How Web3 is Transforming Carbon Trading in Circular Tech

A Circular economy is the new big thing. Why? As our planet has finite resources, sustainable manufacturing practices are inevitable. Organizations that excel in processing "already processed" materials can position themselves as pioneers in innovative manufacturing, achieving higher profit margins while doing so. From a business perspective, the proposition is compelling: extracting substantial value from low-cost, end-of-life materials that would otherwise be discarded. Consequently, we are witnessing a surge in businesses that specialize in recycling, upcycling, and downcycling end-of-life products. These businesses not only reduce waste but also gain a new secondary revenue stream through the Carbon Credit Trade.

I’ll explain the process as we go along, but first, the illustration below encapsulates the idea:

Who is classified as a Carbon offset provider?

First and foremost, let's have a look at who is eligible to sell carbon credits. Traditionally, providers have been involved in renewable energy, energy efficiency, reforestation, or forest conservation projects. These entities often sell credits directly or collaborate with non-profit or public benefit organizations that assist in verifying or managing their projects. However, with the rapid growth of the circular economy, a broader range of companies are now eligible to become carbon offset providers. This includes plastic and textile recyclers, who develop innovative technologies that transform waste into materials indistinguishable from virgin materials, thereby significantly reducing carbon emissions that would otherwise result from industrial production. As the Circular Tech sector continues to evolve and the number of companies qualifying as carbon offset providers increases, the carbon trade market is expected to expand substantially. Consequently, the demand for robust verification mechanisms will escalate dramatically.

How are carbon credits issued?

Before carbon credits can enter the market, they must undergo a thorough verification process. This typically involves carbon removal projects compiling comprehensive documentation, including precise calculations of the carbon reductions achieved through their initiatives. An accredited third-party auditor then reviews the submitted documentation and conducts a site visit to evaluate the accuracy of the methodologies and calculations used. The assessment process includes establishing a baseline scenario, which quantifies the environmental impact that would have occurred if the project had not been implemented. Following verification, the auditors submit a detailed report to the relevant carbon credit authority for approval. Once approved, the carbon credits are officially eligible for trading on the market. Compliance is an ongoing process, with periodic audits conducted to ensure that carbon projects continue to meet the required standards.

The integration of Blockchain technology into this process offers several significant advantages. Given that the verification process involves multiple checks on submitted data and subsequent transactions in the market, it presents an ideal scenario for leveraging Blockchain and Web3 technologies. By harnessing these technologies, the process can become more transparent, secure, and efficient, ensuring the integrity of carbon credits and enhancing trust in the market.

How can Blockchain and Web3 enhance traditional carbon trading?

It’s possible to integrate Blockchain in a value chain to automate data collection and perform an automated Life Cycle Assessment. By combining Smart Contracts with technologies like sensor data, IoT, and satellite imagery, it is possible to directly connect to source databases, making the entire process trustworthy and automated. This setup enables the collection and immutable storage of a wide range of data, including energy usage, production practices, emissions, chemical values, and more. These data points can then be utilized to calculate LCAs using various scientific models, ensuring accuracy and reliability. Blockchain could easily automatize the entire data collection and ensure the legitimacy of the verification process.

Another transformative benefit of Blockchain is its ability to tokenize carbon claims, effectively preventing manipulation and double-counting - which has been a recent challenge in the market. One solution provider to this problem is the Toucan Protocol, which is essentially a ReFi (Regenerative Finance) infrastructure layer that uses Web3 and Blockchain to tokenize carbon credits and verify its transactions. By bringing carbon credits onto the blockchain, Toucan provides a global ledger that offers an immutable and transparent record of ownership and transactions, effectively eliminating the risk of fraud or double-counting.

Currently, only a few carbon credit registries exist worldwide, and they manage all transactions while overseeing multiple controls. These include ensuring project trustworthiness, establishing standards for project submissions, and maintaining a database of transactions and credits. There is a significant opportunity to manage and monitor the transactions of verified carbon credits safely using a decentralized system like Web3. By employing a tokenized structure, carbon credit registries can avoid double-counting transactions and trace credits back to their originating projects. A global ledger system, where data is stored with consistent standards, can enhance transparency and trust in critical data such as trading history, retirement details, and project specifics.

Challenges

The carbon trading ecosystem remains largely controlled by dominant registries that dictate which emerging technologies may integrate with their frameworks. Verra, one of the major registries and standard-setting authorities in Voluntary Carbon Markets suspended using tokenized carbon credits 3 years ago temporarily due to its concerns about the retirement process of tokenized carbon credits, although they now use Toucan Protocol. The ongoing advancements in blockchain technology are substantially improving transparency, liquidity, and accessibility, which in turn appears to be positively impacting the decisions made by key stakeholders and decision-makers.

Another challenge that stands in the way of Blockchain integration in Carbon Markets is the energy intensity due to heavy processing levels. Blockchain-based systems consume large volumes of energy which positions them as a major carbon emitter. As a response to this situation, a big chunk of early adopters of tokenized Carbon Credits are Cryptocurrency providers. In other words, they promote the environmental benefit by financing carbon offset projects. On top of this, there are some new eco-friendly blockchain technologies like Polygon and Celo, which use “Proof of stake (PoS) validation”. This method significantly reduces energy consumption by choosing validators based on the amount of cryptocurrency they have staked, rather than making them compete in solving puzzles to validate transactions as done in Proof of Work (PoW) validation model.

Conclusion

Integrating Blockchain and Web3 capabilities can transform the environmental finance ecosystem. As the Circular Tech industry expands and the number of carbon offset providers grows, there will be a surge in demand for sophisticated verification and trading mechanisms. The value Blockchain offers is unique with automated life cycle assessments, transparent record-keeping, and tokenization of carbon credits—effectively addressing long-standing issues of double-counting and fraud. Even though there are challenges associated with energy intensity and regulatory pressure, innovations like Proof of Stake validation and protocols demonstrate viable pathways forward. The convergence of these technologies signals a transformative opportunity to create a more efficient, trustworthy carbon market ecosystem capable of scaling to meet global climate challenges while unlocking new value streams for sustainable businesses.