As the voluntary carbon market continues to scale rapidly, carbon credits have been tokenized to allow for their more efficient, reliable, and accurate handling and tracking.
A token is a digital asset governed by a smart contract on a blockchain network. Tokens can represent shares or securities (security tokens); the right to participate in a community or to access specific goods or services (utility tokens); commodities (currencies); uniquely identifiable, authenticated assets (non-fungible tokens); and more. The creation of a token to represent one of these rights or assets is called “tokenization”.
Tokenizing Carbon Credits
The tokenization of carbon credits works as follows. When one ton of CO2 (or more precisely, the reduction in emission of one such ton) is captured, stored and measured, and those measurements have been verified by a validating party, a corresponding token is minted on a blockchain to represent it. A carbon token could be a non-fungible token (or NFT) – if the token represents “one, unique ton” of captured CO2 that is associated with a particular place and time and is therefore distinguishable from other tokens – or it may be a fungible representation of “a ton” of CO2.
Once minted, the tokens are made available for purchase. Their value comes directly from general market forces relating to the value of carbon capture and credits. Once purchased, a carbon token may be “burned” by the owner to offset their own CO2 emissions or transferred to a new token holder in the same way any other token is transferred. The validity of the token is tracked and verifiable on the blockchain over the course of its life and as it moves between holders.
Trees are one of the biggest carbon sinks as they absorb CO2 from the air as they grow and sequester or store it both above ground as well as below ground (in the root system). Thus we could grow more trees, sequester carbon, and convert the sequestered carbon into tokens that be traded or purchased.
As shown in Figure 1, Coorest provides carbon token called NFTrees. Coorest buys or leases or onboards farmers in many countries to plant trees that provide a safe income to the farmers as well as sequester carbon. Trees are minted as NFTs on Polygon. Using Floodlight technology, Coorest is able to provide the carbon sequestered monthly on a blockchain.