Carbon credit NFTs are only effective if burned, experts say

Using non-fungible tokens (NFT) as carbon credits, or carbon offsets, reveals an outlet for Web3 technology to promote a more environmentally friendly future.

NFTs such as carbon credits are a slow-rolling trend in the refinancing market and decentralized finance (DeFi). Most of this activity currently takes place on the Polygon (MATIC) blockchain, as it has already compensated for its entire carbon footprint. However, the way these digital assets work with carbon credits is different from other businesses in the space.

Rather than being a repository of wealth or a piece of unique digital art, carbon credit NFTs act as a repository of information related to a particular group of carbon offsets.

This information may include, but is not limited to, the total number of displacements (ie, how many metric tons), the year of removal, the project name, geographic location, or the certification program used.

Such NFTs are then fractionated into Ethereum-based ERC-20 tokens, fungible with each other.

But unlike most NFTs available to consumers, a properly functioning carbon credit NFT comes with a catch. In order for it to serve its real purpose, to verify and account for carbon emission offsets, it must be burned. In environments outside the chain in the carbon market, this is called “retirement”.

A core member of KlimaDAO, a decentralized organization, which uses DeFi to fight climate change, explained to Cointelegraph how this works both on and off-chain.

“Retirement means that somebody essentially takes that carbon offset, and claims it for its environmental benefit, which means that they are basically offsetting their emissions. Then that carbon compensation is permanently taken out of circulation and can no longer be traded or sold to anyone else.”

However, when it comes to retiring these carbon offsets in a chain setting, one must burn the token once the retirement certificate is obtained. In other words, it must be removed from the database and no longer available for trades.

It is very important that if there is any kind of environmental claim regarding the offset being embedded in an NFT, that the NFT is actually burned in some respect, and a specific entity or person is named to claim that environmental event.

There are a large number of projects emerging in the space that claim to implement NFT technology for carbon offsetting, including carbonABLE and MintCarbon.

However, with a market value of over $850 billion, the carbon credit industry is not small. Like other profitable markets, it is prone to fraud. As NFTs continue to grow in popularity, NFT fraud is becoming more prevalent.

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KlimaDAO emphasized that projects claiming NFTs as carbon credits should also have accreditation from internationally recognized standards. Mainly an approval from ICROA, or the International Carbon Reduction and Offset Alliance.

If not, projects with this claim should be looked at carefully before investing under that pretext. Although the carbon credit market is valuable, the way it operates is still unknown to the masses.

The point is that you combine Web3 with a market that is not very well known. So, unfortunately, you have different actors taking advantage of people.”

Nevertheless, these carbon offset NFTs could be very useful if fully disclosed because they would do what they promise. These displacements provide an inflow of capital from another source to sustain and develop a project. This can vary from renewable energy production to forest protection or afforestation.