Carbon Credit Tokenization: Key Benefits & Challenges- Unicsoft (2024)

The carbon credit market is booming, fueled by an increasing number of environmental, social, and governance (ESG) regulations and initiatives. By 2030, this market is expected to be worth $50 billion a year.

What else is great news for investors? Tokenized carbon credits will also cost more, reaching $80-150 per tonne by 2035, which is 2-3 times more than they are now, depending on location.

In this article, we’ll explain how to generate carbon credits, why you should consider investing in it, how blockchain helps create reliable trading solutions, and some examples of successful blockchain carbon credit products, including the carbon credits trading platform developed by Unicsoft.

Carbon Credit Market Overview 2024

In this article, we’ll discuss two types of carbon credit markets: certified and voluntary.

• The certified emission reduction (CER) market deals with units (or credits) that were created through a government-regulated framework (third-party).
• The voluntary carbon offset (VCO) market issues credits that can be used to fund carbon reduction incentives. These credits aren’t issued by government-approved entities and can’t be used to buy companies the right to emit GHGs within the mandatory compliance framework.

Despite its voluntary basis, the VER market is effective and growing fast. Here are some recent statistics:

• By 2030, California’s carbon price could reach up to $93 per metric ton, starting from around $42 per ton in 2024. In contrast, the EU aims for €149 per ton by the same year, beginning from €71 per ton ($76 per ton) in 2024.
• The latest Bloomberg NEF report claims that the carbon offset market can be valued at over $1.1 trillion annually by 2050.
• If this flexible demand continues in the current market with increasing prices, companies might buy 1 billion offsets each year by 2030, stabilizing around 2.5 billion by 2050.
• The global demand for carbon credits could reach up to 1.5 to 2.0 gigatons of carbon dioxide (GtCO2) by 2030 and up to 7 to 13 GtCO2.
• The Institute of International Finance believes there is “huge upside potential” for voluntary carbon credits, predicting the market could be worth as much as $100 billion per year by 2050.
• The cost of one tCO2e is estimated to rise to $80-150 by 2035.

Voluntary market offsets are an opportunity for experimentation and innovation. Contrary to standardized offsets, they can serve niche projects too small to be covered by compliance programs and companies that want to extend their corporate responsibility.

How does the voluntary carbon market work?

The voluntary carbon market plays a crucial role in achieving net-zero carbon emissions by facilitating the purchase and trading of carbon credits.

In this market, the carbon emission tokens work on a cap-and-trade basis. A state regulator assigns a carbon emission quota (in credits) based on a company’s activity and size. If a company emits less CO2 than its assigned quota, it can sell or trade its remaining credits with other companies. If it produces more, it must buy extra credits to comply with regulations and avoid penalties. These credits can be used for funding projects aimed at GHG research and reduction.

Very often, credits are sold by companies that have surplus carbon credits or that are seeking other options on the voluntary carbon market to comply with regulations and avoid fines and extra taxes.
The credits in the voluntary carbon market are generated through various carbon reduction initiatives.

These are usually projects related to renewable energy, energy efficiency improvement, greenhouse gas (GHG) capture and storage, land use, and reforestation.

Why invest in the carbon credit market?

Investing in the carbon credit market is a promising opportunity as global temperatures rise and companies adopt clean energy transition technologies. This growth is attracting sustainable investors and supporting broader adoption of carbon credit technologies.

Here are a few reasons to invest in this sector:

• High growth potential. With the rise of global temperatures, organizations worldwide are seeking new ways for technology to accelerate the transition to clean energy and combat climate change. Much of what we perceive as initiative today will become a must tomorrow.
• A growing trading base. As the carbon credit market expands, more corporate and individual clients will be willing to create, purchase, or trade their carbon credits. They will need secure digital solutions for this.
• Heightened investor interest. Developing more technologies for carbon credits will speed up the broader adoption of voluntary carbon credit markets, attracting even more investors.
• A green investment in itself. Developing a carbon trading platform can be a part of your long-term sustainability initiatives. Plus, you can invite partners to participate in programs, buy credits, and help reach net zero faster.

What is carbon credit tokenization?

Carbon tokenization is the process of transforming carbon credits into digital assets within the cryptocurrency ecosystem. This allows companies to use carbon credits as tokenized asset within the carbon credit cap and trade system. Thus bringing liquidity to carbon markets and helping everyone reach their net zero goal faster.

How carbon credits work? For example, imagine a company that emits 300 tonnes of CO2 annually. For carbon offsetting, they would need to purchase 300 carbon credits, where each credit represents one tonne of CO2 or other greenhouse gas emissions. If this company reduces its emissions and ends up with surplus credits, they can tokenize these credits – turning them into tokens that can be traded or invested more easily. This flexibility promotes efficient trading and supports efforts to reduce carbon footprints effectively.

