Blockchain and Tokenized Carbon: Present and Future

Environmental pollution has been a topic of discussion at thematic forums and in the offices of ministries of the largest countries of the world for many years. Tokenization of carbon credits is one of the blockchain opportunities that can be used to solve the problem of climate change. In this article we will tell you about what it is, how digitalization and tokenization work in the field of ecology.

According to researchers, in 2021, the volume of the voluntary carbon market has grown almost 2 times, reaching $800 million.

A carbon credit is a unit that characterizes the amount of greenhouse gas emissions that were prevented due to the implementation of a particular climate project. It is a certain quota for greenhouse gas emissions and is expressed in tons of CO₂ of the corresponding equivalent. As one of the important instruments of emission control, it is a way of state and market control on a national and global scale.

The most active buyers of such credits are energy companies as well as financial and insurance sectors. But everyone faces difficulties in rapidly reducing the climate impact of both direct and funded emissions, since a significant share of them falls on infrastructure or technological base which simply cannot be upgraded quickly.

The overall pace of market development has not kept pace with the growing growth of emissions. Of the 55 billion tons of CO2 entering the atmosphere annually, only 20% are compensated by voluntary carbon credits. It is obvious that carbon markets need new effective mechanisms and tools to combat climate change.

Holders of carbon certificates place them on the voluntary carbon market. The voluntary carbon market is separate from the mandatory carbon market, which is created and regulated by mandatory national, regional or international emission reduction schemes and organizations, such as the EU Emissions Trading System (EU ETS) or the California Cap-and-Trade Program. The voluntary market is not subject to these regulatory mechanisms and operates for companies and enterprises that do not have strict carbon limits, but want to compensate for their imminent CO2 emissions on a voluntary basis. In this case, they can purchase carbon credits, which are then moved to the registry used to prevent resale.

Blockchain guards nature
With the tokenization of carbon credits, blockchain and the latest crypto technologies can give the voluntary carbon market a second chance. Carbon credits existed in the form of electronic certificates for many years before the creation of cryptocurrencies, but have not yet been successfully tokenized. With the introduction of smart contracts and the use of blockchain to improve transactional capabilities, the situation may change.

Tokenization implies the transfer of carbon credits into crypto tokens. Blockchain is a single database of transaction records which is replenished by different people and organizations. Linking carbon credits in the form of tokens to this mechanism can facilitate understanding of the carbon market, make it more transparent, stimulate cost reduction, and increase transaction security. Carbon credits will become attractive and valuable for a wider range of users and their purchase will be easier and more reliable.

But despite the obvious advantages of tokenization of carbon credits, many experts doubt the real benefits of this technology to combat climate change. The main problem of voluntary carbon markets is their overcrowding with "false" carbon credits. For example, some forest protection organization may claim that its efforts have preserved the potential of the forest to absorb and store CO2 emissions. But if this forest was not initially threatened by danger, or it was intentionally overestimated, in fact, this project does not bring "additional" benefits, does not reduce the CO2 content in the atmosphere and does not prevent carbon emissions. Thus, the carbon credits issued by the project do not have a real reduction in CO2, and the purchase of such credits does not help the fight against climate change.

Often such "false" carbon credits are excluded from the global compensation scheme due to their questionable quality, but their tokenization can lead to their being on the market again. In this case, additional verification mechanisms and special attention to the verification of carbon credits, their authenticity and the level of real impact on the climate are required.

Is a "green" blockchain possible?

With all its advantages and prospects opening up to humanity when using blockchain in the field of environmental protection and tokenization of carbon credits, the question arises: how safe for nature is the blockchain itself?

We all know that blockchain is an ideal financial instrument that provides speed, efficiency and low transaction costs. But there is one "but". According to the researchers, one bitcoin transaction consumes as much energy as the average American household would consume in 73.82 days (2.5 months). Since mid-2021, the annual energy consumption in the Bitcoin network has grown from 78 Terr (trillion) watt-hours (TWH) to almost 198 TWh last year. Ethereum, although less demanding on energy, still uses as much electricity for a single transaction as a household in the US in 8.32 days. The annual energy consumption of the Ethereum network has grown from almost 15 Twh to more than 92 Twh.

Bitcoin is also the most polluting cryptocurrency. In total figures and based on estimates made in 2021, the mining of this cryptocurrency led to the emission of more than 56.8 million tons of CO2 into the atmosphere (or more than 1,000 pounds of CO2 per transaction). To compensate for such a scale of pollution and make Bitcoin mining carbon neutral, additional planting of more than 280 million trees will be required. To compare the scale of pollution from mining, it is worth saying that as a result of mining in the same year 2021, just over 22 million tons of CO2 were emitted. Other cryptocurrencies that also use the same proof of work (PoW) consensus mechanism face the same problem.

