Verra, a certifier of carbon credit standards, said on May 25 that it would immediately ban the conversion of withdrawn credits into blockchain tokens, months after crypto platform Toucan’s ambition to use blockchain to disrupt the entire carbon credit system.
In light of World Environment Day 2022, with its campaign for this year using the hashtag #OnlyOneEarth to advocate for revolutionary changes in policies and choices to enable a cleaner and greener environment, the ban put in place by Verra is an indispensable step towards a sustainable life in harmony with nature.
Crypto-backed carbon credit trading has allowed people to trade carbon credits that are converted into crypto tokens. One of these tokens is BCT by Toucan (one BCT represents one ton of CO2 removed from the atmosphere). However, the recent announcement of Verra, the world’s largest carbon credit program, points to a potential fraud of double counting carbon credits withdrawn.
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A “credit withdrawn” indicates that its environmental benefits have been consumed. Therefore, Verra announced an immediate ban on the creation of tokens or instruments based on withdrawn credits. However, this has jeopardized the core mechanisms of crypto-based carbon credit trading platforms such as Toucan and KlimaDAO.
Verra aims to investigate the feasibility of “immobilising” credits in Verra ledger accounts so that they can be tokenized with the transparency and traceability demanded by market participants, provided this can be done in a way that prevents fraud and preserves environmental integrity.
After all, the whole purpose of carbon credits is to offset environmental degradation.
The future of crypto carbon offset projects
Several blockchains and crypto platforms that perform tokenization use carbon credits registered with Verra. The credit is marked as “retired” on the ledger before creating a token to avoid double spending. However, Verra observed that some platforms leave the credit active, leading to potential fraud.
After Verra’s decision to stop the tokenization of withdrawn credits, the main activity of Toucan will stop and the same could happen to KlimaDAO as well. Currently, it is unknown what will happen to the 22 million withdrawn credits that have already been placed on the blockchain. Toucan and Klima tokens dropped drastically after Verra’s announcement.
However, crypto-carbon proponents still hold out some hope. Toucan believes he will be able to help Verra build a new “live” credit tokenization system as opposed to retirees to continue trading in tokenized carbon credits.
However, according to a report by TIME, Verra is keen to work with a project like Carbonplace which is created by a consortium of banks including CIBC and UBS. Carbonplace has similar goals to Toucan, but it operates on a closed, proprietary system as opposed to blockchain. Verra believes that by choosing a more centralized project like Carbonplace, he would have greater control over who buys credits as there were fears that crypto tokens would be used for shady purposes.
However, Verra also said she would begin a public consultation process to decide the future. The company says the way forward doesn’t have to be banks, it could be any entity that has sophisticated KYC checks and the infrastructure to perform those checks. Officials from Toucan and other crypto entities hope they will be involved in future decisions.
Carbon credit tokenization issues
Research suggests that some carbon credits that are tokenized by crypto platforms are not as environmentally friendly as they claim. Many carbon credits come from age-old projects that offer very little value and often don’t need additional funds to operate. And the idea of some of these platforms to remove these mediocre credits to force big companies to buy better and more valuable carbon credits has backfired.
In addition, quantifying the exact amount of CO2 that a carbon offset project extracts from the atmosphere poses fundamental problems. For example, reforestation projects may not yield long-term value because trees could die, be destroyed, or burn in forest fires.
Additionally, there are widely documented incidents of fraud, double counting, and creative accounting rendering much of the carbon credits untrustworthy, as one of these activities led to Verra being banned.
With this, there is a lot of ambiguity regarding the crypto future of carbon credits, however, with better regulations and a better framework, the blockchain system has the potential to revolutionize the carbon trading market.
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The Future Of Crypto Carbon Offset Projects As Blockchain And Crypto Tokenization Are Halted TechRadar
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