Introduction to Carbon Tokens
When tokenizing already issued carbon units, all information about them is transferred to the blockchain. Alternatively, carbon units can be issued by the standard directly in the form of carbon tokens. Carbon tokens can be transferred, sold, redeemed, or stored in a blockchain wallet. The functionality of carbon tokens depends on the smart contracts used.
Characteristics of Carbon Tokens
Carbon tokens have the following characteristics:
- Backed by a Real Asset: They are backed by a real carbon unit.
- Price Formation: Their price is linked to the price of the underlying carbon asset, especially if the token can be converted back into the carbon unit.
- Interchangeability: Tokens can be interchangeable with other identical carbon tokens or non-interchangeable, depending on standards, methodologies, and the year of issuance.
Purposes and Possibilities of Carbon Tokens
Complexity and High Cost of Traditional Trading
Traditional trading of carbon units is quite complex and expensive, requiring KYC procedures, account opening and maintenance fees, and transaction fees, making small purchases difficult.
Solution: After tokenization, carbon units can be transferred between blockchain addresses without the need for registration in traditional registries, thus reducing costs.
Inaccessibility of Registry Data
Carbon units are issued by standards and stored in their registries, making it difficult for third-party users to track them and increasing the risk of double counting.
Solution: Carbon tokens can be tracked on the blockchain at any time, preventing double usage.
Low Liquidity of Carbon Units and Lack of Price Transparency
Large companies are the primary consumers of carbon units, limiting opportunities for small purchases. The trading process is complex, and price information is often hidden by intermediaries.
Solution: Blockchain allows the creation of 24/7 markets for carbon tokens with transparent pricing. Tokens can be fractionated into units smaller than one metric ton.
Approaches to Carbon Tokenization
One-Way Bridge
This approach involves converting carbon units into tokens without a reverse process. Carbon units can be redeemed in the registry, and the tokenizer issues an equivalent number of tokens for sale, storage, or redemption. Examples of this approach include Toucan Protocol`s Base Carbon Tonne (BCT) and Nature Carbon Tonne (NCT).
A kind of one-way bridge is a mechanism where carbon units are redeemed after the repayment of the tokens secured by them, as was implemented by MOSS in the case of MCO2.
Two-Way Bridge (Custodial)
The tokenizer locks the client’s carbon credits in a custodial account and issues carbon tokens, which can be converted back into carbon units. This process is implemented, for example, by Flowcarbon with the Goddess Nature Token and by the Toucan protocol with CHAR.
Issuance of Carbon Tokens According to Standard
Some standards have developed their own rules for issuing carbon units directly in the form of tokens, such as REGEN Network and Coorest.
The Future of Carbon Tokens
Initially, leading voluntary carbon standards like Verra and Gold Standard opposed the tokenization of their carbon units by third parties. However, recognizing the potential for increased liquidity, they began developing their own tokenization rules.
Key Principles for Future Tokenization:
- Reliability of Standards: Tokenization must use carbon units issued according to internationally or nationally recognized standards.
- Control of Standards: Standards must have the authority to authorize or prohibit tokenization and control the accounting of these units.
- Consumer Protection: Token issuers must undergo KYC and AML checks.
- Sustainability: The digital technology used must be sustainable, secure, and have a low carbon footprint.
- Public Accounting: Tokens must be registered in a public ledger linked to the standard.
- Carbon Neutrality Claims: Possible only after tokens and associated carbon units are withdrawn from the registry.
