This is an audio transcript of the Behind the Money podcast episode: Blockchain seeks a role in fighting climate change

Marc Filippino
For a little while now, our reporter Camilla Hodgson has been looking into carbon credit markets.

Camilla Hodgson
The carbon credit market is growing, and it’s already substantial. It was around, worth around $1bn last year in 2021, and everyone is expecting it to keep growing. It’s really been on quite a, prices have really gone up in the last 18 months, and interest also in credits has really exploded.

Marc Filippino
Camilla says carbon credits are this trendy thing companies buy in order to show that they’re thinking seriously about climate change and the effect their business might have on climate change.

Camilla Hodgson
They represent a tonne of carbon that’s either been removed from the atmosphere or avoided in the first place. So they come from things like tree planting projects or tree protection schemes. Companies want them because you can use them to offset your own emissions. So if you, say your carbon footprint is 100 tonnes of carbon a year, you can buy 100 carbon credits and in theory you net out at zero. You can say my, my carbon emissions have been neutralised.

Marc Filippino
But here’s the thing about this market, it’s kind of a mess.

Camilla Hodgson
You don’t always know who’s bought them, who’s sold them. You don’t know what they’ve been sold for. There’s a kind of lack of, a general lack of transparency in lots of different pockets of the carbon credit market. So it’s all over the place. It’s really difficult sometimes to find out the details of transactions.

Marc Filippino
But there is this one group of people who think they have found a solution, a way to fix the carbon offset market and make it easier for companies to fight climate change.

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JustCarbon is taking the market one step further by providing a global platform, taking down borders and using blockchain technology to directly connect sellers and buyers sellers . . . 

Marc Filippino
This is a promotional video from a company called JustCarbon. It’s one of several recent groups that believes it can use the blockchain technology that underpins cryptocurrency to make it easier to track and trade on the carbon market.

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 . . . Transparency, efficiency and value is created through a token system, giving its holders governance over the business.

Marc Filippino
Camila says it’s hard to tell which companies are in it for the right reasons.

Camilla Hodgson
I think there is a lot of PR in this space. This is one of the problems, actually. There are a lot of groups that have sprung up that are talking about blockchain solutions to climate change in general, and a lot of them are talking specifically about carbon markets. And it’s a little hard to tell who the serious people are and who’s just jumping on the climate bandwagon.

[MUSIC PLAYING]

Marc Filippino
I’m Marc Filippino, in for Michela Tindera, and on today’s episode of Behind the Money, will blockchain technology help clean up carbon markets and in the process help fight climate change, or are crypto bros just cashing in on an environmental trend?

[MUSIC FADES]

Look, I’m going to be straight with you. Carbon credits, blockchain technology, these concepts are not easy to understand. So let’s take this one at a time. First, carbon credits. Why do you need them? Well, some places like California actually regulate carbon emissions, and they require companies to buy permits, and sometimes also carbon credits, to cover their carbon footprint. Camilla is here to help me understand the rest. Camilla, welcome to the show.

Camilla Hodgson
Hi.

Marc Filippino
All right, Camilla, let’s do this. How do carbon credits get made and how do you trade them?

Camilla Hodgson
Yeah. OK. So imagine you have a forest, and the forest is at risk of being chopped down for whatever reason. You can say, OK, look, instead of chopping it down, say you need the money for wood, instead of chopping it down for wood, instead what we’ll do is we’ll maintain the forest, we won’t chop it down, and we will apply to create carbon credits instead. And that gives an alternative revenue stream. It means you can sell the credits and you got money for selling the credits instead of getting money for chopping down the trees. So that is a good thing. It means you have, you’re keeping the trees standing. The trees sequester carbon. This is good news for the climate.

Marc Filippino
But how do you get them? Who gives them out?

Camilla Hodgson
There are a couple of big companies that will, that have rules for what you need to do in order to create a carbon credit. And you can go to them and say, this is my forest, this is what I plan to do with it. These are all of the risks that it’s facing. This is the business plan. And they’ll have lots of very complicated rules and hoops that you have to jump through and tests that you have to pass and audits that you have to pass. But once you’ve provided that, you tick all those boxes, one of these groups will say, OK, great, yes, you can create carbon credits, and you might generate, you’ll generate a certain number every year or every couple of years, and you’ll then be able to sell them to whoever you want to sell them to.

