A previous article, Scan's SoC1385 — The Carbon Market's Troubled Future, discusses how the voluntary carbon market could grow rapidly during the next few decades, potentially resulting in the removal of billions of tons of carbon dioxide from the atmosphere each year. But to realize its potential, the voluntary carbon market will need to overcome key challenges, including a lack of stakeholder trust in the market and a lack of supply of new high-quality carbon offsets. Emerging Web3 technologies could help the voluntary carbon market address these challenges, but such technologies have challenges of their own.
Unlike carbon-credit markets, which are highly regulated and have limited participation, voluntary carbon markets are open to almost anyone. Voluntary carbon markets trade in carbon offsets that entities create by implementing projects that reduce, avoid, or sequester greenhouse-gas emissions. These markets then receive verification from an organization that certifies and monitors carbon offsets. Individuals and organizations can purchase the carbon offsets for any purpose, but offset buyers have tended to be large companies that have used the carbon offsets as a means of achieving their sustainable-development goals.
Web3 technologies have already been finding use in voluntary carbon markets, displacing or supplementing conventional systems for creating, verifying, monitoring, and trading carbon offsets with more-automated systems that leverage decentralized blockchain-based protocols (for a discussion about Web3 technologies, see Scan's SoC1298 — Web3). For example, Open Forest Protocol (OFP) offers a Web3 infrastructure and a suite of software applications for carbon offsets that involve forest projects (such as projects that aim to preserve an existing forest to avoid carbon emissions or to plant and manage a new forest to sequester carbon from the atmosphere).
An entity that wishes to use OFP's solution to create a carbon offset first registers its plot of land on OFP's blockchain and then gathers and uploads preliminary monitoring data via an OFP mobile app. The plot registration and associated metadata become a nonfungible token (NFT)—a type of permanent and unique digital asset with registration on a blockchain. Third-party validators can then use the blockchain to access the information about the plot and the initial monitoring data and verify the information "with ground data analysis, remote sensing technologies, and forest expertise" (www.openforestprotocol.org/product). Once the resulting NFT receives verification, the entity that owns it can sell it into the carbon-offset market, and all monitoring activities that relate to the project that the NFT represents become part of the NFT's metadata on the blockchain.
Ideally, Web3 solutions could make voluntary carbon markets more accessible, more transparent, more trustworthy, and more efficient. For example, OFP claims that creating a carbon offset using its solution is much easier than is doing so via the typical process that requires negotiations with brokers and verification agencies. For this reason, OFP's solution is accessible to a much larger and more diverse pool of small-scale landholders who might otherwise be unable to create carbon offsets for sale in the market. In theory, representing a carbon-offset project as an NFT on a public blockchain prevents the kinds of double-counting problems that have recently plagued the voluntary carbon market and allows anyone to inspect the project-associated data or to add additional relevant data to it. As new and more-automated forms of verifying and monitoring carbon offsets come into use, Web3 protocols such as OFP's can integrate the data easily. For example, OFP envisions that automated satellite-imaging networks and new Internet of Things devices for forestry sensing could one day add relevant information to a carbon offset's NFT metadata.
Web3 technologies could thus resolve some of the problems that the existing voluntary carbon market has, potentially including the most challenging problem of all: a lack of sufficient supply of new offsets to meet future demand. Although making carbon offsets easier to create could greatly expand the potential pool of suppliers, it can do little or nothing to deal with the immense uncertainty that surrounds the future viability of land-based offsets in a rapidly changing climate. Web3 solutions also have many other challenges that they must overcome to find widespread use in the voluntary carbon market. The following bullets highlight some of the most important challenges.
- Regulatory acceptance and support. Governments are increasingly interested in imposing stringent regulations on blockchain technologies and tokenized assets. Such regulations could hamper the adoption of Web3 in carbon markets. Conversely, supportive regulations could foster growth.
- Scalability and efficiency. Blockchains have a reputation for being environmentally inefficient. Web3 providers for the voluntary carbon market have been using energy-efficient blockchains that use proof-of-stake protocols, but such protocols have various security problems; accordingly, the future of Web3‑based solutions for the voluntary carbon market might hinge on the emergence of new forms of blockchain technology that are simultaneously secure and energy efficient.
- Validation and monitoring infrastructure. Web3 protocols for voluntary carbon markets provide a trustworthy, accessible, transparent, and decentralized means for storing data that associate with a particular carbon-offset project. But people still need to add and verify these data, and the data need to be trustworthy. OFP's solution offers cryptocurrency-based incentives for third parties to add or validate data, but OFP evaluates such parties before allowing them to participate. Ideally, large numbers of independent validators will work together to establish the legitimacy of individual carbon offsets through a consensus-based mechanism. Potentially, investor and regulator dissatisfaction with the existing voluntary carbon market's structure could stimulate changes that popularize Web3 protocols for carbon offsets and lead to a robust ecosystem of verifiers and technologies.