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The challenges of carbon credit tokenization

Blockchain technology has the potential to digitize corporate reporting and even replace many business processes. These include smart contracts, supply chain traceability, and corporate carbon footprint reimbursement. Against the backdrop of the evolution and globalization of carbon regulation and related markets, blockchain can help address climate change and collect carbon credits, including in developing countries.
The challenges of carbon credit tokenization
The challenges of carbon credit tokenization
Carbon credit tokenization projects are being launched and are already in operation
Carbon credit tokenization projects are being launched and are already in operation
Blockchain solves many problems, but there are still difficulties with its application
Blockchain solves many problems, but there are still difficulties with its application
It is worth using more than one technology to improve the carbon credit market
It is worth using more than one technology to improve the carbon credit market
Blockchain is an innovative database that records every transaction and operation ever made on it. The system allows stakeholders to track company reporting and supply chain transparency, the carbon footprint of each product entered into the registry and greenhouse gas emissions into the atmosphere. This makes the blockchain indispensable in the fight against climate change: the transparency it provides enables companies to make their processes more sustainable.

Carbon credits and tokens
Blockchain projects for carbon credits have already been launched. For example, the blockchain group Universal Protocol Alliance is working on Universal Carbon (UPCO2), a token for carbon credits. These are ERC-20 tokens certified by Verra that can be used like regular carbon credits to offset a carbon footprint or investment.

Brazil has its carbon token. Moss, a member of the Brazilian Economic Council for Sustainable Development, has tokenized both the economic rights to forest land in the NFT and the management system. With Moss Earth, you can calculate and offset your carbon footprint. MCO2 tokens represent ownership of a single carbon credit registered in a globally recognized registry. More than $30 million were invested in Amazon forest conservation. Since March 2020, this has saved 152 million trees and prevented the emission of 230,000 tons of carbon dioxide. This is equivalent to running 49,600 cars a year.

Recently, the International Finance Corporation (IFC), a division of the World Bank, launched its carbon credit tokenization project. This project focuses on carbon credits verified by Verra and Gold Standard. Given the number of low-quality carbon credits that could harm the overall carbon market, verification by verification companies and anchoring the data in the blockchain is now essential, according to program participants. Strengthening trust will open the door to more funding flows and accelerate the implementation of carbon reduction and elimination strategies.

While tokenization projects are already working, there are still real questions in the market about how a tokenized type of carbon credit should work and what methodologies should be used.
Carbon credit tokenization projects are being launched and are already in operation
Carbon credit tokenization projects are being launched and are already in operation
Blockchain solves many problems, but there are still difficulties with its application
Blockchain solves many problems, but there are still difficulties with its application
It is worth using more than one technology to improve the carbon credit market
It is worth using more than one technology to improve the carbon credit market
Challenges and opportunities of tokenization
Carbon regulation and the carbon credit market have been in place for more than a decade. Carbon tokens traded on exchanges and in the blockchain system, however, are still a new thing for sustainable management.

The biggest challenge of blockchain is implementation. For the cryptosystem to work properly, all the company's contractual partners must be included in the process. Such a conversion is time-consuming and expensive. New applications of blockchain also bring new legal challenges, such as intellectual property rights, data protection, liability for system failures, competition issues, and more.

The use of new technologies, especially in unproven markets, carries risks as well as benefits. The right technical setup is key to improving network scalability, processing speed, and security. The first steps should address regulatory issues related to the use of blockchain technology.

Blockchain can help avoid double counting, but it does not solve other carbon credit issues, and we still need expensive certification and verification. To improve this side, other technologies, such as the Internet of Things, can be used to automate measurements and verifications while avoiding human error and high costs.

Despite the challenges and risks of using blockchain alone or in conjunction with other technologies, it is so far one of the few ways to make ESG measurable, transparent, and unbiased. This can open new opportunities for honest market participants, avoid greenwashing and boost impact investments, generate fair prices for goods with a carbon tax, track logistics and business processes, and advocate for human rights
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