Dispelling 5 myths about tokenized carbon 🔮

Tokenized carbon credits are created by moving credits from the traditional voluntary carbon market (VCM) onto the blockchain. To date, Toucan have tokenized nearly 22 million carbon credits from the Verra Registry, representing 5% of current market supply.

The speed at which innovation in this space has occurred however has created confusion around what tokenization is and its benefits to building a high integrity VCM.

This post starts to unpack this by exploring five common misconceptions that we have encountered about tokenized carbon credits:

1. Tokenized credits have already been ‘used’ or retired
2. Current restrictions on tokenization have killed on-chain markets
3. Tokenized carbon credits are low value
4. Tokenized carbon credits are low quality
5. Tokenization is just a flash in the pan

Over the coming weeks we hope to further the conversation on how tokenized carbon can contribute to building strong, transparent and rapidly scaling carbon markets.

Enjoy! 🌞

#1. Tokenized credits have already been ‘used’ or retired

This myth arises from the process used to transfer credits from the Verra Registry onto the blockchain to date, which involved converting these credits to a ‘retired’ state within the Verra Registry. As the action of retirement is normally associated with releasing the climate impact of a carbon credit , this approach has caused confusion between these two actions.

This approach was selected as the only way available to bring traditional credits onto the blockchain. To date, it has proven transparent and reliable in avoiding double counting between traditional and on-chain registries, with Verra using a similar method (albeit more manual) when converting credits to its own registry. Therefore, while somewhat confusing the definition of retirement, this approach has proven reliable and effective in transferring tokenized credits.

Other approaches to bridging traditional credits on-chain that avoid confusion around retirement are now being developed. Indeed, Verra, the Gold Standard and the International Emissions Trading Association (IETA) are all exploring this process via consultations and working groups involving blockchain actors.

#2. Current restrictions on tokenization have killed on-chain markets

While solutions are developed to transfer carbon on-chain while avoiding 'retirement', both Verra and the American Carbon Registry (ACR) have suspended the tokenization of credits from their registries. This has caused the media to speculate that tokenized carbon may have met its maker.

While no new credits have been tokenized nearly 3 months, the use of those already brought on-chain is continuing to grow. Indeed, there has been no impact on the liquidity of tokenized carbon pools and the amount of projects building with tokenized carbon has continued to grow.

Current restrictions have additionally created new momentum around the need to diversify credit supply into other registries and markets. This has become a hot topic for research and collaboration within the web3 community.

#3. Tokenized carbon credits are low value

This perception stems from prices for some on-chain carbon credits being lower than similar off-chain counterparts. For example (on the day of publication), GEO was trading at $4.14 and on-chain BCT at $1.80.

These price differences are driven by exposure to different on and off-chain market drivers. For example, on-chain carbon price is dictated by supply and demand within the crypto world. With many crypto assets dropping drastically in the last quarter, there are many holders of tokenized carbon credits that have since exited their positions. As a result, on-chain prices have reduced from where they have sat historically.

If on-chain credits had lost their worth, they would not trade within a reasonable range of equivalent off-chain credits. Until there are diversified sources of demand on-chain, prices may continue to diverge from traditional markets.

#4. Tokenized carbon credits are low quality

Tokenized credits reflect a large mix of different vintages and methodologies. Toucan Protocol’s carbon pools for example, are composed of credits from over 120 projects. While these include those awarded with ‘Prestigious Honour’ status, there have also been issues of dormant credits being bridged from Verra’s Registry, which adopt older methodologies and a more questionable climate impact.

As the issue of these credits moving into on-chain markets came to light, measures were taken to prevent this moving forward. Toucan for example updated the gating criteria associated with the BCT pool to prevent further dormant credits from entering.

Critically, it should be noted that these issues draw attention to the biggest difference between on-chain and off-chain carbon markets- transparency. Because all data on tokenized carbon credits is publicly available, the ongoing presence of questionable carbon credits in traditional markets is brought to light. Tokenizing carbon can therefore expose some of these market characteristics, which can help build greater integrity as the market scales into the future.

#5.  Tokenization was just a flash in the pan

At present, the price of many major crypto assets has dropped over 70% from all-time highs, largely driven by the collapse of TerraUSD and Luna, which wiped out $40 billion of value. This crash has caused speculation that web3 engagement in carbon markets was short-lived and will gradually die off as we enter 'crypto winter'.

While there is no denying the market is down, it is important to recognize that crypto projects are still attracting substantial investment interest. The use and adoption of crypto is higher than ever and web3 companies are continuing to attract talent from traditional tech companies.

As interest in crypto continues to expand, tokenized carbon is therefore set to receive growing interest and demand from web3 projects over the coming months and years. This should continue to drive innovation in developing a transparent, secure and decentralized voluntary carbon market as we scale into the future.

Conclusion

We hope this piece lifts the lid on some of the misconceptions around tokenized carbon. We will be diving further into some of the key topics introduced here over the coming weeks as Toucan and the web3 community continue to contribute to consultations and working groups run by Verra, the Gold Standard and IETA.

Have a specific question? Let me know! @DrHolWat