The COP also created tools to prevent climate catastrophe. Such financial tools as voluntary carbon and compliance markets, carbon credits, green bonds, and other green assets linked to positive environmental impacts play a critical role in global decarbonization efforts. However, they are often out of reach for small and medium-sized enterprises from developing countries. The main reasons are the high initial cost and complex structuring procedures according to global green standards.
Positive and negative effects on the environment must be predicted and described according to approved methodologies. This information is used for future monitoring and reporting and is verified by assurance providers. This is where misleading ecological claims can arise. On-chain verification brings data immutability and transparency, encouraging issuers to fulfill their green commitments.
12% carbon offsets and the birth of ReFi
It is an open secret that the issuance of green financial instruments has long been monopolized by Web2 financial infrastructure actors such as banks, exchanges, registries and standards. So it’s no surprise that Web3 is causing the most disruption at this stage.
The most obvious use case for Web3 in green finance is the transfer of assets from traditional central registries to the blockchain via tradable or non-tradable tokens (NFTs). The contribution of carbon credits pioneered by DAO IPCI in 2017 and scaled up by Toucan and Klima DAO in 2021 led to the withdrawal of 20 million tons of CO2 — almost 12% of the annual volume of voluntary withdrawal from the carbon market. As a protective move, the leading carbon standards immediately banned tokenization. This started an ongoing public debate and underlined the need for a broader approach than increasing liquidity.
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Such an approach, originally described by the late DAO IPCI founder Anton Galenovich, is now being implemented by a new generation of infrastructure solutions. One of these is Guardian, an open source tool that provides auditable, traceable, reproducible records documenting the emissions and life cycle of green assets. It provides a low-code environment for instantiating new applications, component types, and even templates. Blockchain-based infrastructure has proven to be faster, more cost-effective and transparent overall. This is crucial to unlocking green finance for SMEs and eliminating greenwashing.
Web3 also offers the opportunity to develop innovative instruments that enhance the liquidity of previously illiquid assets or merge the advantages of several instruments. Take, for example, bonds attached to carbon. They combine the characteristics of green bonds and carbon credits, giving green bond investors more incentives and allowing issuers to obtain lower coupon rates. Biodiversity credits give value to ecosystem services, and Evercity’s own “carbon deadlines” allow early-stage carbon projects to be funded before actual carbon credits are issued. There are already Web3 exchanges, decentralized autonomous organizations (DAOs), and liquidity groups such as Solid World that deal with such assets.
Combining blockchain technology with monitoring tools such as the Internet of Things and satellites can provide further transparency and traceability of impact reports along the green finance value chain. All of the aforementioned use cases have already begun to have a significant impact on the achievement of the Paris Agreement and the UN Sustainable Development Goals. The companies behind them consider themselves part of the growing Regenerative Finance (ReFi) community.
Convergence of Web3 and Carbon Markets
In 2017, Glocha and DAO IPCI, which conducted the world’s first voluntary carbon credit transaction, presented a blockchain booth at the COP. The Climate Change Coalition was created with the support of the UNFCCC Secretariat to unite blockchain pioneers, who at the time faced great skepticism from traditional players amid the initial wave of coin offerings. Five years later, the picture had changed dramatically — COP27 in Egypt marked the convergence of the worlds of green finance and Web3.
As nation states fall short of their climate responsibilities, new players have stepped up. Sunny Sharm El Sheikh featured a record number of Web3 companies. The United Nations Global Innovation Hub was at the center of all climate technology conversations, with high-level speakers and critical topics. The Web3 agenda was also presented at the Singapore pavilion, the International Emissions Trading Association, the Climate Chain Coalition, the Gulf Organization for Research & Development and many others. At dinners and hotel conferences like the one hosted by Hubculture, Hedera and the HBAR Foundation, carbon market veterans mingled with the Web3 crowd. What should be a more consistent sign of industry adoption?
Two of the most important standards of the carbon market, Verra and Gold Standard, were presented at blockchain events, but no official statements were made about tokenization. At the same time, some of the carbon market veterans have already adopted Web3, with the AirCarbon exchange, Climate Trade, Climate Check and Ecoregistry leading the way.
This COP also marked Africa’s increasing openness to carbon markets and climate finance, as the continent seeks finance and technologies that encourage sustainable, independent development. But the basic infrastructure must be developed first. Web3 and its open source division offer such an inclusive, decentralized infrastructure with peer-to-peer payments and transparency that build trust between green publishers and investors.
Regenerative finance is one of WEF’s hottest trends
Held annually in a fancy ski resort in the most expensive country, the World Economic Forum (WEF) is the antithesis of the COP in many ways, but primarily in attendance. While the COP always changes its host country, the WEF remains in the snowy fortress of Davos. The outside temperature this year was around -17C, but hotel prices were even more extreme. The lack of snow underscored that climate change is indifferent to wealth and status.
Access to the WEF event zone was restricted to politicians, business leaders and friends of the organization and one had to have a badge to enter. Outside stakeholders gathered in conference hotels and the Promenade, a street full of boutiques converted into promotional spaces, also known as Houses. The houses were mainly occupied by companies, blockchain companies and countries, such as India, Indonesia and Saudi Arabia, that wanted to promote themselves on the international stage.
The main topics of discussion at WEF were the economic downturn, geopolitical issues, sustainability and Web3. The intersection of the latter two was among the top trends. In September 2022, the WEF launched the Crypto Sustainability Coalition with the goal of exploring how Web3 and blockchain tools could be used to achieve positive climate action. Among other thematic events were the meetings of the working group on carbon credits and climate action.
Key Web3 houses included the World Blockchain Business Council, Hedera, Blockchain Hub Davos and a ReFi creative space with digital art. In addition to the ReFi project, these events featured speakers including someone from the Commodity Futures Trading Commission, Will.i.am and Naomi Campbell. Each day ended with a late-night party where attendees had the opportunity to mingle with high-profile individuals and investors from around the world.
What’s coming in 2023?
Web3 companies had their strongest showing ever at both the COP and WEF events, showcasing solid use cases with broad global support. Climate and Web3 were among the hottest topics, with the ReFi sector growing. 2023 and beyond promise continued growth for this trend, with the potential to become the main focus of the blockchain space. The industry expects guidance from carbon standards and regulations to drive the market, but there are also untapped opportunities in issues beyond climate, such as biodiversity.
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Web3 native standards and infrastructures like Guardian are coming soon and ready to shake up the market landscape. Incumbent players must act quickly to stay relevant. Adoption is in full swing, with developing regions, including Africa, ideally positioned to reap the most benefits from Web3’s sustainable solutions.
The Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change brings together approximately 40,000 people from 196 countries. Governments, international organizations, donors, businesses, non-governmental organizations and indigenous communities are coming together for a two-week sprint to discuss measures to tackle the climate crisis. The famous 17 Sustainable Development Goals of the United Nations were also introduced for the first time at COP21 in Paris along with the historic Paris Agreement. It aims to limit global warming to below 2 degrees Celsius above pre-industrial levels, with a goal of limiting it to 1.5 degrees (probably already achieved by most assessments).
Alexey Shadrin is co-founder of Carbon Fund and Evercity.io, a Web3-based platform for green finance. He is also head of the finance team at the Climate Chain Coalition and a frequent speaker at high-level events from the World Bank, UN and WEF. He also co-authored a book published by Elsevier on using blockchains for climate finance.
This article is for general information purposes and is not intended and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are solely the author’s and do not necessarily reflect or represent the views and opinions of Cointelegraph.