Tokenization of carbon emissions

Many shipowners strive to reduce the carbon emissions from their ships in order to meet the requirements from various stakeholders. The shipping industry is already ahead of most other industries when it comes to reducing the carbon footprint. Can blockchain technology help the shipping industry reach its ambitious goal even faster?

The demand for carbon credits has grown as a result of  the increased focus on carbon reduction. Tokenization of credit carbons means that the information and functionality of the carbon credits are moved onto a blockchain. They will then be presented as a token. This way, blockchain technology can be used to create a more transparent and efficient carbon credits market.

How does it work?

Carbon credits work like permission slips for emission. They are in fact carbon allowances. When a company buys carbon credits, it gains permission to generate one tonne of CO2 emissions.

A carbon token could either be a non-fungible (exchangeable) token (NFT) or a exchangeable token. If it is an NFT, it means that the token represents something unique, e.g. a ”unique tonne” of CO2 which is captured at a specific time and place and hence is distinguishable from other tokens. In a way, an NFT is like the chassis number of your car – your one of a kind red 1987 Ferrari F40 bought at an auction in Maranello, Italy. Exchangeable token represents a general, not unique tonne of CO2. To follow the car analogy, this could be any automobile in world, regardless of colour, fabrication or model.

Whether you as a shipowner should go for a unique NFT or a exchangeable token, depends on the environmental impact you want to make, and the regulatory framework in the area where your ship operates. Attributes of a carbon credit you might consider, can be country of origin, methodology, project type and year of verification.  

Will carbon emissions be reduced when they are tokenized?

The tokenization of carbon credits alone will probably not lead to reduced CO2 emissions. However, when credits are tokenized, they can be bought or sold by anyone who has a crypro wallet. For the time being, roughly 1 billion people have a CW, and the number is increasing. This implicates that the market for carbon credits will be larger and most likely more liquid when it´s tokenized. With traditional VCM (Voluntary Carbon Market), the carbon credits are only accessible through a broker, i.e. large corporations or other actors with deep pockets.

What are the main advantages of tokenization?

To summarize, some of the main advantages of smart contracts, like tokenization of carbon credits, are that the market will be more transparent, open and efficient. The liquidity will be improved and the bid/ask spread will narrow. Transactions will settle quicker and it will be easier to cash in for sellers. There will most likely be less counterparty risk, and the number of market participants will grow.

Does this still sound very cryptic to you? Don´t worry. Maritime Carbon Solutions will be happy to help you better understand how the trading of tokenized carbon credits work.