Marc Filippino
So I, my forests are saved. I get carbon credits. I sell them to who? And then what do they do with them? Do they keep them or do they sell them again?

Camilla Hodgson
Yeah. So you’ve got carbon credits. Great news. You can now decide either to sell them to end users so companies, airlines are big buyers, for example, of carbon credits or energy companies are big buyers. Or if you don’t want to do the marketing pitch to all the various companies that might be interested, you can sell to a middleman broker and the broker will then find, the broker will do its thing. It will sell to whoever comes to them for credits.

Marc Filippino
So, dear listeners, does this make sense? Basically, carbon credits are proof that you’ve given money to people who are taking carbon out of the atmosphere and taking steps to offset your pollution. Carbon credits are kind of like a receipt showing that you care about the environment or kind of like a self tax if you don’t. It’s a great concept in theory, but sometimes it’s hard to track where these carbon credits come from. So you might not know whether the carbon credits that you’re buying are from something that legitimately wants to help the environment or only kind of does or doesn’t actually care at all. And this, this is where crypto companies think the blockchain might answer this problem. But what is the blockchain, Camilla? What is the blockchain?

Camilla Hodgson
Blockchain is essentially just a record-keeping system. A blockchain is a distributed digital ledger that keeps a secure record, which can’t be changed, of transactions. And it’s what cryptocurrencies like bitcoin are based on. They use blockchain technology to record transactions and people say this is very useful because you can track what has happened. There are timestamps on transactions. None of this can be changed, and so you’ve got kind of a safeguarded database of information.

Marc Filippino
Let’s take the same example of my forest and me not chopping it down. Where does blockchain work into this?

Camilla Hodgson
Right. So you’ve got your carbon credits, and you go through all the same steps to begin with. But instead of selling them to an end user or to a broker, you can use one of these new blockchain companies to tokenise the credit. And that means the company essentially creates a digital version of that credit. They’re not creating a new credit; they’re just creating a digital version of the credit that you already have. And so it’s still the same underlying asset, but the credit is being brought on to the blockchain ledger.

Marc Filippino
Camila, when did blockchain companies start getting involved?

Camilla Hodgson
So let’s take a step back. In the traditional carbon credit market, there are actually records of transactions. It’s not as centralised, and it’s not as easy necessarily to get the details from as a blockchain might be. But there are records. And so people at the end of last year was saying we can see millions and millions of credits that are being bought by, kind of, this, the same unknown entity. That was just one entity that was buying loads and loads of credits, and they think, they thought that was unusual. And then a little bit of digging revealed that that entity was a company that was buying credits in order to then tokenise the credits. So that was the first one that I think that really caught people’s attention. And it has, I think it’s probably the one that’s tokenised the most credits today.

Marc Filippino
OK. So some of the companies that have been doing this, specialising in crypto in the green energy space, they claim that it will help actually offset climate change, fight climate change. What is the argument behind that?

Camilla Hodgson
Yeah, the argument behind that is really just the argument for carbon credits in the first place, whether they’re tokenised or not. And that is that each carbon credit represents an environmental and a climate benefit. So it’s carbon that has been removed from the atmosphere or it’s carbon that didn’t, wasn’t released into the atmosphere in the first place. And I think that’s, if you can be sure that that is what’s happened and that is what this credit represents, then sure, there is an environmental benefit there. The problem historically and that’s this is a problem with the traditional market and also the blockchain credits market, is that it can be difficult sometimes to know how, how good a credit is. What is the quality of that credit? Are we actually sure that it represents a tonne of carbon removed? And it’s not always easy to verify that that is the case.

Marc Filippino
The other big problem is that when you tokenise a carbon credit, you make it less unique.

