Tokenization of carbon credits

Article Overview

As climate activists raise more awareness, the urgency to tackle climate change has led to the development of innovative projects. Carbon credits are one of the popular solutions that measure ozone-depleting GHG emissions in the atmosphere. Companies and industries now work hand-in-hand to reduce toxic environmental emissions by buying carbon credits. However, this booming market is susceptible to fraud and scams. To ensure transparency, carbon credit tokenization is a leading solution to simplify the credit card market and enhance effectiveness. This article discusses carbon credit tokenization.

What are carbon credits?

Before we delve into the complex technology of carbon credit tokenization, let’s first understand the concept of “carbon credits.”

Carbon credits are a permit granted to business owners and certain private individuals that allows them to emit a certain amount of carbon dioxide into the atmosphere. One carbon credit we chased equals one ton of emittable carbon dioxide. This unique concept of reducing carbon dioxide has yielded a positive change in climate change.

These companies also have the opportunity to give credit to other companies or individuals and to buy more if they exceed the emission limit.

What is tokenization?

Tokenization is the process of transforming real-life assets into digital tokens or assets on the blockchain. This technological advancement has allowed for better accessibility to funds that were once inaccessible to certain individuals in the traditional financial system. Tokenization is a revolutionary tool that consists of different technical and legal parts that allow anything to be tokenized. With the blockchain, you can convert carbon credits, estates, fiat currencies, artworks, and more with tokenization.

What is carbon credit tokenization?

Carbon credit tokenization is the process of transferring carbon credit metadata or information into the blockchain, allowing it to be represented as a token. A tokenized carbon credit bears the same power and value as a physical one, as one carbon credit equals one carbon token. The carbon bridge allows holders or users to transfer carbon credits from one ecosystem to another. Each represented carbon credit has a physical equivalence, which is usually held at traditional registries like Verra and Gold Standard.

Differences between carbon tokens and cryptocurrencies

Carbon credits may be digital assets, yet they are different from other digital assets like cryptocurrencies.

Cryptocurrencies are native assets of a specific blockchain, such as Ether, which is the main asset on the Ethereum platform, whereas carbon credit tokens are built on the platform, serving different functions. Most cryptocurrencies have no real-world asset backing and are mostly used as a medium of exchange. Carbon credit tokens are security tokens representing a stake in physical carbon credits being sold by traditional organizations.

Benefits of carbon credit tokenization

Carbon credit tokenization is a revolutionary step to innovate the carbon credit market and the entire climate at large. The following are some of the of the benefits of carbon credit tokenization:

Promotes the fractionalization of carbon credits

Carbon credit tokenization has paved the way for the easy distribution of carbon credits. Usually, carbon credits are purchased en masse for industries and organizations that contribute massive amounts of carbon dioxide into the environment through gas flaring and other associated activities. With tokenization, meticulously tons of carbon credit are broken into smaller amounts for small-sized organizations and even individuals, allowing them to offset their carbon footprint easily.

Eliminates intermediaries

The average carbon credit market consists of buyers, sellers, and intermediaries, or middlemen. These intermediaries are responsible for educating prospective buyers and marketing them on behalf of the sellers. However, they charge expensive fees for their services and are fond of buying carbon credits at a cheaper price in third-world countries to sell at an inflated price. Carbon credit tokenization removes the need for these intermediaries, reducing transaction fees and eliminating risk potential.

Reduces risk in the carbon credit market

The tokenization of carbon credits has reduced the risk of experiencing scams as well as other market delays. Otganizyikns can now buy credits at will and almost instantly. In addition, carbon credit tokenization has eliminated the need to meet requirements to get approval.

The fast liquidity of carbon tokens

For organizations willing to sell excess credits to organizations for cash, tokenization of carbon credit has simplified the once stressful process. Carbon credit tokens allow for the easy liquidity of illiquid carbon assets.

Prevents double counting

Double counting is a common drawback in the carbon market that lays claim on previously claimed credits as new ones. With blockchain technology, every newly generated credit is registered, preventing dubious claims on them.