Benefits of Carbon Credit Tokenization

The use of blockchain in carbon credit tokenization helps secure transactions, keeps data intact, and provides complete visibility and traceability, but it comes with its own share of challenges. Here are a few that platform developers will usually need help with.

Increased Transparency

Tokenized carbon credits increase market transparency and trust. The immutable nature of blockchain ensures that each carbon credit is traceable and verifiable. This reduces the risks of double counting and fraud.

Liquid Marketplaces

Tokenized carbon credits can be traded on various blockchain-based platforms, which creates a more liquid and accessible market. These digital marketplaces enable faster and more efficient transactions. Buyers and sellers can trade carbon credits with ease and at lower costs.

Enhanced Accessibility

Tokenization allows carbon credits to be divided into smaller units, which makes it easier for individuals and smaller companies to invest in carbon offsets. Anyone with internet access can participate in the carbon credits market. Lower entry barriers encourage wider adoption and investment in carbon offset projects.

Improved Efficiency

Blockchain technology streamlines the processes involved in the issuance, trading, and retirement of carbon credits. This reduces administrative costs and speeds up transactions.

Greater Security

The decentralized nature of blockchain provides robust security for carbon credit transactions. Smart contracts can automate and enforce the terms of carbon credit deals, which ensures that transactions are secure and tamper-proof. Investors, regulators, and consumers can have confidence in the authenticity and impact of tokenized carbon credits, encouraging more robust participation in carbon offset initiatives.

How a Carbon Credit Trading Platform Works

A carbon credit trading platform brings together organizations that own, issue, and trade voluntary carbon credits. These platforms allow users to tokenize a specific pool of eligible credits. One token has the value of one carbon credit (one tCO2e) and contains all the information related to the specific credit. This information includes

• Third-party credit certification data, if applicable
• Transaction records
• Auditing details
• Project data

This information forms the basis for smart contract creation: a program stored on a blockchain that runs if predetermined criteria are met. A third party can easily verify a token’s background information, and once ownership is confirmed, the contract executes automatically. This eliminates the need for intermediaries and creates a completely transparent process.

Carbon tokens follow the data encryption standards inherent to the blockchain, allowing easy and transparent integration with decentralized finance (DeFi) markets. With smart contract verification, decentralized exchanges (DEXs) can offer a range of financial instruments to owners of tokenized carbon credits.

Read Also: DeFi Staking Platform Development Services

5 Most Notable Carbon Credit Platforms

Carbon trading platforms allow users to create, store, tokenize, sell, and sometimes exchange carbon credits. Here are some of the most popular platforms:

Carbon Trade Exchange (CTX)

Carbon Trade Exchange (CTX) is the world’s first carbon trading blockchain platform and a collaborator with the United Nations CDM registry. Its services support the full carbon credit trading lifecycle. CTX trades Gold Standard, Verified Carbon Standard, and UN CDM credits (VER, CER, VCU, EUA, EUAA).

AirCarbon Exchange (ACX)

AirCarbon Exchange (ACX) is a carbon trading platform launched in 2019 in Singapore. The platform uses both traditional central order book architecture and blockchain technologies to accelerate carbon credit purchasing, clearing, and settlement. Its engines can match nearly 10,000 trades per second with complete blockchain transparency. ACX now has over 90 clients, including corporate entities, carbon project developers, startups, and other industry stakeholders.

Toucan

Toucan provides infrastructure for Web3 builders, credit suppliers, and credit buyers. It features two types of credits: BCT (Base Carbon Tonne) and NCT (Nature Carbon Tonne).

These credits are tokenized as a unified reference token called TCO2. TCO2 tokens are stored on a smart contract on the Open Climate Registry, a blockchain database. This unification helps the platform issue tokens that can be traded within Toucan’s ecosystem and on major crypto exchanges. Plus, it makes the registry information transparent, which improves market adoption.

KlimaDAO

KlimaDAO is a decentralized autonomous organization with a platform offering carbon credit minting, tokenization, and trading to both organizations and individuals. The organization has its own KLIMA tokens that are minted and distributed automatically.

One of the most distinctive features of KlimaDAO is that its tokens are backed by BCT (Base Carbon Tonne) tokens created by Toucan. BCT is linked to real assets, which helps KlimaDAO push the carbon-based ecosystem forward, drive carbon credit prices higher, and get more market exposure.

OMoss NFT

Moss Amazon NFT is a project that takes the carbon credit industry into Web3. The project has minted NFT-based tokens stating the number of acres of the Amazon forests that the NFT owner is obliged to preserve. The carbon credit NFT is a digital certificate that proves the owner’s rights to property and protection of the actual land. Moss NFT owners can monitor their part of the Amazon preservation project and organize visits to see it.

