blockchain-based registry," he wrote in an email.
After initial resistance, the climate industry is opening up to blockchain
To be sure, early attempts to move carbon credits onto the blockchain have faced some speed bumps.
When Toucan, in late 2021 and early 2022, first began moving existing carbon credits from Verra onto the blockchain, the process resulted in a flood of older — often low-quality — credits on its registry. In response, Verra banned such credit conversions last May. John Hoopes, a cofounder of Toucan, told Insider the company intended its initial conversions of credits onto the blockchain to be a small pilot, but received much more interest than anticipated.
Despite the flaws of that initial attempt, it showed ample market demand for blockchain-based carbon credits, Hoopes said.
Other established organizations are beginning to take notice of the technology's different use cases. In September, the United Nations Development Programme placed Topl in its Digital X catalog of digital tools to address issues including the climate crisis, gender inequity, and global-health disparities.
And after early resistance, even large, standard-setting organizations such as Verra and Gold Standard have shown willingness to explore the technology. Verra completed a consultation on blockchain technology in January and plans to finalize its approach "in the near future," a spokesperson told Insider.
Meanwhile, Gold Standard is working with several startups to develop a potential set of standards for blockchain-enabled credits. A spokesperson said that the company hasn't made a final decision on whether to enable the use of blockchain but is "looking carefully at how uses of the technology can be enabled to realize the benefits it can offer."
Hoopes, whose startup is among those invited to work with Gold Standard on its blockchain pilot, is optimistic.
"Getting that first authorized credit tokenized is going to be a real milestone," he said. "Once we have a framework established, then we're going to be able to go nuts on building out all these use cases and proving that blockchain-based carbon registries are better than the alternative."
In case you missed it, watch a replay of Insider's One Planet virtual event with activist and artist Elijah McKenzie-Jackson.
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