Different models of carbon credit tokenization

There are two major carbon credit tokenization models: carbon bridges and native issuance. Carbon bridges are further broken down into custodial and non-custodial bridges.

Carbon bridges

Carbon bridges can run manually or automatically without human interference.

A manual system requires a human reporter to execute several responsibilities, while a programmable system requires no human supervision.

Custodial Bridges (Carbon Bridges)

Carbon credit tokenization via the carbon credit method involves tokenizing carbon credits through a third-party operator called the custodian or tokenizer. The custodian is in charge of locking up quantified carbon credit in the blockchain to prevent double-buying. They are also in charge of issuing carbon tokens on the blockchain.

A third party can either be an approved third party or representatives from a registered carbon credit registry. In addition to the already-listed responsibilities, these custodians are also in charge of retiring carbon credits, as you have to file a claim with them to retire your carbon credits.

A major drawback is that the presence of a custodian defeats the purpose of decentralization, as placing this amount of trust and responsibility on such a centralized body gives room for fraud and manipulation. Since the tokenizer remains in control over the carbon credit retirement and issuance, the possibility of human error is still high. Experts recommend that custodial carbon bridges embrace automation and reduce the overdependence on humans on machines to prevent risks and human errors.

Non-custodial bridges (carbon bridges)

Non-custodial bridges involve more dependency on complex machines. Here, carbon credit owners transfer their credits out of the initial source to a Web3 environment since they do not trust anybody to tokenize their credits. Instead, they chose independent software infrastructures that publicized the entire tokenization process.

Another advantage of non-custodial profits is that they allow for on-chain retirement. Carbon credit owners can perform their credit retirement and also share the transaction with the public.

Native issuance

Native issuance is another carbon credit tokenization process whereby credits are issued on the blockchain directly instead of the conventional way of tokenizing. This procedure serves as the right method for the carbon credit registry looking to create immutable credit records while reducing dependency on themselves.

Which utility do carbon credits provide?

Carbon credit tokens have numerous uses in the blockchain. For instance, tokenization serves as a reward for project developers. Project developers get receiver royalties from carbon crier transactions instead of a one-time payment, providing better incentives.

Tokenized carbon credits could serve as revenue or other passive income in decentralized applications. Like many utility tokens, carbon credits could be programmed to yield monthly revenue improvements and serve as a tool to borrow. To hedge against volatility, organizations providing carbon credits could include tokenized carbon credits in their portfolios to reduce investment risks.

Like many utility tokens, the gamification of carbon in the blockchain and the gamification of carbon credit tokens are also possible. Carbon credits could serve as a reward or in-game asset. Blockchain gamers can also exchange their rewards for a specific amount of carbon credit to offset their carbon use.

How is carbon credit tokenized?

Carbon credits are security tokens created to represent ownership of real carbon credits. Like most security tokens, there is no capped value or fixed supply. The process of tokenizing carbon credit involves many stages, from ideation to completion.

The process usually starts by calculating and verifying the carbon emission reduction of an organization, company, or project. This value is then recorded on the blockchain and stored securely in the decentralized ledger. Once successfully saved, it is immutable and visible to everyone. The smart contract is written to automatically issue and transfer these carbon credits, reducing the time of issuance and encouraging reliability. Once these carbon credits are successfully tokenized, they can then be sold to any interested organization or individual to encourage sustainable climate practices.

Create carbon credit tokens with PTPShopy

If you’re looking to migrate traditional carbon credit organizations into the blockchain, PTPShopy is the right solution for you. PTPShopy facilitates security token development. Incorporating features of both ERC-20 and ERC-721 tokens to fully satisfy the ERC-20 requirements of security tokens on Ethereum, our DeFi solution is just for you. In addition, the PTPWallet team of experts is ready to offer cutting-edge, customized contracts on Ethereum or Hyperledger that suit your needs. Start by following this link


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