A carbon credit is equivalent to one metric ton of carbon dioxide or other
greenhouse gases measured in carbon dioxide equivalent (CO2-eq) terms. Carbon
credits also known as carbon offsets, permit the end user to emit an equivalent
amount of carbon dioxide. Due to the economic importance of carbon credits, they
have become a new currency enabling sustainable climate action.
However, there are many key issues with carbon markets mainly with double counting
of GHG emission reductions, greenwashing, lack of transparency and lack of
traceability of a carbon credit.
Xeptagon, which has been involved in developing the DPG carbon registry and transparency
system for UNDP as well as carbon exchanges and marketplaces for several countries
including South Korea and Hong Kong has proposed a novel approach where these issues
with carbon credits can be solved through tokenization. The proposed carbon credit tokenization
platform can be integrated with carbon registries and well as exchanges including interoperability
with multiple registries.
What is Carbon Credit Tokenization?
Tokenization is the act of creating a digital representation of assets on the blockchain.
Tokenizing carbon credits is the process of converting traditional carbon credits to digital
tokens on a blockchain, embedded with all of the attributes of the carbon credit. The token
represents the original asset and can be transferred, retired or de-tokenized on the blockchain.
Blockchain technology revolutionizes the carbon credit market by enhancing transparency, traceability,
efficiency, and security. It enhances transparency by utilizing a decentralized and immutable ledger,
ensuring all transactions are permanently recorded and publicly accessible to the network users, which
builds trust among stakeholders. Traceability is improved by identifying each carbon credit uniquely,
which enables the system to track the carbon credit throughout its life cycle, from the issuance to retirement.
Efficiency is increased by automating processes with smart contracts, which reduces costs and speeds up
transactions, making the market quicker and easier to manage. Security is strengthened by replacing sensitive
information such as personal and financial data with a token which is then stored securely, while the token is
used for the transactions.
Initial Tokenization
Carbon credits, once recorded on a registry approved by a trusted authority, can be converted into unique
digital tokens, through a smart contract on the blockchain. This process allows the carbon credits to be
securely traded on a digital platform. Each carbon credit carries a unique set of attributes specific to its
originating project. When these credits are tokenized, the resulting digital tokens are encoded with these unique
attributes, ensuring they are identifiable and traceable throughout their lifecycle on the blockchain.
Any user who owns an account on the carbon registry and a wallet on the blockchain can convert their carbon credits
to digital tokens. To prevent double issuance, once a carbon credit is tokenized, it is transferred to a common
tokenized account, owned by the registry. This system not only ensures the integrity of the tokenization process but
also enhances the transparency and security of carbon credit trading on the blockchain.
Transferring Tokens
When a token is traded on an exchange platform, it is transferred from the seller to the buyer, along with all the
attributes embedded within the token. This process occurs on the blockchain, where each transfer is recorded by
creating a new block for immutability. This also enables to track of the ownership of the token as well as the lifecycle
of it. This preserves the integrity and transparency of the entire transaction history.
De-Tokenization
De-tokenization is converting the token back to its original form, and in this matter to a carbon credit. With
the de-tokenization process, the attributes which were embedded to the token would be transferred back to the
carbon credit. Once the transfer is completed, the token would be burnt, which would no longer be a digital asset on the blockchain.
While tokenization provides many advantages, instances such as regulatory frameworks or specific business needs require tokens
to be transferred back to their original form within the registry. In the instance where the de-tokenization happens of a
transferred token, where the original carbon credit resides in a different registry, the tokenization platform handles the
de-tokenization of the carbon credit on the platform and then coordinates with the original registry to transfer the carbon
credit to the new user's registry.
Token Retirement
Once the carbon offset, that the token represents has been utilized, the token would be removed from the blockchain which is
referred to as the token retirement. At retirement, the token available in the owner's account would be transferred to an address
zero account not accessible by any user making it burnt.
Interoperability
The platform is designed to enable seamless integration with various blockchain networks such as Avalanche (Avax), Ethereum (ETH),
Volta, and any other network though a simple configuration. This gives the organisations the flexibility to select the most suitable
blockchain for their needs. This capability makes the platform adaptable to the changing needs of the global carbon market.
As the world moves towards a more sustainable future, the need for innovative solutions like blockchain-based tokenization becomes increasingly apparent.
The processes of initial tokenization, secure transfers, de-tokenization, and token retirement ensure that every carbon credit is accurately
represented, efficiently traded, and appropriately retired, maintaining the integrity of the environmental commitments they embody.
By embracing this innovation from Xeptagon, organizations will not only enhance their sustainability practices but also position themselves at the forefront of the evolving global carbon market.
Read more about our climate finance software and carbon credit exchange from here.
