Carbon Credit Trading
There’s no question that environmental concerns are some of the most pressing of our time. Of course, “environmental sustainability” is a catch-all term covering multiple areas including biodiversity loss, pollution, and drought and water scarcity, among others. But it is the issue of climate change that has been front and centre of the global push for environmental conservation.
Whether one believes climate change represents a rapidly approaching existential threat or a slowly manifesting problem that requires slow and considered solutions, the global race to reduce GHG emissions is already very much underway. Achieving net zero by 2050 will require global emissions reductions in the region of 50 gigatonnes by 2030 and the National Academies of Sciences, Engineering and Medicine estimates that 10 gigatons of C02 will have to be removed from the atmosphere each year by mid-century in order to maintain the global temperature rise below 2 degrees Celsius.
Figure 1: Three-in-four across 19 countries view global climate change as a major threat to their country
The Carbon Credit Opportunity
Unfortunately, the speed and scale of GHG reductions required necessitates a correspondingly large change to global business and industry as well as individual consumer choices and behaviours. It's unsurprising, therefore, that companies are misleading consumers and investors by claiming to be more environmentally responsible than they actually are. This 'greenwashing' has emerged as a major issue and undermined the push for sustainable products and the claims behind ESG impact investing.
It is in this environment that the trading of carbon credits that represent one tonne of CO2 has emerged as an important economic and technological incentive to establish a more responsible emissions framework. By putting a price on carbon emissions, carbon markets are a tool for trading carbon credits and offsets which can go a long way to incentivising the reduction of emissions – a far superior alternative to punitive taxation.
Figure 2: The process of developing and bringing a carbon credit to market
At the same time, the inherent challenges of carbon credits themselves such as verifying their origin (many come from emerging markets where verification, tracking and tracing can be problematic) and data integrity, have all served to limit carbon credit trading participation hitherto. Here, the need to verify carbon credit provenance, with all the attendant data, meta-data tracking and tracing, makes them particularly well-suited to a potential blockchain solution.
By placing carbon credits on the blockchain, double counting, where two companies claim to use the same carbon credits, as well as other fraudulent practices, would be more difficult. Improved transparency and liquidity in voluntary carbon markets will elevate carbon into an asset with a strong risk-adjusted return and uncorrelated with other asset classes. This, in turn, would make it increasingly appealing to institutional investors who have yet to get exposure to this market.
Figure 3: Diagram of the Flowcarbon's GNT tokenomics
One project currently putting carbon offset credits on-chain is Flowcarbon, who provide strategies ranging from carbon project origination and financing to credit sales and corporate carbon portfolio management in order to vertically integrate the entire carbon credit lifecycle. Through its GNT token, Flowcarbon aims to develop and improve the real-world voluntary carbon market (VCM) by bringing in new investments (Figure 3).
And with the global carbon credit trading platform expected to reach $200.6 billion by 2027 from an estimated $67.3 billion in 2022 (CAGR of 24.4% from 2022 to 2027), this will undoubtedly be a high-growth area for blockchain tech application.
While blockchain technology has gained widespread recognition for its potential to boost trust and efficiency in business workflows and transactions, it still requires information sharing with other systems in order to authenticate transactions.
Zero-knowledge proofs (ZKPs) have gained increasing attention as a powerful tool for addressing privacy and confidentiality challenges in blockchain technology.
ZK smart contracts are coded into applications (or "ZKApps") that run off-chain and have significant authentication, transaction privacy, and data verification benefits (Figure 4). This is opening up a far wider range of use cases that will close the gap between Web2 and Web3, including in social networking, voting, games, and zkML (zero-knowledge machine learning).
Figure 4: Three areas ZKPs can enhance blockchain-based systems
At the same time, Zero-knowledge proofs have become an important tool for scaling the Ethereum network via ZK-rollups. Although they derive security from Ethereum, ZK-rollups are off-chain "hybrid scaling solutions' which, according to Ethereum Foundation, makes them safer than pure off-chain scaling solutions, such as sidechains, which are responsible for their security properties, or validiums, which also verify transactions with validity proofs but store transaction data elsewhere (for more see Zero-Knowledge rollups).
Overall, ZKPs will be a powerful tool for addressing the concerns (outlined in Figure 4) by allowing interactions with blockchain-based digital services that keep data private. This will provide consumers with a superior level of control and freedom over their information and greater flexibility over how their data is used. O(1) Labs efforts to build out the first ZK-based layer 1, MINA Protcol, is a good indication that ZK is in the process of making the jump from academia to real-world of Web3 applications.
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