One of the primary carbon credits issuers, Verra banned the conversion of retired Verra credits into crypto tokens leaving crypto platforms like Toucan and KlimaDAO in jeopardy.
Verra, a carbon credit standards certifier, on May 25 declared that it will prohibit the conversion of retired credits into blockchain tokens immediately, months after crypto platform Toucan's ambition to utilise blockchain to upend the whole carbon credits system collapsed.
In light of World Environment Day 2022, with its campaign for this year utilising the hashtag #OnlyOneEarth to advocate for revolutionary changes in policies and choices to enable cleaner and greener environment, the ban implemented by Verra is an indispensable step towards a sustainable living in harmony with nature.
Crypto-backed trading of carbon credits has allowed people to trade carbon credits that are converted into crypto tokens. One such token is BCT by Toucan (one BCT represents one tonne of CO2 removed from the atmosphere). However, the recent announcement from Verra, the largest carbon crediting program in the world, points towards a potential fraud of double counting retired carbon credits.
A “retired credit” marks that its environmental benefits have been consumed. Therefore, Verra announced an immediate ban on the creation of tokens or instruments based on retired credits. This, however, has put the central mechanisms of crypto-based carbon credit trading platforms such as Toucan and KlimaDAO in jeopardy.
Verra aims to investigate the feasibility of "immobilising" credits in Verra Registry accounts so that they may be tokenized with the transparency and traceability that market players require, provided that this can be done in a way that avoids fraud and maintains environmental integrity.
After all, the whole aim of carbon credits is to compensate for environmental degradation.
Future of Crypto Carbon Offset Projects
Several blockchains and crypto platforms that perform tokenization use Verra-registered carbon credits. The credit is marked as ‘retired’ on the registry before creating a token to prevent double spending. However, Verra observed that some platforms leave the credit active leading to potential fraud.
After Verra’s decision to stop the tokenization of retired credits, Toucan’s main activity will halt and the same might happen to KlimaDAO as well. Currently, it is unclear what will happen to 22 million retired credits that have already been placed on the blockchain. Both Toucan and Klima tokens dropped drastically in price following Verra’s announcement.
However, the crypto carbon proponents are still holding out some hope. Toucan believes that it will be able to help Verra build a new system of tokenizing “live” credits as opposed to retired ones to continue the trading of tokenized carbon credits.
However, as per a TIME report, Verra is leaning towards working with a project like Carbonplace that is created by a consortium of banks including CIBC and UBS. Carbonplace has similar aims like Toucan, but it operates on a closed, proprietary system, as opposed to the blockchain. Verra believes by choosing a more centralized project like Carbonplace, it would have greater control over who buys credits as there was concern about crypto tokens being used for shady purposes.
However, Verra has also said that it will start a public consultation process to decide the future. The company says the way forward doesn’t have to be the banks, it could be any entity with sophisticated KYC checks and the infrastructure to perform these checks. Officials of Toucan and other crypto entities hope that they would be involved in the decisions moving forward.
Problems with tokenization of carbon credits
Research suggests that some carbon credits that are tokenized by the crypto platforms are not as green as they claim to be. Several carbon credits come from age-old projects that offer very little in terms of value and often do not need extra funds to function. And some of these platforms’ idea of removing these poor credits to force big companies to buy better and more valuable carbon credits has backfired.
Moreover, there are fundamental issues with quantifying exactly how much CO2 a given carbon offset project removes from the atmosphere, for example, afforestation projects may not yield value in the long-term as trees could die, get destroyed or burn in forest fires.
Also, there are widely documented incidents of fraud, double-counting and creative accounting rendering a large portion of carbon credits untrustworthy as one such activity led to the Verra ban.
With this there is a lot of ambiguity regarding the crypto future of carbon credits, however, with better regulations and framework, the blockchain system has the potential to revolutionise the carbon trading market.
(Edited by : Anand Singha)