Many people have talked about how blockchain and other Web3 solutions could change carbon credit markets by making them more transparent, protecting against fraud, and removing the need for middlemen. Not enough people have discussed the good things that have come from this change. How can using on-chain carbon credit help slow down climate change.
Don’t be mistaken, on-chain carbon credits have a lot more potential than just being a better way to buy and retire carbon credits. First, they can connect to financial services that are not controlled by a single authority. They can also be the main thing in the regenerative finance (ReFi) system, being the best example for ReFi money and other economic activity.
We can look at things like real estate, bonds, and art that are stored on a digital platform to see what can be done with Web3, other than just buying and selling things. Using things like collateral, financing from cash flow, and offering investment options to regular people are the types of things that can make a big difference in the fight against climate change.
Get short-term loans easily
One of the big dreams of a Web3-powered carbon market is to have a more steady way to decide on the price of carbon credits. With this plan, and the fact that credits last for about a year, on-chain carbon credits will become something valuable that can be used as collateral on decentralized finance (DeFi) protocols. This is helpful for projects because they can borrow money for a short time to make sure they have enough cash while they find someone to buy their product or wait for a sale confirmation.
Web3 carbon marketplaces could use this feature to build trust between people lending money, people doing projects, and people buying carbon credits. You can picture a situation where escrow smart contracts are used to help sell carbon credits and automatically pay back a loan.
Project pre-financing means getting some money before starting a project.
One problem for carbon offset project developers is getting money to start their projects. The main reason for this is the delay between starting the project and making money from selling carbon credits. It may take two to three years to get the actual money, which can cause big problems with having enough money on hand.
One way carbon offset project developers can make money is by selling some of their expected carbon credits at a discounted price in advance. In simpler terms, the project plans to offer 10,000 credits in two years and then sell a portion of them as forwards. The remaining part helps to account for the risk of delivery.
Doing this process off of the main blockchain can be done, but if we issue forward credits on the main blockchain, it can help us get money for our project earlier. However, they can also be sold straight to buyers. The buyers then get the credits and can keep them or sell them again. Both are good ways for carbon offset project developers to get the money they need at the beginning.
Investing in more things.
Carbon credits have not been seen as a good way to invest money, and that’s true. First, they are made to be taken out of use right after they are bought so that people can reduce their carbon footprint. Carbon credits can lose their value as time goes on. A wine made in 2021 and sold in 2023 will be worth the most in 2023 but will be worth less every year after that. On-chain credits probably won’t change this situation because we still want the buy-and-retire model to be the main way things are done.
That doesn’t mean investors won’t be included in the tokenization process. On-chain credits and forward credits will let investors lend money to projects and provide cash for loans more easily. Individual investors can join decentralized autonomous organizations that provide funding for carbon offset projects and make money from the difference between the discounted future price and the selling price of the credits.
Changing rewards to support sustainable practices
Regenerative finance wants to change our money system from focusing on making money to focusing on helping the environment and society. Web3 ideas help make universal basic income, preserving cultures, and managing climate assets easier and more available.
Part of the ReFi approach is creating money tools and climate benefits that help create new reward systems. On-chain credits are very important because they are currently the most well-known and widely accepted climate asset. They could be used as security for a stablecoin or even as their own money. On a large scale, this idea would encourage companies and governments to pick renewal over using up resources too much.
We are sure that carbon credit markets using Web3 technology are just the beginning of a bigger plan. We need to come up with new ideas and try new things to reach our goals. We are starting to see how on-chain carbon credits can make a big difference in reducing climate change. The next thing to do is make sure that the projects that reduce carbon emissions and help the environment get the money and help they need to encourage more people to help the environment.