Blockchain is changing the way we fight for sustainability
The COP has also created tools to prevent climate doomsday. Such financial tools as voluntary and compliant carbon markets, carbon credits, green bonds and other green assets linked to positive environmental impact play a crucial role in the global effort for decarbonisation. However, they are often unavailable to SMEs from developing countries. The main reasons are high upfront costs and complex structuring processes in line with global green standards.
Positive and negative impacts on the environment must be predicted and described according to approved methods. This information is used for future monitoring and reporting and is verified by insurance providers. This is where greenwashing or misleading environmental claims can occur. On-chain verification provides data immutability and transparency, and incentivizes issuers to fulfill their green obligations.
12% of carbon offsets and the birth of ReFi
It is an open secret that the issuance of green financial instruments has long been monopolized by the Web2 players in the financial infrastructure, such as banks, exchanges, registries and standards. So it’s no surprise that Web3 is causing the most disruption at this stage.
The most obvious Web3 use case in green finance is the transfer of assets from traditional centralized registries to the blockchain via fungible or nonfungible tokens (NFT). The tokenization of carbon credits developed by DAO IPCI in 2017 and scaled by Toucan and Klima DAO in 2021 led to the retirement of 20 million tons of CO2 – almost 12% of the annual voluntary carbon market retirement volume. As a protective move, leading carbon standards banned tokenization immediately. This sparked an ongoing public discussion and highlighted the need for a broader approach than boosting liquidity.
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Such an approach, originally described by the timeless DAO IPCI founder Anton Galenovich, is now being implemented by a new generation of infrastructure solutions. One of them is Guardian, an open source tool that provides auditable, traceable, reproducible records documenting emissions and the life cycle of green assets. It provides a low-code environment to instantly launch new apps, asset types, and even standards. Overall, the blockchain-based infrastructure has proven to be faster, more cost-effective and transparent. This is essential to free up green financing for small and medium-sized enterprises and eliminate greenwashing.
Web3 also offers the opportunity to develop innovative instruments that increase the liquidity of previously illiquid assets or combine the strength of several instruments. Take carbon bonded bonds for example. They combine the characteristics of green bonds and carbon credits, give green bond investors more incentives and allow issuers to obtain lower coupon rates. Biodiversity credits value ecosystem services, and my own Evercity’s “carbon forwards” enable the financing of early-stage carbon projects before the issuance of actual carbon credits. There are already Web3 exchanges, decentralized autonomous organizations (DAOs) and liquidity pools, such as Solid World, that handle such assets.
The combination of blockchain technology with monitoring tools, such as the Internet of Things and satellites, can provide additional transparency and traceability of impact reporting along the green finance value chain. All of the above use cases have already started to have a significant impact on the achievement of the Paris Agreement and the UN’s Sustainable Development Goals. The companies behind it consider themselves part of the growing Regenerative Finance (ReFi) community.
Convergence of Web3 and carbon markets
In 2017, Glocha and DAO IPCI, which executed the world’s first voluntary carbon credit transaction, introduced a blockchain booth at the COP. The Climate Change Coalition was formed with the support of the UNFCCC Secretariat to unite blockchain pioneers, who at the time faced a lot of skepticism from traditional players amid the initial coin offering wave. Five years later, the picture had changed dramatically – COP27 in Egypt marked the convergence of the green finance and Web3 worlds.
With nation states not fulfilling their climate responsibility, new players have stepped up. Sunny Sharm El Sheikh featured a record number of Web3 companies. The United Nations Global Innovation Hub was at the center of all the climate technology talks, with speakers and important topics. The Web3 agenda was also featured in the Singapore pavilion, the International Emissions Trading Association, the Climate Chain Coalition, the Gulf Organization for Research & Development and several others. At dinner parties and hotel conferences, such as the one organized by Hubculture, Hedera and the HBAR Foundation, veterans of the carbon market mingled with the Web3 audience. What should be a more solid sign of industry adoption?
Two of the main carbon market standards, Verra and the Gold Standard, were discussed at blockchain events, but no official statements regarding tokenization were made. At the same time, some of the carbon market veterans have already adopted Web3, with AirCarbon exchange, climate trading, climate check and eco-register as leaders.
This COP also marked Africa’s increasing openness to carbon markets and climate finance, as the continent seeks financing and technologies that promote sustainable, independent growth. But the key elements of the infrastructure must be deployed first. Web3 and its open source part offer such an inclusive, decentralized infrastructure with peer-to-peer payments and transparency that builds trust between green issuers and investors.
Regenerative finance is among the hottest WEF trends
Held annually at a fancy ski resort in the most expensive country, the World Economic Forum (WEF) is the opposite of the COP in many ways, but primarily in terms of inclusion. While the COP always changes host countries, the WEF remains in the snowy Davos fortress. The outside temperature this year was around -17 Celsius, but hotel prices were even more extreme. Lack of snow highlighted that climate change is indifferent to wealth and status.
Access to the WEF event zone was restricted to politicians, business leaders and friends of the organization and a badge was required to enter. The external stakeholders gathered at hotel conferences and the Promenade, a street of shops transformed into promotion spaces, also known as Houses. The houses were mainly occupied by companies, blockchain companies and countries, such as India, Indonesia and Saudi Arabia, which wanted to promote themselves on the international stage.
The main topics of discussion at WEF were the economic downturn, geopolitical issues, sustainability and Web3. The intersection of the last two was among the top trends. In September 2022, the WEF launched the Crypto Sustainability Coalition which aimed to examine how Web3 and blockchain tools can be used to achieve positive climate action. The working group meetings on carbon credits and climate measures were held among other thematic events.
The main Web3 houses included the Global Blockchain Business Council, Hedera, Blockchain Hub Davos and a creative ReFi space with digital art. Apart from the ReFi project, these events featured speakers including some from the Commodity Futures Trading Commission, Will.i.am and Naomi Campbell. Each day concluded with evening parties, where attendees had the opportunity to mingle with high-level individuals and investors from around the world.
What’s coming in 2023?
Web3 companies had their strongest showing ever at both the COP and WEF events, showing solid use cases with broad global support. Climate and Web3 were among the hottest topics, with the ReFi sector on the rise. 2023 and beyond promises continued growth for this trend, with the potential to become the blockchain space’s leading focus. The industry is awaiting guidance from carbon standards and regulations to drive the market, but there are also untapped opportunities in topics beyond climate, such as biodiversity.
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Web3 native standards and infrastructure, such as Guardian, are coming soon and are poised to shake up the market landscape. Established players must act quickly to stay relevant. Adoption is in full swing, with developing regions, including Africa, ideally positioned to benefit most from Web3’s sustainable solutions.
The Conference of the Parties (COP) to the UN Framework Convention on Climate Change unites around 40,000 people from 196 countries. Governments, international institutions, financiers, businesses, non-governmental organizations and indigenous communities are coming together for a two-week sprint to discuss the measures to tackle the climate crisis. The famous 17 UN Sustainable Development Goals were also first introduced at COP21 in Paris together with the historic Paris Agreement. It aims to limit global warming to below 2 degrees Celsius above pre-industrial levels, with a goal of limiting it to 1.5 degrees (most likely already achieved according to most assessments).
Alexey Shadrin is one of the founders of Carbon Fund and Evercity.io, a Web3-based platform for the origination of green finance. He is also the finance group leader of the Climate Chain Coalition and a frequent speaker at high-level events of the World Bank, UN and WEF. He also co-authored an Elsevier-published book on the use of blockchains for climate finance.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.