Climate change is one of the greatest problems facing society today. Therefore, it shouldn’t come as a surprise to see large corporations stepping in to mitigate their environmental impact. For example, Amazon plans to be carbon neutral by 2040; Starbuck has goals to become “resource positive” by reducing carbon emissions; and Microsoft has aims on getting to a carbon-negative status by 2030.

Companies that vow to take responsibility for offsetting their own carbon emissions are part of voluntary carbon marketplaces. Unfortunately, a common set of standards doesn’t exist to ensure that voluntary carbon markets operate efficiently when companies produce environmental, social and governance reports. Instead, a number of offset standards have been passed over the years, creating confusion and even fraud among organizations. 

Interestingly, tokenized carbon marketplaces may provide a solution. Marley Gray, the principal architect at Microsoft, told Cointelegraph that carbon credits achieved from ESG reporting have underlying value; therefore, they are a natural fit for tokenization:

“Carbon credits are purely digital assets representing the right to emit one tonne of carbon dioxide. These can be made into tokens that can be sold, with its representation of shared value recorded on a blockchain ledger.”

According to Gray, given that ESG reporting is already common practice among many corporations worldwide, making climate and sustainability accounting more efficient through tokenization is critical. 

For instance, tokenization of carbon markets could help solve fragmentation and a lack of transparency faced by centralized, traditional systems. According to the Carbon Token Ecosystem white paper, carbon offset markets are prone to fragmented implementation and lack of cross-market exchange of value. This often results in demand-and-supply imbalances, hyperinflation in carbon credits and a lack of trust in carbon credit markets.

Developing standards around tokenization

Although some companies have already started to create tokenized carbon credits, Gray, who is also the chairman of the InterWork Alliance — a nonprofit group aimed at creating global standards around tokenized ecosystems — explained that there are currently no standards in place for tokenized carbon markets.

As such, IWA announced the formation of its Sustainability Business Working Group. The group will focus on tokenizing sustainability business use cases, while establishing a set of standards for carbon markets. Paul DiMarzio, the marketing director of IWA, told Cointelegraph that there are currently 43 members who compose the nonprofit organization. Microsoft is one of IWA’s largest corporate members, as the company plans to become carbon negative in the next 10 years, with the aim to remove all historical emissions by 2050.

Yet with such lofty goals, DiMarzio explained that organizations have to work together to achieve emissions reductions. He noted that many of IWA’s members either want to become carbon neutral like Microsoft or build out carbon mitigation exchanges moving forward:

“The IWA has been examining areas where our members are interested in working together to meet common goals. The interest in sustainability has been building for quite some time on multiple fronts. One of the first things IWA can do is enter a large multi-party scenario in sustainability to tackle problems facing carbon markets.”

Is this a reasonable goal?

While tokenization and a set of standards may solve problems facing carbon markets, other elements must be taken into consideration. Arun Ghosh, the U.S. blockchain lead at KPMG, told Cointelegraph that the value proposition of tokenizing data related to greenhouse gas emissions reductions is directly correlated with the integrity of the data that the token is derived from.

In the context of tokenizing carbon credits, Ghosh explained that accurate measurement, cryptographic capture and AI-based validation are core to enabling trusted digital tokens representing the ownership interests in indirectly sourced renewable energy certificates. 

While data quality and integrity are critical factors for organizations looking to reduce carbon emissions through tokenization, Gray explained that the IWA isn’t focused on collecting carbon emissions data, but rather in coming up with a standard for businesses on how data will be reported and shared. He noted that IWA aims to develop a technology-neutral framework for tokenizing emissions and offsets, along with contractual requirements to operate against these tokens. Once these standards have been established, the implementation of voluntary carbon marks and, eventually, regulated carbon markets may take place.

For example, Gray pointed out that just as cryptocurrencies solve the double-spend associated with fiat currency, tokenizing carbon credits under a common standard could solve double counting of emissions reductions. Indeed, a report by the Environmental Defense Fund notes that double counting is a big concern. This means that emissions credits are counted once by the country of origin reporting its emissions inventory, and then again by the receiving country or entity. The report states:

“In the absence of rules, a country of origin could reduce emissions to meet its pledged effort and transfer those to a recipient; the recipient could then claim those same reductions to meet its pledged effort. In that case, only one reduction has actually occurred, but it is being claimed twice.” 

Working on regulating the markets

As the need for tokenization and standards becomes more apparent, KPMG’s Ghosh further pointed out that there have been ongoing conversations at a global level with the United Nations Framework Convention on Climate Change, or UNFCCC, for developing token standards for carbon markets:

“UNFCCC is looking at token standards, which can achieve interoperability as defined within Article 6.2 of the Paris Agreement for bilateral and multi-party collaboration for the sale and purchase of internationally transferable mitigation outcomes (ITMO).”

Although UNFCCC has expressed interest in using blockchain technology for climate action, along with creating standards around tokenization, Grey noted that UNFCCC has been focused on creating standards for regulatory markets. IWA, however, has been primarily concerned with guidelines for voluntary markets.

Gray further remarked that since IWA is member-led, it’s likely that standards for sustainability will be implemented much faster than those from UNFCCC. Regardless, Ghosh noted that challenges still need to be addressed in order for a framework on tokenization of carbon markets to be successfully implemented:

“The challenges largely pertain to the validation of integrity and provenance of assets exchanged in these types of schemas based on the Paris Agreement’s 6.2 standards. Further challenges relating to double accounting/spending will persist until there are verifiable information systems that can prove the integrity of emissions reductions activities.”