Imagine starting your day with a cup of coffee. The beans were grown in Brazil, roasted in Italy, and brewed in your American kitchen. This simple cup holds a carbon journey, encompassing its transportation, processing, and preparation. Multiply this with every product you use or consume, and you get a sense of your daily carbon footprint or, in other words, the volume of greenhouse gas generated directly or indirectly by your activities.
It's easy to overlook the invisible clouds of carbon dioxide. These occur naturally through the carbon cycle, a natural process by which carbon is exchanged among the Earth's biosphere, geosphere, hydrosphere, and atmosphere. While most of it is naturally occurring, one of the biggest CO2 emitters in the cycle is combustion, the burning of organic matter by humans, including fossil fuels, that releases stored carbon into the atmosphere as CO2. These contribute to a global crisis because carbon dioxide and other greenhouse gases like methane are responsible for trapping heat in our atmosphere. The outcome? Rising global temperatures, unpredictable weather changes, loss of biodiversity, and surging sea levels. If unaddressed, our world might see an alarming rise in temperature of more than two °C this century. While renewable energy solutions offer viable options for reducing humanity's carbon footprint, unchecked emissions in sectors like transportation and manufacturing could dim this light. The concept of carbon offsets and credits ties into the carbon cycle by aiming to balance the carbon released into the atmosphere with an equivalent amount sequestered or offset. By doing so, they aim to maintain or restore the balance of the carbon cycle, which human activities have disrupted.
These are platforms where carbon credits become commodities that can be bought, sold, or traded. Let’s dive into an example. Imagine a coal power plant in Country A and a wind farm in Country B. Due to strict environmental regulations, the power plant needs to offset its emissions. The wind farm generates carbon credits because it produces clean energy. The power plant can buy these credits from the wind farm, compensating for its emissions and financially supporting green energy.
The voluntary and compliance carbon markets are two distinct mechanisms aimed at reducing greenhouse gas emissions, albeit through different modalities and levels of regulation. The Voluntary Carbon Market (VCM), estimated to reach a value of up to $480bn by 2050, is characterised by its optional participation, allowing individuals, companies, and governments to buy carbon credits voluntarily to offset their emissions. The demand for Voluntary Carbon Credits (VCCs) is expected to rise significantly soon, reflecting a growing interest among various entities in offsetting their carbon footprints voluntarily. On the other hand, compliance carbon markets are established through national, regional, or international policies or regulatory mandates. These markets primarily target energy-intensive emitters like power generators, oil refineries, and airlines, among others, and enforce mandatory carbon reduction regimes. Entities within these markets must adhere to specified emission reduction targets, and they can trade carbon credits to meet these targets.
Unlike voluntary markets, participation in compliance markets is obligatory, guided by stringent regulatory frameworks to achieve broader emissions reduction goals outlined in agreements like the Paris Agreement. The European Union’s Emission Trading System (ETS) and China’s ETS are prime examples of the former, where regulations stipulate emission caps. These markets not only address emissions but funnel funds into climate initiatives with the sale of credits.
The cover decision of COP27, known as the Sharm el-Sheikh Implementation Plan, highlights that a global transformation to a low-carbon economy is expected to require investments of at least $4-6 trillion a year to achieve global climate action targets.
Source: Carboncredits.com
Both these terms navigate the carbon landscape but serve different purposes. Carbon offsets are tangible actions that mitigate carbon emissions. Let’s say you take a flight from New York to London. That journey has a carbon cost. Investing in a tree-planting initiative like Kyoto in Kenya can offset those emissions, essentially balancing out the environmental impact.
On the flip side, carbon credits are like environmental currency. Returning to our coal plant and wind farm example, the credits generated by the wind farm's clean energy can be sold or traded, incentivising companies to invest in eco-friendly projects.
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 because it provides the perfect digital ledger to record accurate and transparent carbon-related data.
In the context of emissions, blockchain can track and verify the authenticity of each carbon credit or offset, ensuring that the reported reductions are genuine. This minimises the risk of greenwashing and the proliferation of brands using smoke and mirrors to portray sustainable values. It also reinforces trust in the system while allowing for the scaling of the VCM. Consider a European company purchasing carbon credits from a reforestation project in South America. Through effective blockchain and application and robust carbon-tracking-related products, every stakeholder, from local communities to international auditors, can track and validate the legitimacy of these credits, bolstering faith in such eco-initiatives.
Blockchain’s potential to transform the lagging carbon markets is becoming increasingly evident. However, it can only be effective when safeguards are in place to ensure environmental integrity. Web3 applications can form a critical part of the climate solution but must be designed and applied correctly.
Kyoto is developing many solutions, ranging from its innovative, carbon-negative blockchain to a carbon registry, DMRV, to bring an innovative new digital carbon standard. Together, they create one unified ecosystem designed to scale the VCM and regenerative finance.
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