The Problem, At-Large:
On the one hand, the carbon markets and the change in incentives created are the best scalable tool to fight the climate crisis. They could be the linchpin that leads us to a better, sustainable future.
On the other hand, they are also a dysfunctional market. Market dynamics are outdated, opaque, and cumbersome. There are security concerns across the board concerning phenomena like double counting, and many projects fail to receive the actual value of their credits.
The fight against misinformation is already significantly derailing positive climate action; if the carbon markets collapse due to internal issues, our future as a species looks exceptionally bleak.
Currently, the market dynamics of the offset market are problematic. The market involves centralized brokers that pair buyers and sellers together, which presents problems on all sides of the market.
On the demand side, buyers suffer under this model because they lack information about their offsets. Since the brokerages are the only ones with access to large amounts of data, the buyer only knows about the offsets they purchase. This opaqueness leads to uncertainty surrounding the quality of offsets.
On the seller’s side, the lack of financial information means they have no idea if they are receiving the true value of their credits upon the sale. This allows the brokers to take massive cuts from all sales. This is a huge issue since projects depend on profit to sustain their livelihood, and the environment depends on projects receiving money to finance future projects.
It may seem strange that an industry whose mission is to solve the climate crisis chooses to operate on blockchains since their general perception in the media is that they are terrible for the environment.
While it’s true that the Bitcoin blockchain has an energy output larger than many countries, most are not like that. Most blockchains, including those on which carbon market applications are built, use a staggering 99.95% less energy than Bitcoin.
Under the current dynamic, offsets flow from the seller to a small group of middlemen to the buyer. Because the buyer and seller can’t find each other directly, the intermediaries use that as leverage to extract vast amounts of value from both sides of the market, which kills its growth potential.
Using the blockchain’s capability of being a public ledger fixes that issue. Offsets and their associated data can now be published for everyone to see, removing the brokers' leverage.
Removing that leverage allows for an explosion of value. 💥
On the buyer side, the fact that they no longer have to pay broker fees or overbid for offsets that are low quality means that they save money that can be spent on buying more offsets. That extra money, along with additional money that the sellers save by not having to sell to the brokers, now flows directly into reinvesting in more offset projects.
This creates a market that is fundamentally different from the current one.
In a market where all of the added value is captured by brokers, the brokers are the only ones who can use that money to scale up their businesses. By eliminating them from the market, the people who create the value receive it, which allows the market as a whole to scale.
That fundamental difference radically changes the carbon markets from just another failed attempt at climate action to the tool that will create the positive feedback loop necessary to stave off the climate crisis.
Removing the middlemen from the market is the critical linchpin that will enable the carbon offset market to scale correctly, which is only achievable through the use of the blockchain.