A global investment platform to sell and track carbon credits using blockchain technology is being launched by a partnership including the International Finance Corporation (IFC), part of the World Bank Group.
The Carbon Opportunities Fund is looking to raise private capital for an ‘innovative model to source, tokenise and sell high-quality, verified carbon credits’, according to an announcement by the IFC and three California-headquartered ‘anchor investors’ – Aspiration, Cultivo and Chia Network – in the project.
Carbon credits refer to tradeable permits or certificates to emit a set amount of polluting gas. Blockchain is a list of records, known as blocks, securely linked together using cryptography as an immutable ledger.
The Carbon Opportunities Fund is billed as a ‘new model for the carbon trading ecosystem’. Seeded with $10 million (about £8.5m) as a proof-of-concept, it has the aim of ‘catalysing investments in voluntary carbon markets and broadening access to finance for nature-based projects certified by leading international standards bodies’.
Sustainable finance company Aspiration and Cultivo, which is a public benefit corporation, will lead the Carbon Opportunities Fund’s strategy and execution. The former will advise on the selection of carbon credit projects and investments. ‘Data-driven technologies’ from Cultivo, meanwhile, will help to identify nature-based projects that ‘recurrently produce high-quality carbon credits’.
As the Fund’s carbon credits are tokenised (moved onto an encrypted distributed ledger – blockchain) they will be tracked by the Washington DC-headquartered World Bank (WB)’s ‘Climate Warehouse’. Housed within the WB’s carbon markets and innovation unit, this is a global public metadata infrastructure that has been developed and tested through three phases of simulations (metadata is data that gives data about other data). It runs on Chia’s public blockchain.
Blockchain deployment ‘in an innovative way’
The project is unveiled as governments and international institutions pay increasing attention to the potential of ‘green fintech’ to help tackle climate change.
Green finance is one of six priorities of the 2022 work programme of the BIS Innovation Hub while the US Senate approved the Inflation Reduction Act, a sweeping $700bn (about £593bn) economic package that includes $369bn related to climate action – the largest investment to tackle climate change in US history – earlier this month. President Joe Biden signed the act into law on 16 August.
Paulo de Bolle, who is senior global director in the Financial Institutions Group of the IFC – which is the largest global development institution focused on the private sector in emerging markets – said the newly announced venture would “foster the standardisation of carbon credits generated in emerging markets and help mitigate climate change”.
“Nature-based solutions can deliver up to 40 per cent of the carbon removal required to combat the climate crisis,” he said. “This new framework will use new blockchain technologies is an innovative way for capital markets to fully engage in carbon credit trading in a transparent, secure, fair and beneficial manner.”
WB publications exploring blockchain’s application in this arena include a 32-page paper, ‘Blockchain and Emerging Digital Technologies for Enhancing Post-2020 Climate Markets’, released four years ago.
BIS project’s COP27 deadline
The BIS Innovation Hub’s Hong Kong office is working on blockchain-based green finance initiative ‘Project Genesis’.
Following a proof-of-concept last year on tokenisation of retail green bonds using a public blockchain and a permissioned blockchain (a distributed ledger that is not publicly accessible), the BIS Innovation Hub’s Hong Kong centre has partnered the UN Climate Change Global Innovation Hub, as well as other public and private parties, on the project’s next stage. The aim is to develop a prototype for the tracking, delivery and transfer of so-called digitised ‘mitigation outcome interests’ – de facto carbon credits recognised under national verification mechanisms compliant with the Paris Agreement (the legally binding international treaty on climate change adopted in 2015) – attached to a bond.
Due to be completed by the next UN Climate Change Conference (COP27), which will take place from 6 November to 18 November 2022 in the Egyptian city of Sharm El-Sheikh, BIS has two consortia developing solutions ‘that are expected to digitally track real-time mitigation outcome data linked to a bond lifecycle, and thereby provide transparency and reduce the risk of green-washing’. The first consortium comprises Goldman Sachs, Allinfra and Digital Asset while the second comprises of InterOpera, Krungthai Bank, Samwoo Corporation and Sungshin Cement.
If successfully implemented, the newly created financial product would ‘transform the current carbon finance, which is an ex-post reward in the current carbon market, into an ex-ante enabler in the form of additional benefit for the green bond issuer in an integrated green bond and carbon market,’ BIS states on the section of its website devoted to the project (‘Genesis 2.0: Prototyping use of Smart Contracts for Carbon Credits attached to Green Bonds’).
*** BIS has this week published a 135-page compilation of speeches and panels from the ‘Green Swan 2021: coordinating finance on climate’ virtual conference held in June 2021 and co-organised by the BIS, the Bank of France, the International Monetary Fund (IMF) and the Network of Central Banks and Supervisors for Greening the Financial System.
‘Going green: governments look to fintech to help combat climate crisis’ – write-up of Global Government Fintech’s ‘How Can “Green Fintech” Help Tackle Climate Change?’ webinar (held on 8 February 2022)
‘BIS and HKMA unveil green finance blockchain project’ – our news story (24 August 2021) on the launch of blockchain-based green finance initiative Project Genesis