The COP has also created tools to prevent climate doomsday. Such economic tools as voluntary and compliance carbon markets, carbon credits, green bonds and other green assets tied to positive environmental impact play a crucial role in decarbonization global efforts. However, they are often inaccessible to small and medium-sized companies from developing countries. The main reasons are high upfront costs and complex structuring processes in line with global green standards.
Positive and negative impacts on the environment have to be forecasted and described according to approved methodologies. This information is used for the future monitoring and reporting and is verified by assurance providers. That’s where greenwashing or deceptive eco-claims may occur. On-chain verification brings data immutability and transparency, stimulating issuers to meet their green commitments.
12% of carbon offsets and the birth of ReFi
It is an open secret that the issuance of green finance instruments has long been monopolized by the Web2 financial infrastructure players, such as banks, exchanges, registries and standards. So, it is no surprise that Web3 is bringing the most disruption at this stage.
The most obvious Web3 use case in green finance is the transfer of assets from traditional centralized registries to the blockchain via fungible or nonfungible tokens (NFTs). The tokenization of carbon credits pioneered by DAO IPCI in 2017 and scaled by Toucan and Klima DAO in 2021 led to the retirement of 20 million tons of CO2 — almost 12% of the annual voluntary carbon market retirement volume. As a protective move, leading carbon standards immediately banned tokenization. This initiated an ongoing public discussion and highlighted the need for a wider approach than increasing liquidity.
Related: What Goldman Sachs’ CEO misunderstands about private blockchains
Such an approach, initially described by the timelessly passed DAO IPCI founder Anton Galenovich, is now being implemented by a new generation of infrastructure solutions. One of them is Guardian, an open-source tool that provides auditable, traceable, reproducible records that document emissions and the lifecycle of green assets. It provides a low-code environment to instantly launch new apps, asset types and even standards. The blockchain-based infrastructure has overall proven to be faster, more cost-efficient and transparent. This is crucial for unlocking green finance for small and medium-sized enterprises and eliminating greenwashing.
Web3 also offers the opportunity to develop innovative instruments that boost the liquidity of previously illiquid assets or merge the strengths of multiple instruments. Take, for instance, carbon-linked bonds. They unite the features of green bonds and carbon credits, giving green bond investors more incentives and allowing issuers to get lower coupon rates. Biodiversity credits value ecosystem services, and my own Evercity’s “carbon forwards” enable financing for early-stage carbon projects ahead of issuing actual carbon credits. There are already Web3 exchanges, decentralized autonomous organizations (DAOs) and liquidity pools, such as Solid World, that deal with such assets.
The combination of blockchain technology with monitoring tools, such as the Internet of Things and satellites, can provide further transparency and traceability of impact reporting along the green finance value chain. All of the abovementioned use cases have already started to make a significant impact on the attainment of the Paris Agreement and U.N. Sustainable Development Goals. The companies behind them consider themselves part of the growing Regenerative Finance (ReFi) community.
Convergence of Web3 and carbon markets
In 2017, Glocha and DAO IPCI, which executed the world’s first voluntary carbon credit transaction, introduced a blockchain booth at the COP. The Climate Change Coalition was formed with support from the UNFCCC Secretariat to unite blockchain pioneers, who back then faced a lot of skepticism from traditional players amid the initial coin offering wave. Five years later, the picture had changed dramatically — COP27 in Egypt marked the convergence of the green finance and Web3 worlds.
With national states falling short of their climate responsibilities, new players have stepped up. The sunny Sharm El Sheikh featured a record number of Web3 companies. The United Nations Global Innovation Hub was at the center of all the climate tech talks, featuring high-level speakers and crucial topics. The Web3 agenda was also featured at the Singapore pavilion, International Emissions Trading Association, Climate Chain Coalition, the Gulf Organisation for Research & Development and several others. At dinner parties and hotel conferences, like the one organized by the Hubculture, Hedera and the HBAR Foundation, carbon market veterans mixed with the Web3 crowd. What should be a more solid sign of industry adoption?
Two of the most important…
cointelegraph.com