Crypto – often used as an umbrella term that encompasses anything cryptocurrency – has received considerable and polarized attention over the past decade. Today, industry leaders have entered the carbon market with complaints that integrating these markets into the blockchain can lead to huge gains in environmentally friendly business approaches. But skeptics are unsure exactly what problem the crypto is trying to solve and whether it will succeed in reviving the CO2 credit market as countries race towards net-zero targets.
What are carbon credits?
The carbon market – or CO2 market – was first developed and introduced in the 1990s. By putting a cost on the environmental damage of CO2 emissions, companies could in theory track and offset their own emissions. By buying CO2 credits linked to “green projects” in the market, companies in different sectors could continue their practices while offsetting emissions and thus reducing environmental damage.
For example, a mining company subject to an emission limit could purchase a set-off credit held by a forest owner who could agree to use that money to delay or reduce a harvest. This would then allow the mining company to pollute beyond the set limit and use the avoided forest emissions as a credit.
Figure 1: The mechanism of carbon offset credits
Today, almost three decades after the introduction of the CO2 market, policy makers and activists are unsure of its success. The market remains largely unregulated, and discussions are often centered on which projects to include. In fact, more recent studies pointed out that often associated projects are overpriced or have little or no positive impact on the environment. In fact, a study of forest carbon compensation in California (worth over $ 2 billion and the largest program in the United States) found that nearly a third of all compensations were credited. In all, this almost represents 30 million extra tonnes of CO2 emissions.
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This exaggerated credit problem has frustrated critics of the carbon market. The combination of lack of transparency and a systematic error in the way these credits are calculated has resulted in projects continuously miscalculating both polluting emissions and saved emissions.
Taking the California study as an example, there are often big misconceptions about what an environmentally friendly offset project is. The vast majority of these projects do not involve the growth of new forests, as is often believed, but are rather devoted to the development of practices known as ‘Improving forest management’ (IFM), which is significantly more step-by-step in environmental benefits. This single example highlights some of the problems with CO2 markets and their often overestimated utility.
Double counting – a term that refers to a situation where two separate parties claim the same carbon offsets project or credit – has also emerged as a problem with the current carbon market. This is truly a huge problem that has highlighted the gap between theory and practice in carbon markets. So how are you?
Most often, double counting occurs when the organization settles emissions and the country hosting the project to achieve climate goals below The Paris Agreement require the credits. This is, of course, problematic: both a country and a company claim to be CO2-neutral, and yet nothing has been achieved in terms of emission reductions. In addition to the immediate environmental effects, double counting also discourages countries from acting to meet long-term climate goals.
Crypto supporters believe a solution lies in this carbon market. Industry leaders have argued that the traditional carbon market is outdated, disorganized and often lacks incentives. They suggest that by shifting carbon credits to blockchain – a digital, open database – the crypto-economy can encourage companies to take more environmentally friendly approaches.
In addition, crypto traders claim that if more people get involved in cryptocurrency credits, it will increase the price of the credits. In doing so, they hope to force companies to pay higher prices to reduce emissions or encourage them to invest in more energy-efficient business practices.
The crypto industry’s initial approach was to ‘Sweep the floor’. This involved using a transition process to buy carbon credits that were already in circulation on the conventional market and migrate them to the blockchain, in which case a token would be issued to the owner. These tokens can then serve as tradable objects through which blockchain trading can take place. Although advocates of such a move to the blockchain often link their mission to environmental goals, there is a clear financial incentive for the move. In the current market, the price of CO2 equalization credits has traded in the perimeter from $ 1 to $ 2, while virtual tokens reached a record high of around $ 3,000; clear benefit to those involved.
While open source blockchain technology in theory provides increased transparency, an analysis of some of the earliest issued crypto-carbon credits revealed two striking results. The first was that a significant number of “zombie” projects – projects that were not active until the financial incentives generated by crypto-carbon credits were generated – had appeared on the blockchain. The second was that almost all of the credits that had been migrated to blockchain came from projects that were originally excluded from the current carbon market due to project quality concerns. So what do these two results mean for climate action?
What are the weaknesses of cryptocurrency loans?
The appearance of “zombie” projects can seem positive at first glance. In theory, more CO2 compensation projects should lead to lower emissions. But often, if these credits do not find buyers in the traditional CO2 market, it is because buyers were initially concerned about the quality of the projects. Migrating these credits to blockchain does not address these concerns. Instead, previously unsaleable credits and projects are simply used to generate revenue from owners who have “swept the floor” rather than generating exciting new projects with real potential. But these projects are not the only concerns.
The Paris Agreement defined the rules of the carbon market in the rules of trade The Clean Development Mechanism under Article 12, which bans credit trading before January 2013. This is to ensure that any new request for carbon offsets complies with the revised standards. Dog and narcotics 84.8% crypto the CO2 credits traded would not have complied with the rules of the Paris Agreement when they were registered before 2013. In short, the crypto-carbon credits appear to be commercial projects that would not have found buyers in conventional markets. In doing so, this technology only exacerbates existing structural problems in the current CO2 market, while avoiding the regulatory standards introduced under the Paris Agreement.
Crypto supporters say the benefit of migrating to the blockchain would be to tackle an outdated, opaque and disorganized carbon market. In doing so, they hope to either raise the price of carbon emissions or force companies to seek more energy-efficient practices. While it is true that the price may have risen for some credits, it seems that this has been to the advantage of the owners of the credits; while the environmental benefits of this practice are either insignificant or in some cases even exacerbated.
But if crypto is not the answer to the problems of the carbon market, then what is it?
Can we fix the current carbon market without crypto?
To address the important issue of double counting, the alignment of national emission targets in Article 12 was a good first step. This meant implementing a policy of highly controversial “similar adjustments”. These adjustments mean that the CO2 emissions that are reduced or eliminated with the set-off will be deducted from the project country’s greenhouse gas inventory. This mechanism guarantees that for every CO2 credit purchased on the market, only one country claims the reduction of emissions.
Ultimately, the biggest problem with CO2 credits the absence of a single quality standard. This means that it is highly likely that many sub-optimal projects will end up being evaluated and commercialized, even if there is no environmental benefit. If markets are to take climate change seriously, they must move away from financing small individual projects and towards paying whole companies, and thus whole industries, in order to reduce emissions. In the end, crypto encouraged the financing of these smaller, insignificant and often disused projects, which goes against the solutions proposed by experts.
In order to have a single quality standard, a reliable and verifiable benchmark for reducing emissions must be established. By targeting individual companies and then industries as a whole, voluntary and offset markets can be improved as the world aims for a low-carbon future.
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