Recent literature on the Digital Carbon Market

By KlimaDAO (Jan 20, 2023)

As the nascent Web3 space matures, technology which claims to improve consumer experience and enhance market efficiencies will become increasingly evaluated. In time, research, analysis and project demonstrations will lead to a greater understanding of different technologies' utility, and help define what further work can be done to leverage benefits for markets and civil society.

Innovations include Confluence Analytics, which enables sustainability-focused investing while automatically offsetting the carbon footprint of your investment portfolio; the Sushi decentralized exchange, where transactions are automatically offset for opt-in users; and Carbonlink, which has built a carbon subscription service on KlimaDAO rails. Driven by these developments, over 500,000 digital carbon credits have been offset within the Digital Carbon Market on Polygon.

While Web3, carbon markets and so called ‘restorative finance ‘ (ReFi) in general are relatively immature markets, the blockchain-enabled carbon market has seen growing interest from organizations and academics, as it represents a novel interface between burgeoning DeFi innovation and the climate finance space.

In this article, we introduce the research and key aspects of its conclusions:

In Volume 5, Issue 7 of the One Earth journal, authors Adam Sipthorpe et al. published Blockchain solutions for carbon markets are nearing maturity. The paper investigates the role of blockchain technology in carbon markets as a whole and examines the Technology Readiness Level (TRL) for 39 different organizations working in blockchain climate solutions.

Carbon markets could hasten climate change mitigation [...], but they face problems around trust, transparency, and uptake. Blockchain offers a foundational technology upon which new carbon markets can be built which address these shortcomings.

One of the major issues the authors have identified is that “this sector is still nascent, fragmented, and clouded by technology hype [...]”. Sipthorpe et al. therefore applied a mixed-methods analysis consisting of a literature review, interviews, and quantitative assessments to their research. The research had the objective of separating the “technology hype” from actual, competitive systems proven in an operational environment.

The results of the authors’ TRL analysis show that “the market is immature, with more than half of the solutions currently in the lowest three levels: at initial proof-of-concept stage or below.”

The paper identifies several key barriers which slow down other projects, specifically around TRL 4, 6, and 8, which are presented as problems of scalability, system integration, and regulatory concern, respectively.

This was an unprecedented development – increased demand for carbon credits drove the Platts Renewable Energy Current Year assessment up by 63%, from $2.3/mtCO2e on August 9th to $7.20/mtCO2e on November 22nd. Carbon credit volumes grew correspondingly, as KlimaDAO’s liquidity pools facilitated over $5 billion of trading volume – 5x the entire off-chain market. On the 25th of May, Verra became the first major carbon registry to issue a freeze on the tokenization of carbon credits.

Carbon-backed currencies and their impact on climate change - UNDP, published by United Nations Development Programme

#Web3for2030, authored by Rowan Yeoman and Kate Sutton, investigates the role of Web3 in achieving global Sustainable Development Goals as defined in the United Nations’ 2030 Agenda for Sustainable Development. The report states that “new technology is morally agnostic, it won’t improve society on its own”. This subsequently leads to questions posed by the authors, such as:

• “How can we leverage the tools Web3 is making available to create positive impact?”
• “How can the tools of Web3 support progress on the Sustainable Development Goals (SDGs)?”

Solving coordination failures with open ReFi protocols - RMIT, published by SSRN

In Governance of ReFi Ecosystem and the Integrity of Voluntary Carbon Markets as a Common Resource, the authors investigate how projects operating in regenerative finance can help to mitigate climate change – our biggest challenge in managing 'common pool resources' like our climate.

The Voluntary Carbon Market is recognized as a vital tool in helping corporations reach their climate commitments, albeit with shortcomings such as “inefficiencies (e.g. fragmentation, illiquidity, multiplicity of standards), flawed practices (e.g. expired carbon credits in circulation, fraudulent schemes, double-accounting) and the effectiveness of the offset projects mechanisms […]”.

The paper recognizes the work of “community-driven decentralized autonomous organizations (DAOs)” in building systems to address these inherent challenges – bringing attention to over 180 projects that are active in the ReFi space. The potential for technologies inherent in the KlimaDAO protocol, such as tokenization, to help lessen the negative impact of coordination failure is acknowledged:

The tokenization of physical assets or rights (i.e. renewable generation/storage units or forestry land) and the automation of operations (i.e. exchanges) via smart contracts provides participants with new affordances to enable secured coordination.

The paper considers Elinor Ostrom’s 8 Principles for Managing A Commons to be an important criterion in evaluating solutions to address climate change, and it examines KlimaDAO’s governance process – considering it to be “Ostrom-compliant with regard to some principles […]”.

Diaz Valdivia and Poblet Balcell find that the ReFi space and, by extension, KlimaDAO, already deliver on important aspects:

The findings show [the] ReFi ecosystem as a low-transaction-cost environment that enables open source prototypes of peer-production for carbon accounting and trading.

At the bleeding edge of climate and Web3

Web3 is widely seen as one of the transformative technologies of the decade, while the climate sector is poised for the inflow of billions of dollars of funding in order to foster innovation. The very process of innovation is unfolding in real time, and KlimaDAO is operating at the nexus of these two trends.

Digital carbon and ReFi are still novel concepts, and through continued third-party analysis and project development, existing projects stand to enable growth within ReFi and the DCM and climate finance space at large. Research, analysis and development can also lay the groundwork for future projects to enter the space with novel approaches based on the progress of others.

This article was originally published by KlimaDAO on January 20, 2023. For the original article, please visit KlimaDAO's website.