New and existing blockchain projects are exploring everything from switching to less energy-intensive consensus-building systems to exploring the possibility of mining based on renewable energy sources. While it seems obvious and effective to solve the problem of CO2 emissions and high energy consumption by banning cryptocurrency mining, such a decision can seriously slow down the development of the blockchain. And therefore, it is possible and necessary to look for solutions that can return the blockchain to the status of "green" technology. The most promising is the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS). The operability of PoS-blockchains is supported by validators — owners of cryptocurrencies. They check user transactions, and if at least 2/3 of the validators agree that the transaction is correct, it is included in a new block. Validators are engaged only in useful work (verification), and not in sorting numbers, so they do not have a race for performance, like miners.

The PoS algorithm is the most environmentally friendly way of blockchain operation. It is he who is used in the work of the HAQQ blockchain of the IslamicCoin project. IslamicCoin cannot be arbitrarily printed and therefore devalued. It also cannot be "inflated" by raising the Central Bank's interest rate; its price is determined by the market and, therefore, is always fair. IslamicCoin can be minted (issued) only by those who contribute to the work and investments as validators of the network at a predetermined announced rate.

HAQQ blockchain can also be used in projects of so-called green smart contracts. Green smart contracts open up new ways to combat climate change and overcome the negative consequences of its change. This is especially important in areas requiring the collection and verification of large amounts of data and the promotion of sustainable environmental behavior, such as regenerative agriculture, carbon offsetting, crop insurance, etc. Green smart contracts can help solve environmental problems as they expand the scope of environmentally-oriented blockchain-based solutions. And this is an excellent application for compliance with the 7 and 12 Sustainable Development Goals, declaring "Access to inexpensive, reliable, sustainable and modern energy" and "Ensuring rational consumption and production models".

Advances in consensus mechanisms and a focus on the use of renewable energy sources will reduce the overall environmental costs of cryptocurrencies and blockchain networks with widespread adoption. There is still a problem of electronic waste from outdated mining operations that needs to be dealt with, but non-PoW cryptocurrencies will reduce the demand for the construction of new and larger mining installations in the future, which will potentially reduce energy consumption and environmental emissions.

From theory to practice

"Green" smart contracts

We have already mentioned green smart contracts and cited them as an example of a reasonable and responsible use of blockchain to conserve natural resources and reduce CO2 emissions. Smart contracts on the blockchain are an ideal platform for the implementation of the carbon registry creation program.

The basis of this system is the so-called "carbon points" which use allows for greater liquidity, transparency, accessibility and standardization of carbon markets. Built on the blockchain, such a system can unite all stakeholders (wind farm projects, tree planting, CO2 absorption, etc.), create a tokenization mechanism with clear protocols for the release and burning of "greenhouse units", their transparent distribution and trade.

Consumers of carbon points are companies that emit carbon or pollutants of any kind in their production. Validators are accredited, technically competent companies that monitor harmful industries and have the ability to write off carbon points.

Buyers and sellers of carbon credits can use a decentralized exchange platform on the blockchain to trade carbon credits. The price will be determined by the market dynamics determined by supply and demand. Such tokens will be "burned" by sending these tokens to a smart contract or a specific blockchain address, the private key of which is unknown to any party and can be seen by a team of validators, as well as regulatory authorities.

"Green" NFT

Carbon credits issued in the form of non-fungible digital NFT tokens are gradually gaining momentum in the recovery finance (ReFi) and decentralized finance (DeFi) markets. In early 2021, a carbon credit that represented one ton of carbon dioxide was sold as an NFT for $70,000 at auction.

Carbon NFT credit is issued in the same way as any other blockchain token and can be put up for sale at any site where similar objects are sold and bought. The advantage and advantage of "green" NFTs is the transparent and accessible to any user ability to track all transactions and provide buyers with carbon credits with a detailed history that they can trust.

A very common situation that arises in the carbon credit markets is that two organizations declare the same reduction in emissions. This leads to disputes and conflicts. Using NFT eliminates this problem, but even here you can find pitfalls. Before a company developing carbon NFT credits puts them up for sale, an efficient system for entering and processing data on carbon emissions is needed.

Conclusion

The prospects for using blockchain in the issuance, sale and accounting of carbon credits are really impressive. And the active use of distributed ledger technology suggests that the world is already ready for digital transformation for the benefit of all inhabitants of the Earth and environmental improvement on a global scale. It is only necessary to create conditions for the use of new technologies.

IslamicCoin is the first project to provide the community with powerful financial technology that allows for seamless transactions, support innovation and charity. The project is 100% compliant with Sharia law and benefits the community. Developers focus on sustainable development and use technology and innovation to ensure financial sustainability.

IslamicCoin is aimed at 1.1 billion Muslims using the Internet. The project creates convenient tools designed for users who have never been owners of cryptocurrencies. The mission of the project is to provide the international community of followers of Islam with a reliable and promising financial instrument that allows for independent financial interaction, support innovation and philanthropy.