Digital Carbon

Why build on the blockchain?

Carbon credits on public blockchains are identical to those held on off-chain databases, however, their presence on the blockchain allows the credits themselves to yield a number of advantages to their users. Foremost, all credits on public blockchains can be transparently traced, every trade and retirement can be validated and viewed by market stakeholders, this reduces information asymetry within the market and enables the market to build trust. Furthermore, credits on the blockchain can be leveraged by Web3 protocols and applications - allowing the carbon itself to become programmable and composable; to become a 'money Lego' – this can in-turn empower new use-cases, and ultimately drive innovations that will increase scale and efficiency within these critical markets.

Explore the Digital Carbon Market with the KlimaDAO Digital Carbon Market dashboard.

Carbon Projects

What is a carbon credit?

Carbon credits are issued by Carbon Standards (such as Verra and Gold Standard) on behalf of verified carbon projects that can demonstrably remove or avoid greenhouse gas emissions. This includes initiatives like renewable energy, forest conservation and regeneration, soil carbon enhancement, and industrial emission capture. Issued carbon credits are traded in the market and retired (or "offset"), often by corporate users; carbon credits therefore function as a financial incentive for those developing the carbon projects.

Carbon dioxide equivalent" (CO2e) is a metric that aggregates the impact of various greenhouse gases into a single measure, based on their Global Warming Potential (GWP). GWP is a concept designed to compare the effects of different gases on global warming. It quantifies the amount of heat trapped by the emissions of 1 tonne of a gas over a specific period, in comparison to 1 tonne of carbon dioxide (CO2). For example, the warming effect of methane is approximately 28 times greater than that of CO2.

What are carbon markets?

There are both compliance markets and voluntary carbon market (VCM) where carbon credits are traded actively as a means to finance sustainability projects.

Voluntary carbon market (VCM): Businesses and individuals driven by sustainability goals can choose to offset their emissions. Traditionally, they would purchase credits from various projects through carbon registries such as Verra, Gold Standard, International Carbon Registry (ICR), Puro Registry, American Carbon Registry (ACR) and Climate Action Reserve (CAR) etc. not linked to specific state-mandated compliance schemes.

In the voluntary markets, carbon projects are required to follow specific methodology standards and are subjected to a strong verification process from carbon credit registries to ensure credit quality and impact.

Compliance market: These operate under mandatory government regulations like cap-and-trade systems in Europe, California, or Colombia. Entities exceeding their allocated emission limits must purchase credits from verified projects to comply. Such credits are issued and tracked through government-sanctioned registries.

The role of blockchain-enabled markets

The VCM has been around for decades and has become an integral mechanism for raising climate finance. It has however had its growth inhibited due to difficulties relating to market accessibility, transparency, illiquidity and high transaction fees. KlimaDAO any many others within the Web3 ecosystem aim to develop new technologies and governance mechanisms which leverage the blockchain for the carbon markets, that avail market participants with the benefits of open-source, distributed infrastructure.

What are examples of carbon projects?

  1. Nature-based carbon sequestration. Biological sequestration absorbs CO2 emissions through the growth of vegetation and the continued storage of some of the carbon in plant tissues and organic materials derived from plant tissues (e.g. stored in the soil). An example project is the restoration of degraded mangrove landscapes in Myanmar. Other examples include biochar (long term carbon storage from biological sources), and afforestation initiatives (e.g. tree planting on degraded landscapes).

  2. Renewable energy. Renewable Energy projects include hydro, wind, and photovoltaic solar power, solar hot water and biomass power and heat production. Many renewable energy projects have high up-front capital costs, although they may offer high rates of return, and their operating costs are often minimal once built. Carbon credits help support these projects by providing an additional revenue stream to offset their high up-front capital costs. This wind energy power project in India is an example and helps reduce 182,016 tons of carbon dioxide equivalent a year by replacing polluting fossil fuel power plants.

  3. Methane capture. Methane’s global warming potential is about 28 times greater than that of CO2, and thus preventing methane emissions can have significant environmental benefits. Methane is emitted by landfills, during wastewater treatment, in natural gas and petroleum systems, from agricultural activities (livestock and rice cultivation), and during coal mining. Methane is basically ‘natural gas’ and can therefore be captured and used as a source of energy. Such projects include those that capture and purify methane in wastewater treatment plants or landfills and use it for electricity production or the production of another form of energy. The West Star North Dairy project in California, USA is an example project that captures methane from a dairy farm and uses it for energy.

  4. Energy Efficiency and Impact. The types of projects which would qualify for the EEIMP pool include clean cookstoves, clean drinking water, and small biogas plants. KlimaDAO ratified 250,000 USDC in funding to support the development of the Improved Cookstoves project in Bangladesh in collaboration with SCB Group. The funding enables the issuance of 31,250 Gold Standard certified carbon credits between 2023 and 2025, with the goal of providing liquidity for consumers within the Digital Carbon Market (DCM) on the Polygon blockchain.

Carbon Credit Tokenization

In order to make use of carbon credits on the blockchain as digital carbon, carbon credits must be "tokenized" or bridged onto the blockchain from a traditional carbon registry via a carbon bridge. Tokenization allows the integrity of the carbon credits that have been issued in accordance with rigorous carbon standards to be maintained, but for them to benefit from the market infrastructure develop on the blockchain.

While the technical details of each bridge may differ, the process of bridging and tokenizing carbon credits is generally similar. Carbon credit holders (such as project developers, traders, and corporates) can initiate the bridging process by submitting verified carbon credits to their chosen bridge. Upon successful transfer, the bridge seamlessly tokenizes the credits, translating each verified tonne of carbon into a unique digital token on the blockchain. Key characteristics of the carbon credits are brought on-chain when it is transformed into a tokenized digital carbon credit, including:

  • Project Name

  • Serial Number

  • Project type (renewable energy, forest carbon project, blue carbon, etc.)

  • Vintage Year

  • Verification Standard

This process ensures users can always verify the integrity and provenance of the credit.

Carbon Bridges

Carbon bridges serve as a vital link connecting traditional carbon registries with blockchains.

Toucan

Website Toucan carbon tokens (TCO2) is the general term for fungible tokenized carbon credits bridged via Toucan. When you fractionalize a BatchNFT received after bridging, the resulting TCO2 ERC20 token will have TCO2- as a prefix, followed by an information-rich name that includes the registry of origin, the project, the vintage, and so on. More information on the tokenization process can be found in the Toucan docs.

C3

Website C3 supports carbon credits from the leading ICROA-endorsed carbon standards including Gold Standard, Verra, American Carbon Registry and Climate Action Reserve methodologies which enable carbon removal.

C3 Tonne (C3T) is the general term for fungible tokenized carbon credits bridged via C3. When you fractionalize the C3VCU NFT received after bridging, the resulting C3T ERC20 token will have C3T- as a prefix, followed by an information-rich name that includes the registry of origin, the project, and the vintage. More information on the tokenization process can be found in the C3 docs.

Moss

Website Moss carbon tokens (MCO2) is the term for fungible tokenized carbon credits bridged via Moss. More info about MCO2 can be found on the MCO2 page.

Additional resources

Explore the Digital Carbon Market with the KlimaDAO Digital Carbon Market dashboard.

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