Analyzing IBM’s Move To Tokenize Carbon Credits

Trading of carbon credits is among the most important applications of blockchain in the energy sector. Now IBM and Veridium Labs are tokenizing the carbon credits system.

IBM, which has already done significant work on the technology, is partnering with Veridium and InfiniteEARTH, a company that is also owned by Veridium’s parent EnVision Labs. “Our digital environmental assets are designed to help companies and institutional investors purchase and use carbon credits to mitigate their environmental impacts today, and even hedge their potential carbon liabilities risks in the future,” said Todd Lemons, chairman of Veridium Labs.

The idea for the product germinated from the difficulty involved in accounting for carbon credits through a complex supply chain that spans multiple geographies, according to Lemons. Hence, the environmental impact varies based on a variety of factors, from changing climate conditions to differences in regulatory regimes. Currently renewable energy certificates are used in international trading of carbon credits. There is also the problem of accounting for carbon credits on a balance sheet. The Financial Accounting Standard Board (FASB) is working on developing a standard in conjunction with the International Accounting Standards Board (IASB), as of this writing. But a standard that works across multiple industries responsible for purchasing carbon credits is still to exist.

The solution proposed by IBM and Veridium Labs uses an accounting methodology developed by InfiniteEARTH called REDD+Carbon Credits. The credits are backed by long term projects focused on environmental benefits, such as mitigating the effects of deforestation. To arrive at a standardized value for these credits across industries, IBM and Veridium plan to create a central exchange for trading of the credits. “By using a public, permissioned blockchain network, we can help Veridium create a new sustainable marketplace that is good for business and good for the world,” stated Bridget van Kralingen, Senior Vice President, IBM Industry Platforms and Blockchain, adding that tokenizing carbon credits on a blockchain was “a far more efficient and transparent approach to carbon accounting and offsetting.”

The new product will work on the Stellar blockchain to ensure a decentralized approach. However, not much is known about the “permissioned” approach mentioned by Kralingen in the press release. Presumably, permissions on the blockchain will be restricted to the stakeholders involved in the process. Whether those permissions translate into complete transparency in the process remains to be seen. In the Techcrunch interview, Lemons said the carbon credit tokens on Stellar’s blockchain will be valued at “carbon density per dollar times product group.”

IBM and Veridium are late entrants in an already-burgeoning market for carbon credit trading. Numerous startups and organizations have launched initial coin offerings (ICOs) to attract investor interest to their initiatives. For example, Climatecoin, which conducted its ICO last year, has similar ambitions to create a trading portal for carbon credits. On its website, the token’s backers claim that they are “democratising climate change action” by enabling investors to buy tokens. The Decentralized Autonomous Organization (DAO) has launched the Integral Platform for Climate Initiative (IPCI), which has similar ambitions.      

Looking Beyond Tokens

To be sure, blockchain and tokenization is not the only approach being undertaken to bring transparency and accountability to carbon credit markets. “Tokenization might not be scalable due to market and regulatory differences,” says Douglas Miller, senior associate at Energy Web Foundation, a global non-profit focused on blockchain applications to energy. As an example, he points to the non-profit’s Energy Web Origin application built in collaboration with Microsoft Inc. on ethereum’s blockchain. The decentralized application records renewable energy sources at the kWh level without tokens. “We made this choice explicitly because of different regulations, prices, etc. for different types of renewable energy and across different markets/countries,” he says. Lemons from Veridium has said that the company was working with organizations, such as the UN and the World Resources Institute, to establish values for each product group, whose carbon credits they plan to tokenize.