The streets of Brasilia, the capital of Brazil, erupted in celebration of the inauguration of the nation’s new president on January 1, 2023. Chants of “Ole, ole, ola, Lula, Lula!” welcomed the new head of state, Luiz Inácio Lula da Silva, who has vowed to restore protections for the country’s Amazon rainforest. Just weeks into his tenure, that promise is already being tested, as the emergence of new carbon market schemes in the Amazon brings with it a new and misunderstood threat and opportunity: Web3.

In theory, Web3 is exciting for climate action: it is an internet that is not controlled by a select few, but rather is decentralized and powered by blockchain technology that promises the transparency that decarbonization has notoriously lacked. At the forefront of this new era is regenerative finance, dubbed ‘ReFi’ in Web3 communities, a new economic approach that combines the paradigm of Web3 technology with the urgent need for climate action.

Web3 and blockchain technology can improve transparency and efficiency in voluntary carbon markets, where companies and individuals can purchase carbon credits to offset their carbon emissions. These markets are typically less regulated than mandatory carbon markets and are used to achieve corporate sustainability goals or to offset emissions not covered by mandatory schemes.

Web3 and blockchain can create a decentralized and tamper-proof platform for tracking and verifying carbon market credits. ReFi can be integrated by enabling the creation of financial instruments based on carbon credits, allowing companies and individuals to trade carbon credits as assets and use them as collateral for loans, creating new opportunities for financing and investment of carbon credits.

However, the idea of ​​a global carbon market is still nascent. Just a few months ago at COP27, experts expressed their concern about the ability of the regulatory framework provided for in Article 6 of the Paris Agreement to account for issues such as indigenous rights, double counting and, fundamentally, the lack of a definition. what constitutes a carbon footprint. sink. The rise of Web3 carbon offset projects in the absence of clearer and stronger carbon market regulation could spell meta-scale trouble, experts warn.

“Many crypto credits are little more than a fancy repackaging of existing carbon credits,” says Khaled Diab, director of communications for the NGO Carbon Market Watch. “If they are reselling a credit that has already been sold before, [there are] there are no new weather benefits, just revenue for the seller.”

The government of President Lula has moved quickly to block Nemus, a project that demonstrates the dangers of anticipating the regulation weapon. The company attempted to purchase more than 150 square miles of the Amazon rainforest and sold non-fungible tokens (NFTs) corresponding to land to buyers called “keepers.” While the guardians did not technically own the land, they did have a say in the types of projects undertaken on the territory.

However, members of indigenous groups in the area expressed concern that the land is already declared and that Nemus had not consulted the people who live there. Furthermore, the company did not actually secure ownership of the land in question, despite selling over 1,500 NFTs.

In response to these concerns, federal prosecutors in Amazonas state have recommended that Nemus immediately stop trading NFTs in indigenous territory and refrain from contacting or co-opting indigenous leaders without following International Labor Organization requirements, such as the Indigenous and Tribal Organization. People’s Convention (1989) and various frameworks on workers’ rights and gender equality and non-discrimination. The recommendation follows decades of exploitation and disruption of the region by companies seeking to take advantage of its natural resources and follows the efforts of the Apurina indigenous group to restore harmony in their community.

carbon tokenization

Not so long ago, cryptocurrency was known for its exorbitant energy intensity. Thanks to his mining modus operandum, proof-of-work (PoW), crypto accumulated a higher carbon debt than many of the world’s countries combined. However, in September 2022, Ethereum, the second largest cryptocurrency platform after Bitcoin, significantly reduced its energy consumption through an event known as a Merge. By switching from the blockchain PoW mining system to an alternative called proof-of-stake (PoS), Ethereum reduced its electricity consumption by 99.84%, a reduction equivalent to the annual energy needs of Ireland or Austria.

“Because the vast majority of successful NFT projects were built on Ethereum, prior to the merger, we could argue that those transactions were not climate friendly, but we can no longer say that,” says Nihar Neelakanti, CEO of Ecosapiens, a company specializing in NFT carbon capture. “A single NFT transaction in [post-Merge] Ethereum uses less energy than watching a TikTok video. PoS networks like Ethereum use less power than Web2 Internet services like Netflix and YouTube. I think this will probably help make NFTs more mainstream. More creators and buyers who were undecided due to carbon footprint will join.”

