In the spirit of climate innovation, some technology companies are combining carbon credits and cryptocurrency tokens—merging two unregulated mechanisms that have previously been criticized for their inability to meet expectations.
Flowcarbon, backed by WeWork founder Adam Neumann, is one of the latest crypto carbon projects to emerge. The company converts carbon credits into digital tokens that are usable on a blockchain with the goal of simplifying how the credits are traded. Flowcarbon announced in May that it had raised $70 million in its first major funding round. But whether the tokenization of carbon credits can help mitigate climate change is yet to be proven.
A carbon credit is a permit that represents 1 ton of carbon dioxide removed from the atmosphere. These credits are created when projects reduce, avoid, or capture emissions. Project developers can then sell these credits to individuals or companies that seek to offset their environmental footprint, oftentimes with the goal of reaching net-zero emissions.
“Flowcarbon combines two of the most hyped technologies, so-called feel-good technologies, which is blockchain and carbon credits,” says Lee Reiners, executive director of the Duke Global Financial Markets Center. “It may very well be a good business, but that doesn’t necessarily mean it’s a good thing for the environment or for the climate.”
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Flowcarbon CEO Dana Gibber says tokenizing carbon credits will make their prices more transparent and lower transaction costs, which will enable credit holders to more easily access financing for their emissions-reducing projects.
But some experts in the carbon markets field are skeptical that Flowcarbon can enhance these credits in a way that makes them better at addressing climate change. This is because crypto carbon projects like Flowcarbon have so far failed to overcome the main challenge plaguing the carbon credit industry: ensuring “additionality.”
Additionality means that the emissions-reducing action would not have happened if carbon credits hadn’t been issued. Some projects like tree planting or technologies that extract carbon from the atmosphere are clearly reducing emissions. But other projects can be a little murky.
For instance, carbon credits can be issued to an organization to protect a forest. But if that forest was not under threat in the first place, the project isn’t truly additional—it isn’t reducing atmospheric carbon dioxide or preventing its release. In other words, carbon credits that aren’t additional do not actually help buyers achieve net-zero emissions.
“If a carbon credit is not additional, it’s not addressing climate change,” says Bruce Usher, professor at Columbia Business School and former CEO of EcoSecurities. Companies like Flowcarbon might add value to carbon markets, he says, but “the issue is that they don’t get to the core of the problem.”
Currently, nonprofit registries like Verra and Gold Standard that independently certify carbon credits also attempt to ensure additionality by scrutinizing emissions-reducing projects. But even then, credits can fall through the cracks.
Usher compares the current carbon credit system to a stock market with no rules. Since the creation of the US Securities and Exchange Commission, which enforces the law against market manipulation, the stock market has been able to evolve into a highly efficient financial institution. The carbon credit system might benefit from similar oversight by enforcing quality and integrity, he says.
Without such careful review, the tokenization of carbon credits can harm the environment. Toucan, a blockchain-based technology for tracking carbon credits, appeared to be “generating entirely new demand for long-neglected credits,” researchers with the climate nonprofit CarbonPlan wrote in an April report. Toucan was artificially inflating the market by providing a platform for credits that would have otherwise been ignored.
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Grayson Badgley, one of the research scientists at CarbonPlan, notes that many of the credits that Toucan moved on-chain were low quality with questionable environmental benefits. Since then, Toucan has made reforms and tightened up its criteria for the types of credits it will work with. Badgley is waiting for Flowcarbon to announce the credits it will be moving on-chain so that he can investigate those projects, too.
Flowcarbon’s first token, the Goddess Nature Token, only includes carbon credits that are certified by globally-recognized registries and created from nature-based projects no older than five years, Gibber says. She adds that Flowcarbon co-founder Neumann, who became a controversial business figure during his WeWork days, is not operationally involved.
To Reiners, the use of blockchain technology in the carbon credit sphere is irrelevant to the fight against climate change. Even if Flowcarbon makes carbon markets more efficient, the result is a rise in demand rather than an increase in the amount of high-quality credits, he says. “It’s been proven that these carbon credits have a lot of weaknesses and that there’s systematic over-crediting in the market.”
Instead, Reiners argues that efforts to reduce emissions should focus on putting a price on carbon, either through a carbon tax or a cap-and-trade program. These mechanisms follow the logic that, as he explains, “if you want people to do less of something, you make that something more expensive.”
Despite their current challenges, Usher believes carbon credits are a part of the suite of tools and technologies that can realistically get the world to a net-zero economy within the next few decades. Experimentation will continue to be key to the search for climate solutions, he says, including in carbon markets. But Usher also cautions that projects in the crypto carbon sphere have not been getting to the fundamental issue at hand: “I don’t know if crypto offers a solution within carbon markets.”
