Voluntary Carbon Markets’ Uneasy Start With Blockchain

Retirement Demand 4Q21-1Q22 for Verra Project Credits, by Year (Millions of Tonnes)

Source: Carbon Direct (data from the Berkely Voluntary Registry Offsets Database)

Key Points: A new report, from Carbon Direct, concludes that blockchain-based buying of carbon offsets has had lower quality standards than traditional buyers (i.e. corporates), which bear more direct reputational risk. Meanwhile Verra is seeking to ensure transparency and bolster the perceived climate integrity of Blockchain tokens.

Blockchain-based demand emerges as relevant portion of traded credits. Per Carbon Direct, which analyzed trades on the Verified Carbon Standard (VCS) registry, Blockchain-based (digital) purchases accounted for 29% of the carbon credits that were retired in the six months of 4Q21-1Q22. (Note that Blockchain-based trades were a much smaller share of the total market as approximately 70% of trades in 2021 on the VCS registry were not retired. Non-retirement purchases are motivated by brokers, investor/speculators and corporates purchasing for planned commitments.)

Blockchain-traded credits perceived to be of lower quality. Versus traditional buyers, the mix of credits purchased digitally on the VCS over that six month period skewed to more renewable energy credits — 64% in the digital pool vs. 37% in the traditional — and to older credits — modes of 2009 and 2013 in the digital pool vs. 2015 and 2019 in the traditional (see chart).

Renewable Energy project-based credits have been criticized for often not being “additional,” as in the projects would have been viable economically without the credits and thus there was no additional climate benefit. Verra, the verifying agency behind VCS, for example, spoke to this issue when, in 2019, it limited credits for Renewable Energy projects to least-developed countries. Related to some degree, older projects are viewed as often having lower standards than newer ones.

Report argues that blockchain can be less discriminating. Carbon Direct argues that blockchain fosters “a willingness to commingle carbon sourced from a wide spectrum of project types” and that token holders have the incentive to grow and that there are “few restrictions on accepted credit project types.” By implication, corporates may feel more scrutinized in the nature of the credits they buy, and thus Carbon Direct implies some hope that (some of the) lower quality credits would not have been purchased. That said, corporates do not face regulatory constraints, nor is it mandated that they provide detail about the purchases, and as such develop their own sense of constraint based on perceived reputational risk.

Verra puts a restriction on; will seek public comment on working in other ways with crypto. In late May, Verra announced that it will prohibit the creation of tokens based on retired credits, an apparent move to shore up perceptions of integrity (so there aren’t two payments tied to one environmental benefit). It also indicated that it will engage in public consultation for its ongoing interaction with blockchain-based transactions, including to ensure adequate traceability and transparency.

Details about the VCS registry and Toucan Protocol. The Toucan Protocol “bridges” VCS credits to Blockchain, where the credit forms the basis for a fungible token. When users bridge these credits, they are retired on the VCS registry. Toucan, which launched in October 2021, comprised 94% of “on-chain” purchasing on the VCS registry in 4Q21-1Q22.

6/7/2022