Why climate asset tokenisation may be the way forward

Asset tokenisation has emerged as one of the best use cases for Web3 technologies. It enables physical assets, such as bonds, real estate and gold, to be represented on-chain, taking advantage of a number of benefits offered by blockchains and smart contracts. Tokenised assets facilitate trade, enable fractionalisation, increase liquidity, reduce fraud risk and provide unprecedented transparency.

Consider the real estate market. Traditionally known as an illiquid market in which properties take significant time and money to trade, representing property deeds on-chain can bring the kind of efficiency needed to make buying and selling as quick as transferring a token. At the same time, property owners will be able to unlock the liquidity of the property by using it as collateral for non-discriminatory on-chain borrowing. And that’s not even to mention the potential of fractionalisation.

Any physical asset can benefit from tokenisation. Climate assets, such as carbon credits, are a strong candidate because they are currently seen as inaccessible and are not even considered an asset class. With no centralised solutions in sight and the environment very much in crisis, asset tokenisation may offer the kind of hope we need to change the way we think about and act towards the climate.

Tokenising the carbon credit

Carbon credits were originally conceived as a way of incentivising good climate behaviour. Companies that beat government emissions targets could earn credits and sell them for a profit. While that market – known as the compliance market – is still in operation, a voluntary market has emerged in which companies seek to voluntarily offset their carbon emissions by purchasing carbon credits generated primarily by certified reforestation and preservation projects.

The issue is that the voluntary carbon market (VCM) is known for being opaque, inefficient and exclusive. There is no industry-accepted way to price credits, for example, and brokers exert disproportionate control over the entire process. This has, in some cases, led to fraudulent activity where credits are sold twice. It’s for these reasons that carbon credits have yet to become their own asset class and remain inaccessible to most people.

Asset tokenisation can have a dramatic effect on the carbon market because it ensures transparency, both in terms of credit provenance and price, and provides the market infrastructure to facilitate the sale and immediate retirement of credits.

A more transparent, efficient and inclusive market means greater participation across the spectrum, from organisations and individuals looking to offset their emissions to projects focused on reforestation and preservation. This then becomes the foundation for mass adoption and makes the tokenised carbon credit the primary asset of the regeneration finance (or ReFi) movement.

A good example is the carbon offset option provided by some airlines. Without intimate knowledge of carbon credit methodologies, it is near impossible to determine the provenance, vintage (the year that the credit was generated) and overall quality of the offsets on offer.
Airlines selling tokenised carbon credits, on the contrary, can demonstrate complete transparency with respect to the credits. Users can then rest assured that the offsets they are buying are the result of legitimate climate initiatives.

Let’s not forget about other climate assets

Carbon credits may have the greatest need of tokenisation, but they are not the only climate asset that can be tokenised. Renewable energy credits from solar or hydroelectric sources, for example, provide great incentives for small-scale projects, but suffer from the same market opacity and illiquidity as carbon credits.

We are also seeing assets such as unexploited land be tokenised as non-fungible tokens (NFTs) as a way of raising capital for preservation. NFT purchasers earn easement rights for a period of time as well as the “avoidance” carbon credits produced by the land. This is a win-win-win for the landowner, purchaser and the environment.

Other candidates are the reforestation and preservation projects themselves. Traditionally seen as accessible only to institutional investors, tokenisation of their equity and/or carbon credit rights could provide a revenue-generating investment vehicle for retail investors looking to support climate initiatives.

How corporations can leverage tokenised climate asset for climate impact

With the support of like-minded investors and governments, we are seeing a wide range of Web3 climate solutions aimed specifically at corporations. At the top of the list are on-chain credit registries. Corporations looking to offset their carbon emissions or fund reforestation and preservation projects can purchase tokenised credits without needing to approach a broker or project directly.

On the flip side, corporations eligible to claim carbon credits can take advantage of the same registries to tokenise and sell them on the open market without the need for an intermediary. Or, in cases where capital is needed to spin up a climate impact project, corporations can turn to on-chain funding solutions such as decentralised autonomous organisations.

We know that this year will be a big one for Web3 climate impact, especially with the UAE announcing 2023 as the ‘Year of Sustainability’ and Dubai hosting COP28 in November. We strongly believe that COP28 will be the biggest and most action-oriented gathering to date, with stakeholders from across the globe coming together to focus on climate impact. This is our opportunity to progress collectively towards our net zero ambitions. But work has to start today. On one side, we need solutions that lower the barriers to access and incentivise climate impact.

On the other, corporations need to step up and inspire the next generation of climate warriors by making demonstrable impact and supporting climate initiatives.

Climate asset tokenisation is a core component of both. It’s an indelible part of the foundation that innovative minds can leverage in our shared quest to confront the environmental crisis and start healing the planet.

Prakash Somosundram is the co-founder and CEO at Enjinstarter

Read: How tokenisation is transforming culture