The World Bank’s International Finance Corporation (IFC) division has launched a project to use blockchain to register carbon removal projects and to turn carbon credits into tokens for cryptocurrency investors to speculate with.
Following several instances of cryptocurrency enthusiasts buying carbon credits which don’t do much good for the climate, this project’s backers want to keep those buyers but steer them onto carbon credits which have been verified by organisations like Verra and Gold Standard.
Steve Glickman, an Obama-era White House official whose company Aspiration is part-funding the project, told Climate Home that “we haven’t seen nearly as much capital and nearly as many institutional investors… that we need to see to have the kind of impact on nature-based carbon removal and reduction strategies that are required for us to hit net zero”.
“Our analysis of why that’s slow,” he said, “is that there’s real questions in the marketplace around how you would do this type of carbon credits, investing in a highly credible, responsible way and so we want to build the mechanisms of methodology for doing that… and that’s where the blockchain comes in.”
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The blockchain is a computer-based system that use digital keys to prove and display who owns what. A blockchain combined with a central registry of carbon credits helps ensure that those who are carrying out green projects aren’t selling the credit for one tonne of emissions reductions to more than one buyer.
Gilles Dufrasne is the policy officer for a watchdog NGO called Carbon Market Watch. He said this kind of transparency was “useful”.
Rachel Kyte is a former CEO of Sustainable Energy for All and leads an initiative to promote integrity in carbon credits. She told Climate Home: “Blockchain offers opportunities to build high integrity voluntary carbon markets and it is good to see IFC looking for ways to bring high integrity to many developing countries who could benefit.”
But Dufrasne warned that the information provided must be understandable to be truly transparent. He said financial technology (fintech) companies often claim their projects are transparent because all the information is public. “It may be transparent, but it’s not accessible because nobody understands how it works apart from the fintech people,” he said.
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Blockchains can use lots of energy. But this project uses a blockchain run by a company called Chia which relies on a system called “proof of space and time” which uses far less energy than the “proof of work” system used to produce Bitcoin.
Catherine Flick, a computing academic at De Montfort University, told Climate Home this method “is less problematic but relies on the miners proving they have the space to store the data (so memory and hard drives) for a period of time. So instead of energy use there is demand for storage which is problematic in terms of electronic waste and demand for rare earth metals and chips required for the storage”.
Companies buy carbon credits and retire them to offset their emissions but investors also buy them and don’t retire them, in the hope that the price of carbon credits will rise and they can sell them for a profit. Or companies can snap up cheap carbon credits and retire them when the price is high, polluting for cheaper than they would otherwise have done.
Glickman said: “From our standpoint, it doesn’t really matter why you’re coming into this to invest, that capital is going to support the climate finance necessary to support those projects and we think it’s a good thing that there are more ways that these carbon credits can be liquid beyond just being retired against a carbon footprint.”
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Turning credits into “tokens” is an attempt to attract investors who have become caught up in the “non-fungible token” (NFT) craze where people have paid up to $69m to be recognised as the “owner” of digital art.
Dufrasne said that buying a carbon credit, whether it’s an NFT or not, doesn’t help the climate unless it is retired rather than being sold on. He said: “I’m not under the impression that so many actors in the in the cryptocurrency space are there to just buy these tokens and then make them disappear because then they don’t have anything else to sell.”
While blockchain can help avoid double-counting, it doesn’t help solve other problems with carbon credits like whether the emissions reductions claimed for wouldn’t have happened anyway and whether the emission-cutting projects will survive for as long as the credit sellers claim.