How Hong Kong can leverage crypto to crack carbon credit dilemma

Jeff Ren April 03, 2023 09:58

Given the environmental impact of proof-of-work crypto mining has always been a criticism of the industry, Hong Kong’s recent regulatory warming to crypto, as well as its ambitious sustainability plans, may seem like the embrace of two contradictory ideas.

Where some see a contradiction, I see an opportunity. Blockchain technology can solve a big macro problem: fixing the disjointed, unstandardized voluntary carbon credit markets.

Industries must acknowledge that they generate carbon emissions and find ways to reduce their environmental impact. From an environmental point of view, actual emissions reduction is the best solution. In reality, however, when companies cannot reduce emissions, offsetting them has become a benchmark for success and credibility in the eyes of consumers and stakeholders. The standard way to achieve this for big companies like Delta, Shell and Volkswagen is purchasing carbon credits representing CO2 or GHG (greenhouse gasses) equivalent. These carbon credits can also be traded or sold if the full emissions allowance is not used.

However, there are some big problems with carbon credit trading. These include potential double counting of credits because of inaccurate/insufficiently stored data and quality concerns about the credits themselves. But the biggest issue facing market participants is that there is no unified marketplace for trading carbon credits. Carbon standards also vary in their frameworks, methodologies and requirements. The combination of all of these factors forces traders to purchase credits over the counter from different vendors in different OTC marketplaces.

This creates a problem - when standards vary, quality does too, yet corporations often don’t differentiate between credits or reveal what kind of credits they purchase, and at what cost. This lack of transparency creates inefficiencies and prevents true consensus on standards from being achieved.

Crypto was created to solve many of these transparency issues in the traditional financial system.

If carbon credits were on the blockchain, visible and auditable by all, carbon credit trading would be changed forever. Tokenized carbon credits could form a new universal marketplace, and any existing carbon credit could be easily converted to a blockchain token, driving scale. Any transactions that occur on the blockchain could be seen by anyone with an internet browser, and this would bring a revolutionary amount of transparency to a previously opaque process. Transparency is the secret ingredient to achieve consensus for standardization - when a market is transparent, accountability and eventually best practices are a byproduct of the scrutiny that follows.

There are already examples of carbon credits being traded on the blockchain. In 2021, Toucan, a bridge protocol that brings carbon credits on-chain, was one of the biggest players in the carbon credit space, almost doubling the number of credits purchased by Delta Airlines. Potential solutions are being tested - but they need momentum and support to become a worldwide best practice.

Few markets have better conditions for this kind of innovation than Hong Kong, a global hub for trading, regulated crypto and sustainability.

As crypto becomes more intertwined with the way we do business in Hong Kong and beyond, it benefits us to investigate crypto’s potential to help solve global problems like the carbon credit markets.

Eventually, through the cooperation of virtual asset service providers, governments, and innovative technology such as blockchain, standards can emerge. As with standard practices in traditional markets, government and non-government bodies will need to be created to oversee the new market. As with any industry, creating these standards and appropriate oversight will take time.

For many unfamiliar with crypto, the issue is that its solutions seem theoretical, and its perceived problems like climate impact all too real. But it has real potential to help solve global problems, provided there is an environment where innovation and new technologies are welcome.

Regardless of which side of the crypto debate we fall on, I think we can all agree this potential is worth exploring.

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Jeff Ren

Partner, OKX Ventures