Saving the forest with carbon credits

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Institutional Communication Service

26 September 2022

ZHAW (Zürcher Hochschule für Angewandte Wissenschaften) organised the Innovation in Sustainable Finance and Commodities conference in Lugano. Opening the proceedings on Friday, 23 September, was Professor Eric Nowak, director of the USI Institute of Finance and the Center for Climate Finance and Sustainability, with a talk entitled “Tokenising Nature: Creating Digital Assets from Environmental Services.” The topic is the effective protection of so-called “ecosystem services,” the set of services and benefits that nature provides to humans. The climate crisis and mainly deforestation threaten these services, but ensuring protection is not easy. 

In the region of Brazil known as the “arc of deforestation”, there are 50 million hectares of private land: thinking about protecting them by buying them is unfortunately difficult due to restrictions in buying and selling, but it is possible to protect them through carbon credits. Basically, it is a matter of turning greenhouse gas emissions into a trading asset. Nowak proposes to do this through a cryptocurrency-based system, which is often accused of being harmful to the environment because of its high energy consumption. “With the successful “merge” of the second-largest ETHEREUM blockchain from proof of work to proof of stake energy consumption and ecological issues will no longer be a problem for Crypto”. Professor Nowak explains.

 

Professor Nowak, could you tell us about your idea? 

If we want to reduce carbon emissions (or deforestation), we need to make it expensive to pollute (or to deforest). The best way to do this is to create a market and put a price tag on it. Deforestation happens for economic reasons, because it is profitable to log timber, ranch cattle, or harvest soy, so by generating Carbon Credits (transforming it into a commodity measured in tons of carbon) from avoiding deforestation and preserving the forest, we can make it more profitable to keep the forest as it is (preventing the release of carbon into the atmosphere).

 

At the European level, we have the European Union Emissions Trading System (ETS). Does it have limits? 

The ETS or so-called “Compliance Market” for companies who are high polluters emitting lots of carbon into the atmosphere. They get annual “carbon allowances” to pollute up to a certain limit. If they pollute more, they need to buy further allowances on the ETS market, if they emit less they can sell these certificates on the ETS. The ETS is limited as it is only for Scope 1 (direct emissions that occur from sources that are controlled or owned by an organisation) and 2 (indirect emissions from the generation of purchased energy), defined by the Greenhouse Gas Protocal and it also does not include carbon credits generated from forestry-related projects.

 

This is where the “tokenization” of credits comes in. 

Carbon credits from avoided deforestation and other forestry-related projects can only be traded on the Voluntary Carbon Credit market. The voluntary market is not standardised and as of today is a pure over-the-counter market between carbon credit developers (sometimes brokers), and buyers of carbon credits (companies buying credits to offset their scope 3 emissions towards net zero targets). There is no standardisation and no central marketplace yet. Individual consumers who want to offset their personal carbon footprint have no direct access to this market and need to use intermediary brokers who are buying carbon credits from developers and reselling the offsets at inflated prices (for example, when offsetting a flight). Tokenization could simplify the process and enable private consumers to directly offset their carbon footprint through buying NFTs or fractions of carbon credit tokens. It could also be a solution for corporations to buy directly from the project developers in developing countries bypassing brokers and intermediaries.