How can blockchain open access to carbon markets?

Today is Earth Overshoot Day, marking the date at which humans have consumed more biological resources than the earth can regenerate for the rest of 2022. We gobble up resources at a rate 50% faster than they can be replenished in nature—meaning if governments and institutions don’t find a way to preserve finite resources and meaningfully wean off greenhouse gas emissions, we’re in for some civilization-threatening scarcity in the coming years.

Based on the current trajectory of carbon dioxide (CO2) emissions, the temperature of the planet could rise 4.4 degrees Celsius by the end of the century. This would devastate communities across the globe, triggering natural and human catastrophes.

Emissions of CO2, the most-burned greenhouse gas on the planet, jumped 6 percent in 2021 to 36.3 billion tons, an all-time high, according to a report from the International Energy Agency. The year represented the sharpest rise in global history, making 2020’s pandemic-induced decline a thing of the past.

As the threat of climate change took center stage in the ‘90s, the UN’s Kyoto Protocol of 1997 established carbon credit markets, marking the first ever international treaty aimed at cutting CO2 emissions. The protocol set target levels to limit emissions among the agreeing parties. This established “emissions trading,” allowing countries and corporations that were below the specified target levels to sell spare carbon units to organizations that reached their limit, turning carbon into a commodity.

The existence of the carbon credit market helps governments and companies ease off the greenhouse gas by mobilizing resources and reducing costs to smooth the transition toward a net-zero carbon future. The carbon credit market serves as a unique way to drive and inspire changes in the way humanity consumes CO2-emitting pollutants.

As the world tries to cooperate to meet the urgent 2050 deadline set forth by the UN roadmap to achieve net-carbon neutrality, the carbon credit marketplace offers an irreplaceable opportunity for collaboration on a wider scale to combat climate change. In fact, the global carbon market rose 164% in 2021, blossoming into an $851 billion industry.

This recent growth of the carbon marketplace certainly represents a positive step towards the goal of reaching carbon neutrality. The problem, however, is that the overwhelming majority of this $851 billion market is sealed off from the general public—only governments and large corporations are legally mandated to offset their CO2 emissions.

Mandatory, or regulated, markets exist in the United Kingdom, California, and the E.U., whose Emissions Trading System (EU ETS) was valued at $769 billion in 2021—easily the largest in existence. Only a mere $1 billion belongs to voluntary carbon markets, which empower individuals and smaller organizations to purchase emission-reducing carbon credits.

Beyond being unreachable for most individuals and organizations, the voluntary carbon market lacks transparency and quality control, deterring potential participants.

As the carbon market experiences solid growth, blockchain technology is uniquely positioned to help the market’s continued expansion by making access less exclusive. The blockchain can solve problems regarding transparency in the voluntary marketplace while simultaneously opening up mandatory markets to all.

Contrary to popular misconception, blockchain isn’t limited to the cryptocurrency industry. It’s a mechanism that can be implemented by many industries to enable efficient transactions, optimize workflows, streamline multiparty processes, boost accountability while minimizing disputes, and open up new markets through asset tokenization.

The telecom industry, for example, has already been using blockchain to help rapidly settle roaming charges between competing providers. The auto industry has also started leveraging blockchain to improve efficiency in key areas, such as safe and autonomous data, secure vehicle-related payments, ridesharing, and logistics planning. An increasingly common use case for blockchain is tokenizing real-world assets, such as precious metals or real estate.

Indeed, the real estate anecdote offers parallels most pertinent to the carbon credit market. There are many especially expensive cities in the world, such as New York, London, Hong Kong, and Tel Aviv, in which the vast majority of people simply can’t afford to buy or own an apartment. Blockchain does offer a path, however, for retail investors to still enjoy the benefits of partially owning an apartment. The idea is to fractionalize ownership of an apartment or house into smaller, more affordable shares – opening access to investments that are today dominated by the very wealthy.

These tokenization-use cases provide a potential buffer against today’s soaring inflation while enabling a larger class of investors to access widely-considered safe-haven assets.

Blockchain technology can do exactly this for the regulated carbon credit market. For the carbon marketplace, blockchain could completely transform the industry through breaking down bulk size carbon credit financial instruments, enabling individuals to take part in a carbon-free future through the currently sealed off mandatory market. Millions of people around the world are eager to create an ecologically responsible future, and blockchain can facilitate this by unlocking the door for everyone to participate in the goal of a carbon-neutral future.

On this Earth Overshoot Day, it is important to recognize areas where climate-related initiatives can be improved and expedited to surpass their goals. In this day and age, technology almost always holds the key to success. There’s no reason not to leverage blockchain, the chief technology for democratization, to open carbon markets to retail investors and tackle the global carbon footprint bottom-up, rather than top-down.

This blog is part of an Agenda series led by the World Economic Forum’s Crypto Impact and Sustainability Accelerator (CISA) which explores issues at the nexus of policy, sustainability, and social impact to help bring about a systemic, inclusive, and effective approach to governing distributed ledger technology.