Challenges of Carbon Credits Tokenization

The use of blockchain in carbon credit tokenization helps secure transactions, keeps data intact, and provides complete visibility and traceability, but it comes with its own share of challenges. Here are a few that platform developers will usually need help with.

The legal link between tokens and carbon credits

A voluntary carbon credit market lacks the legal framework to function more efficiently. While there have been some positive steps, such as the UN’s commercial partnership with the Carbon Trade Exchange, it takes time to bring a market out of the gray zone. Another legal issue on a smaller scale is transferring rights associated with carbon credits.

Without a deep legal analysis and careful implementation of rights transfer, the whole idea of ownership can be jeopardized. NFTs (non-fungible tokens) offer one way to solve ownership issues, but the industry still needs regulation.

Effective digital identity verification

Carbon credits cannot be used for money laundering if digital identity checks aren’t in place. KYC (know-your-customer) procedures, such as those used by high street banks, are essential for creating a safe trading space.

Establishing token and project quality

The quality of tokenized carbon credits is a major issue, as many tokens back projects that don’t add value to carbon reduction. As Toucan’s story shows, a platform may offer a bunch of low-quality credits for projects that don’t need funding or whose impact is overvalued. As a result, any reliable platform needs a way to thoroughly vet projects and their background.

None of these challenges are easy to overcome alone. Fortunately, a reliable tech partner can help you mitigate the risks and create a platform that’s a reliable and safe carbon credit platform for everyone.

How to Launch a Carbon Credit Tokenization Platform: Step-by-Step Guide

• Determine Your Carbon Credit Source. First, decide where your carbon credits will come from. Will you source them from verified projects, purchase them from exchanges, or generate them through your own sustainability initiatives?
• Design Your Carbon Credit Tokens. Before tokenizing carbon credits, think about how the carbon credits will appear on your platform. This involves designing the tokens, including their representation, metadata, and how they will be tracked and traded.
• Develop a Business Model. Create a solid business model for generating revenue. Will you charge transaction fees, offer premium services, or monetize data? Your business model should align with your goals and the needs of your target market.
• Choose a Blockchain Platform and consensus mechanisms. It’s no secret that blockchain technology is energy-intensive. The energy required to create crypto assets and trade tokens often creates a footprint that defeats the aim of carbon emission reduction. As a result, you need to choose solutions that require fewer system resources. Platforms like Ethereum, Hedera Hashgraph, or custom solutions can offer various benefits.
• Payment processing. You have to carefully consider how your platform will receive and process payments – not just technically but also in terms of tax and legal implications. Consider consulting with a team of seasoned business analysts and solution architects to handle this issue.
• Ensure Regulatory Compliance. Navigate the regulatory landscape to ensure compliance. This includes understanding local and international regulations, obtaining necessary licenses, and implementing robust KYC/AML processes.
• Build and Test Your Platform. Develop your platform with a focus on user experience, security, and compliance. Ensure it includes features for buying, selling, and tracking carbon credits. Rigorous testing is crucial to identify and fix any issues before launch.
• Launch and Market Your Platform. Finally, launch your platform and execute a marketing strategy to attract users. Utilize social media, partnerships, and other channels to build awareness and trust in your platform.

Case Study from Unicsoft: Carbon Credit Platform Development

New Frontier Markets (NFM) asked Unicsoft to develop a digital marketplace for corporate and individual investors to acquire and trade carbon credits. These credits are issued on the platform as NFTs, which owners can trade after purchase. The NFTs represent verified carbon credits and are minted on a private blockchain which can only be accessed through the platform.

Unicsoft developed an MVP of a platform with the following features:

• A blockchain-native currency for credit trading
• Special consensus protocols to ensure security and data privacy
• Compatibility with major mobile and desktop web browsers
• Guaranteed 24/7 uptime for all platform modules
• Support for monetizing primary and institutional sales
• Easy transfer of NFTs to crypto wallets

The unified platform provides capital-raising opportunities for project owners and helps investors choose which carbon offset projects to support. All business features benefit from the transparency, efficiency, and reliability of blockchain technology. You can read the full case study here.

Wrapping up

The rapid growth of carbon credit markets has created opportunities for investors in online trading technology. However, both blockchain and carbon credit trading are complex. For the best chances of success and to avoid the many pitfalls, it makes sense to delegate platform development to a tech vendor with experience in creating robust, secure, and scalable solutions.
At Unicsoft, we know what it takes to create a blockchain-based carbon credit platform that makes the most of this exciting new potential. Contact us today, and let’s talk about how your business can grow by tapping into the world of carbon credits.