“NFTs are more than just JPEG files,” continues Neelakanti. “The underlying smart contract is a really exciting piece of technology that may allow more commodities and assets to be easily traded, like real estate deeds for example. [They] they can be harnessed to raise awareness and capital for social good in an incredibly quick and easy way that traditional philanthropy and ESG bonds cannot.”

NFTs enable a new type of fundraising and impact investing mechanism, through which individuals can purchase unique NFTs that support a social cause or represent a stake in a social impact project. Additionally, NFTs make tokenized giving possible, whereby people can donate to charity using cryptocurrency, which can increase the transparency of a donation and its impact.

Neelakanti says that Ecosapiens offers the world’s first carbon-backed digital collectibles. Each NFT offsets 15 tons of carbon, through reforestation carbon credits, or [an average American’s] the value of carbon emissions for the entire year. Ecosapiens sources its carbon credits from third-party carbon intermediaries Cloverly and Patch, whose carbon credits are verified by independent carbon registries such as Puro.earth.

Diab of Carbon Market Watch is wary, but not wary, of companies like Ecosapiens. “Third-party sourcing is not a problem if it comes directly from a credible standard and is sold only once,” he says. it goes to the seller and not to fund climate action or benefit local communities.”

Some people may choose to purchase carbon offset NFTs instead of purchasing carbon offsets outright because NFTs are a more tangible and visible way to demonstrate your commitment to reducing your carbon footprint. Additionally, NFTs can be bought and sold on blockchain marketplaces, allowing for a transparent and verifiable way to track ownership and impact of carbon offset projects. Carbon offsetting NFTs also provide a unique selling point for collectors and investors looking to buy into the ESG trend, which has drawn criticism in some areas for creating too much margin on carbon credits and polluting the values ​​they trade on. carbon markets are built.

One such case made headlines in January 2021, when UK-based cryptocurrency firm Save Planet Earth sold a carbon credit representing one tonne

Web3: the hustle and bustle of the carbon market

“For a public release of 10,000 NFTs, Ecosapiens would collectively offset 150,000 t of emissions, which is the largest carbon purchase on Web3 and equivalent to that of the largest F500 carbon buyers such as Microsoft and Stripe,” says Neelakanti. “When a user purchases an Ecosapien collectible, the capital goes into carbon credits that sequester new carbon, linking them back to the collectible. However, for the consumer, it’s as easy as a click.”

A polished user experience may add a semblance of simplicity, but the complexities of generating and trading carbon credits linger below the surface. Diab cautions that companies should avoid offering ton-for-ton offsets, such as using a ton of carbon sequestered by trees to offset a ton of fossil fuels burned. “It’s misleading or at least misleading and it gives buyers the idea that they can neutralize their climate impact by buying these credits, which is far from the truth,” she says.

“Estimate of the actual number of tons of [emissions] reductions is by no means an exact science”, he explains.

There is also the question of permanence when using trees for offsets. Without a guarantee to safeguard the forests used as offsets, and compensation for their destruction due to increasingly common droughts and fires, they cannot credibly match the fossil fuels burned, which “have been underground for millions of years”, as Diab says.

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It also raises the issue of double counting. “If a state has already counted this reforestation as part of its national inventory, for a private actor to claim it is very problematic,” he says. Companies should offer buyers the option to buy contributions to climate action, he suggests.

weird, crowned as one of the top NFT markets for 2023 by Forbes, offers buyers the option to offset the energy consumption of their purchases at checkout through Nori, a third-party carbon broker. However, when energy monitor asked Alex Salnikov, co-founder of Rarible, for examples of innovative carbon removal or environmental NFTs available on the market, he couldn’t give any. “It is almost impossible for us to keep track of every NFT that is minted in our market,” Salnikov said. “There are a lot of projects in the space that are geared toward sustainability.”

ReFi projects could benefit the race to net zero, but without a strong regulatory framework to ensure transparency and compliance with a set of laws governing carbon markets, unscrupulous sellers could take advantage of consumers and climate change. I would lose out.