The carbon markets are at a pivotal turning point in their history.
On the one hand, the carbon markets and the change in incentives that they create are the best scalable tools to fight the climate crisis. They could lead us to a better, sustainable future.
On the other hand, they are also a dysfunctional market. Market dynamics are outdated, opaque, and cumbersome. There are security concerns across the board concerning phenomena like double counting, and many projects fail to receive the true value of their credits.
The fight against misinformation is significantly derailing positive climate action; if the carbon markets collapse due to internal issues, our future as a species looks bleak.
Like any problem in human history, this fork in the road of the carbon markets presents an opportunity to innovate.
Currently, the market dynamics of the offset market are problematic. The market involves centralized brokers that pair buyers and sellers together, which presents problems on all sides of the market.
On the demand side, buyers suffer under this model because they lack information about their credits. Since the brokerages are the only ones with access to large amounts of credit data, the buyer only knows about the credits they purchase. This opacity leads to uncertainty surrounding the quality of credits they buy.
On the seller side, the lack of financial information means they have no idea if they are receiving the true value of their credits upon the sale. This information asymmetry is terrible for everyone. Projects depend on profit to sustain their livelihood, and the environment as a whole depends on projects receiving the money to finance future projects.
Of course, brokers also cut off the transaction on both ends, driving up buyer expenses in a way that does not help the environment and driving down seller profits, further reducing the financing that projects need to maximize their positive climate impact.
A switch to using blockchain technology in the carbon markets has the potential to streamline the process and make it more transparent.
It may seem strange that an industry who's mission is to solve the climate crisis chooses to operate on blockchains. The general perception of blockchains in the media is that they are terrible for the environment. Some blockchains, such as Bitcoin, do require massive amounts of energy to operate.
CarbonLink uses the Polygon blockchain, which uses 99.9% less energy than Bitcoin, and has pledged to go carbon-negative.
Blockchains’ role as a ledger of data that no one can alter is why it has been improving market dynamics and disrupting industries such as finance and art. Since no one person or entity has the power to profit from applications built on blockchains, many industries are turning to them to improve democracy and accessibility.
In carbon markets, blockchains help transactions go through securely while allowing data such as price history to be available to everyone, something that the current carbon markets lack. The blockchain will help buyers save money while simultaneously allowing the profits and financing of project developers to increase. Additionally, this reduction of information asymmetry enables market participants to create stable price floors and tiers of quality standards, which also help buyers and sellers.
Transparent carbon markets allow businesses to plan with more certainty and give consumers the ability to make informed choices about the products they purchase. Due to the various ways a switch to on-chain markets will help buyers and project developers, blockchain technology is a necessary innovation in the history of the carbon markets. The free flow of funds and information it enables will be the catalyst that propels carbon markets, and our planet as a whole, into a future of sustainable prosperity.
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