The use of non-fungible tokens (NFTs) as carbon credits, or carbon offsets, demonstrates a use case for Web3 technology to foster a more environmentally friendly future.
NFTs as carbon credits are a slow-moving trend in the refinancing and decentralized finance (DeFi) market. Most of this activity currently takes place on the Polygon (MATIC) blockchain, which has already offset its entire carbon footprint. However, the way these digital assets work as carbon credits differs from other companies in the sector.
More than a store of value or a unique piece of digital art, NFT carbon offsets serve as a repository of information related to a specific batch of carbon offsets.
This information may include, but is not limited to, the total number of offsets (ie, how many metric tons), year of removal, project name, geographic location, or certification program used.
These NFTs are fractionated into Ethereum-based ERC-20 tokens, fungible with each other.
However, unlike most NFTs available to consumers, a properly working NFT carbon credit comes with a catch. In order for it to serve its true purpose, check and replace carbon offsets, it must be burned. In off-chain environments of the carbon market, this is called “retirement”.
A member of KlimaDAO, a decentralized organization that uses DeFi to fight climate change, explained to Cointelegraph how this works both on-chain and off-chain.
“Retirement means someone is essentially taking that carbon offset, claiming it for its environmental benefit, which means they’re basically offsetting their emissions. So that carbon offset is permanently removed from circulation and can no longer be traded or sold to nobody else”.
However, when it comes to withdrawing these carbon offsets in an on-chain environment, the token must be burned once the withdrawal certificate is obtained. In other words, it must be removed from the database and no longer available for trading.
It is very important that if any type of environmental claim is made in relation to the compensation that is included in an NFT, that NFT is actually burned in some respect, and a specific entity or person is appointed to claim that environmental incident.
There are a large number of projects popping up in the space that claim to apply NFT technology for carbon offsetting, including carbonABLE and MintCarbon.
However, with a market value of more than US$850 billion, the carbon credits sector is not small. Like other profitable markets, it is susceptible to scams. As the popularity of NFTs increases, scams become more prevalent.
KlimaDAO stressed that projects claiming NFTs as carbon credits must also carry accreditation to internationally recognized standards. Mainly, an endorsement from ICROA, or International Carbon Offsetting and Reduction Alliance.
If not, projects with this claim should be carefully scrutinized before investing under that guise. Although the carbon credit market is valuable, its operation remains unknown to the masses.
“The bottom line is that you’re combining Web3 with a market that’s not very well known. So, unfortunately, you have multiple players taking advantage of people.”
However, these NFT carbon offsets could be really useful if fully disclosed, as they would be delivering what they promise. These offsets provide an injection of capital from some other source to maintain and develop a project. This could range from renewable energy generation to forest protection or reforestation.
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