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Blockchain and carbon: how to scale climate action while protecting investors and ensuring environmental integrity
02 March 2022

Blockchain and carbon: how to scale climate action while protecting investors and ensuring environmental integrity

4 minute read
Net zero
Ingo Puhl Co-Founder and Managing Director Southeast Asia

The end of 2021 saw a surge in the use of web3 applications whose goal is to fight climate change.

According to the Verified Carbon Standard, this new demand for carbon credits made up 5% of the total volume of carbon credits traded on the entire voluntary carbon market (VCM) in 2021.

Blockchain technology has enormous potential for climate action. This is only the case, however, when the right safeguards are in place to ensure environmental integrity. Web3 applications can be part of the climate solution, but they have to be designed and applied in the right way.

Assessing the merit of web3 carbon solutions

In South Pole's view, the main criterion for evaluating the merit of any new web3 solution is whether its design and functionality add net value to accelerated, market-driven climate action. In other words: what additional, positive value does the solution provide compared to current solutions? What are the potential risks associated with the new solution? And does the net balance make it superior to existing alternatives?

We believe that the following criteria should be at the core of any new web3 solution designed to accelerate investment in climate action.

New climate-focused web3 solutions should:

  1. Improve market access for buyers, by expanding the market through improved price transparency and market participation.
  2. Improve market access for project developers by reducing the cost of carbon credit origination.
  3. Improve market access for intermediaries by reducing transaction costs and providing additional liquidity.
  4. Strengthen the investment case for climate action by making the prices in the spot and futures market higher and more reliable, to the benefit of project developers and investors.
  5. Create new and viable asset classes for a broader audience by providing predictable returns on investment and including value protection for buyers and sellers, as compared to existing solutions offered by the VCM.
  6. Have clear safeguards to protect reputation and design legal processes for settling disputes.

Considering the key criteria above will improve the value and scale of the voluntary carbon market, support the high-quality standards and protocols that currently govern the use of carbon credits and accelerate the commitment to net zero by companies with clear sustainability roadmaps.

However, while we believe in the potential of web3 applications to create value in carbon markets, the solutions we have seen to date do not (yet) provide additional value for mainstream users and should be explored with caution.

We have developed four recommendations to guide the efforts of web3 x carbon application developers.

1. Protect the integrity of the voluntary carbon market

Poorly designed web3 applications for carbon management can create the space for fraudulent behaviour. Web3 developers who want to be seen as a reliable force are responsible for integrating clear safeguards into the design and operations of their applications, which should be developed in close collaboration with established organisations that are focused on protecting the integrity of the carbon market.

2. Achieve net zero in your own operations

The energy consumption of web3 applications has distorted electricity grid markets and pointed to the carbon intensity of emissions if that energy is drawn from fossil fuels. According to South Pole's own calculations, the carbon footprint of operating KlimaDAO, one of the many recent climate-focused web3 initiatives, is at least 100 times larger than the use of the traditional registry and trading infrastructure1. To be aligned with the ethos of taking climate action, the climate-focused web3 community must find soft- and hardware solutions that have the lowest possible energy use – even lower than the current solutions. This energy use must be drawn from the cleanest sources, with potential from off-grid sources, to avoid distorting electricity markets.

3. Focus on use cases that create lasting value

The “hard part" of creating value in the voluntary carbon market is convincing investors to fund climate action vs funding the “business as usual" case. Compared to existing solutions, the current carbon-focused web3 projects concentrate too much on drawing new buyers and intermediaries into the market, and not enough on upholding safeguards and increasing the transparency around the actual use of a carbon credit. We encourage carbon-focused web3 developers to invest more time in the hard part: creating use cases in the VCM with lasting value.

4. Collaborate with traditional market players to scale climate action

We need creative solutions to catalyse climate action at an unprecedented scale: the carbon market can play a critical role in achieving our global climate goals of halving global emissions by 2030 and achieving net zero by 2050. The best approach for creating high-quality solutions is to bring together the different skillsets within the web3 and carbon market communities. Those with an interest in achieving real, lasting impact need to collaborate in setting the standard for what 'best-in-class' looks like.

1This calculation is based on data from DigiEconomist related to the carbon footprint of ETH, recognising that polygon is a proof of stake layer 2 blockchain on ethereum.

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South Pole is an established player in the carbon market, with a dedicated digital innovation team.​
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We have already launched multiple cooperations with members of the web3 community to scale up climate action and we are interested in creating further cooperation opportunities.

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