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Carbon credit standards body Verra suspends blockchain, crypto tokenization

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Yesterday Verra, the Washington-based non-profit that sets voluntary carbon credit standards, said it is immediately stopping the practice of creating blockchain tokens or instruments based on retired credits. Many blockchain and crypto platforms that offer tokenization use Verra registered carbon credits and mark the credit as ‘retired’ on the registry before creating a token to prevent double spending. However, some leave the credit active.

Typically carbon credits are used by companies to offset their carbon emissions. Verra is concerned that the ‘retired’ classification is meant to indicate that the carbon credit on the registry has been consumed such as through offsetting, and this blockchain practice creates ambiguity. Instead, it wants to explore “immobilizing” credits to address both the double counting issue and enable transparency and traceability, provided it “can be done in a way that prevents fraud and upholds environmental integrity.”

The fraud issue is a fair point, as the fact that carbon tokens are Verra registered is used as a promotional feature. Hence Verra plans to launch a consultation that will explore crypto key custody, KYC checks on issuers and holders, and potential fees.

Carbon tokenization takes off

The Verra Registry is still pretty new, starting in October 2020. A year later, the Toucan protocol launched and has tokenized 21 million tonnes of carbon, with the much smaller Moss being the second largest solution. Toucan’s tokens are estimated to represent 2.25% of total credits.

New initiatives are launched every week. KlimaDAO offers tokens to enable users to offset their carbon footprint, including a footprint from blockchain usage. It uses tokenized credits from Toucan, Moss and C3. This week WeWork’s Adam Neumann raised $70 million for his Flowcarbon blockchain startup. The Deutsche Börse group recently invested in the marketplace platform AirCarbon Exchange.

Response to Verra’s position

Toucan and KlimaDAO both responded to Verra’s position, with Toucan the more supportive. It took the opportunity to promote the benefits of public blockchain tokenization, such as global settlement, and connecting to DeFi applications. “Beyond these benefits, connecting on-chain and off-chain registries would allow credit prices on each market to maintain parity,” it said in a statement. However, it noted there would temporarily be a shortage of new supply.

While KlimaDAO was supportive of the immobilization concept, it was unhappy that there was no advance warning and bemoaned “unilateral decisions.” 

“Verra has done little to engage with the emerging on-chain carbon market, as evident by the frustration of many working in this space,” it said in a statement.

It also wondered how the immobilization might work at a practical level. It pointed to the tokens issued by Moss, the MCO2 token, which uses live rather than retired credits using 3rd party audits, and noted it expected this to continue to be business as usual.

In March, the International Emissions Trading Association (IETA) published its thoughts on the topic. It sees benefits in using blockchain to monitor, report, and verify the climate benefits (MRV). And it is supportive of using distributed ledger technology (DLT) as a repository tool and for credit tokenization. 

However, it voiced concerns about the speculative nature of some schemes, the governance of decentralized autonomous organizations (DAOs) and the environmental sustainability of some blockchain platforms. It made some initial recommendations, including not retiring credits that were tokenized unless the carbon credit tokens were burned and the underlying credit retired.

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