Exploring Carbon Credit Tokenization: A Guide to the Future of Climate Action

Currently Everyone is facing too many climate imbalance issues, such as rising global temperatures, violent weather conditions, and loss of biodiversity, more than before. This raises the need for carbon and other greenhouse gas reduction. To reduce carbon footprints, various businesses, governments, and individuals are finding more innovative ways. One such innovative way is the carbon credits, which arrived as a market-based solution.

Although it has emerged as a solution to reduce carbon emissions, it still faces major challenges such as a lack of transparency, slowness, difficulty in access, and high expense. To address these issues, carbon credit tokenization has been introduced with blockchain technology. The carbon credit market is now transparent, fast, efficient, and easy to access with carbon credit tokenization. In this blog, we’ll clearly explain what carbon credit tokenization is, how a business can launch a carbon credit tokenization platform, how it works, and why it is a smart investment option.

What is Carbon Credit?

A carbon credit is a certificate or permit representing one metric tonne of CO2 or an equivalent amount of other greenhouse gases eliminated or reduced from the atmosphere. These carbon credits can be produced through environmental activities such as carbon capture, methane emission reduction, or reforestation. By funding these green initiative projects, governments, organisations, and corporations can make money. The carbon credits are tradable assets that can be bought, sold, or retired in carbon markets.

Challenges in Traditional Carbon Credit Markets

Despite fighting climate change, the conventional carbon credit markets have faced major challenges, which have become a barrier to trustworthiness. There is no public record system to track carbon credits completely, making it difficult to find details such as where it originates, who owns it before, or whether it has been retired.

Due to poor record maintenance, the same carbon credit can be mistakenly or intentionally sold more than once, which questions the credibility. Also, the traditional process involves manual steps and paperwork, which takes a long time for a carbon credit to move through the system.

Understanding Carbon Credit Tokenization

Carbon credit tokenization is nothing but converting carbon credits into a digital token on a blockchain to make it secure, transparent, accessible, and digital. You can buy/sell these tokens just like cryptocurrency. You can even purchase the carbon credit tokens in fractions, which requires a small amount. The carbon credit token is retired and non-reusable when you use it to offset your carbon emissions. Therefore, no one can claim the same carbon credit twice, preventing double-counting and cheating.

Working of Carbon Credit Tokenization

Let’s dive into and explore how carbon credit tokenization works:

Carbon Credit Generation

Carbon credits are created through projects that reduce, avoid, or remove greenhouse gas (GHG) emissions from the atmosphere. These green initiative projects protect the earth by cutting off the CO2 from the atmosphere. The Verified Carbon Standard (VCS) or Gold Standards verifies these generated carbon credits. A single carbon credit represents one metric ton of real CO2 eliminated from the atmosphere.  

Tokenizing Carbon Credits

The created carbon credits are converted into carbon credit tokens with advanced tokenization. Each token is associated with a specific carbon credit and contains critical information such as the credit's details, the amount of CO2 cut, the verification history, and the token's issue date. Every token has a unique identity. 

Trading Carbon Credit Tokens

Now the tokenized carbon credits can be bought, sold, or traded across multiple blockchain networks. The traditional carbon credits can be purchased only by governments, organizations, and businesses. But now even individuals can invest in carbon credits, since we can buy fractions of tokenized carbon credits. The carbon credit tokenization just simplifies the process and makes it safer, more transparent, and fraud-proof.

Retiring Carbon Credit Tokens

Once the carbon credits are used to offset carbon emissions, they can be marked as retired, which we cannot do with the conventional carbon credits. Now, the retired carbon credit tokens cannot be exchanged or resold, which prevents double-counting and fraud and protects the integrity. 

Perks of Carbon Credits Tokenization

By implementing blockchain technology, tokenized carbon credits solve major challenges faced by conventional carbon credits. The major advantages of carbon credit tokenization are as follows:

Transparency

In traditional carbon credits, it is hard to trace the history and ownership of the credit. By tokenizing carbon credits, each token is recorded in a public, secure, and tamper-proof ledger. So anybody can view its origin and ownership, making it highly transparent.

Security

The carbon credit token is secured by a robust decentralized system that is hard to steal or manipulate. Also, all the tokens are linked with one another, making it impossible to duplicate.

Global Accessibility

Tokenizing carbon credit makes it easily accessible from anywhere in the world. Since traditional carbon credits require huge capital to invest, these are invested in only by governments, organizations, and big businesses. But with tokenized carbon credits, even startups and individuals across the world can invest, making it more accessible.

Efficiency

Traditional carbon credit trade processes include verification, documentation, intermediaries, and settlement time delays.  However, in carbon credit tokenization, smart contracts will automate these processes, increasing efficiency and removing the need for intermediaries.

Fractional Ownership

People can only buy and trade entire units of conventional carbon credits. The carbon credit tokenization allows you to buy tokens in small fractions, making it more cost-efficient and flexible.

Easy Integration with Other Technology

It helps you to easily integrate with other digital platforms such as ESG dashboards, decentralised finance (DeFi) applications, or automated offsetting systems. It is also designed to integrate with future technological advancements. 

Real-World Projects in Carbon Credit Tokenization

The following are a few significant real-world blockchain-based platforms driving innovation in carbon credit tokenization:

Toucan Protocol - Tokenizes carbon credits for on-chain trading to make them easily traceable and tradable. 

KlimaDAO - Builds a carbon-backed economy using tokenized carbon credits.

Flowcarbon - Enables trading of voluntary carbon credits on public blockchains.

Moss.Earth - Issues tokenized credits (MCO2) tied to Amazon rainforest preservation.

Carbonplace - A bank-backed platform to enable seamless and secure trading.

Celo -  A carbon-negative blockchain supports climate-focused dApps and ReFi projects.

Why Tokenization is the Future of Climate Finance?

As the global climate crisis intensifies, climate finance is becoming a top priority to save the planet. Climate finance is the funding of projects that reduce greenhouse gas (GHG) emissions. Massive financial support is required to invest in traditional carbon credits to solve the climate crisis. While this crisis should be solved immediately, the traditional carbon credit is slow, inaccessible, opaque, and hard to trust. 

The tokenization concept in blockchain technology offers a modern solution to this problem by converting carbon credits into digital tokens. This makes it transparent, traceable, scalable, and accessible to everyone. Tokenized carbon credits can be easily traded on digital marketplaces, thus increasing the capital flow. With the rising climate crisis, carbon credit tokenization has become a go-to solution for managing and financing GHG emission reductions. Thus, climate credit tokenization is not just a technological upgrade; it’s more of a revolution in climate finance. 

Conclusion

Carbon credit tokenization is just an enhanced version of the traditional carbon credit process. With Blockchain technology, this new approach addresses all the challenges faced by conventional carbon credits, such as inaccessibility, non-traceability, and double-counting. The carbon credit tokenization makes the process easier, so anyone willing to protect the environment can invest in the carbon credit tokens. 

Real-world assets such as real estate, commodities, and equities can be tokenized with a concept called real world asset tokenization. As an advancement, we are now able to tokenize carbon credits on blockchain networks. Carbon credit tokenization is not just an advancement but a major transformation in global climate finance. Join hands with us to explore next-gen tokenization solutions and make your mark in the green economy.