Camilla Hodgson
What these blockchain companies are doing is taking a whole range of different offsets. So credits from, I don’t know, 10 different tree planting projects or 10 different forests, for example, and converting them into the same standardised digital token. So in the traditional offset space, you might have ten different looking credits. And in the digital space, all of those ten credits might turn into the same one token. They look the same, and so it means they’re interchangeable, which is great if you’re less bothered about which forest your credit actually came from. It’s easier to trade the credits because there are lots of them that all look the same, and they all worth the same thing. And it’s also easier for a kind of non-expert, if you’re new to the carbon market you don’t want to have to pick through 100 different forests and figure out which one you want to buy from. You can just take the generic forest token.

Marc Filippino
So, Camilla, if I understand this right, there are two parts of blockchain technology that we’re talking about here. You have the ledger, which is the part that keeps track of things, where carbon credits came from. And then you have the tokenisation of carbon credits. And the tokenisation of carbon credits actually undercuts the ledger because you can’t have something that is unique and generic at the same time. And you’ve reported, Camilla, that this is one reason why people think this push to tokenise carbon credits might contribute to greenwashing. So why would this contrast scare people away from buying token versions of carbon credits?

Camilla Hodgson
In reality, the buyers of credits often actually want to know which project credit came from. Big corporate buyers like to be able to tell the story. They like to say, we have operations in Kenya, for example, and so we’re buying credits from a forest in Kenya. They like to be able to tell a story, understand where the credits come from. They don’t necessarily want to just buy a generic token that has kind of no, no kind of human face behind it. The other thing is, if you don’t know which project your token came from, you can run into trouble. There have been lots of different stories about specific carbon credit projects which went wrong, had problems where the credits people think were actually not really very good. And if you don’t know where your credit came from, then how do you know that it’s a good credit.

Marc Filippino
And it means that a company could run the risk of holding a carbon credit that is bad for their image, the complete opposite goal of getting these credits in the first place.

Camilla Hodgson
Someone said to me the other day, it’s likely to end up with the lowest common denominator. If there’s no incentive for you to have the best possible project, if you’re not differentiating between, say, forest projects because they all end up as a standardised token, what is the incentive for the forest manager to manage it really well? You’re not going to get any credit for that if all of the tokens just look the same.

Marc Filippino
And then there’s the matter of how much energy it takes for crypto and blockchain transactions to happen. Bitcoin, for example, requires a lot of computing power, which often runs on coal-generated electricity. So wouldn’t using the blockchain to tokenise carbon offsets just make more carbon?

Camilla Hodgson
Yeah. This is yet another confusing piece of the puzzle. Cryptocurrencies and blockchains can have big carbon footprints themselves. Now a lot of these newer groups would say what they’re doing is much more sustainable or much less energy intensive than, for example, bitcoin. They use different systems, which mean that they’re less energy intensive, which perhaps is true. It probably is true in lots of cases. But I think you still have this, this scenario where an industry that consumes a lot of energy is encouraging more people into that industry. And it’s kind of growing the crypto ecosystem in aggregate. And that ecosystem has a big carbon footprint. So it can be difficult to weigh up the pros and cons.

Marc Filippino
But Camilla, this technology is all pretty young, and it sounds like things could change, including its role, right?

Camilla Hodgson
I don’t think the carbon credit community has written it off. I think what’s happened is there have been a couple of early projects. People have kind of wrestled over the pros and the cons, and there have been concerns raised. I think it’s too early to just write this all off as a bad idea, although I think some people are kind of of that mindset now.

Marc Filippino
So what’s next? It seems like there needs to be more direction, even if there are some major bright spots.

Camilla Hodgson
I think it ends up at this question of what is the problem that you’re actually solving? The problems with the carbon credits are often to do with integrity, meaning how good is the actual credit itself? And it’s not clear that blockchain necessarily helps that much with that problem. And then it’s true to say that there are difficulties around pricing because you have carbon credits that come from all sorts of different projects. It can be hard to know what to pay. Pricing isn’t always very transparent, and so perhaps there is a role for blockchain technologies there. But I think it’s, I don’t get the impression that these groups and these new blockchain projects are going away. I get the impression that it’s kind of a fast evolving space, and we might see that in a year’s time, it looks quite different.

[MUSIC PLAYING]

Marc Filippino
This has been Behind the Money. I’m Marc Filippino. I’m just filling in this week, but you can find me at my normal gig hosting the FT News Briefing. It’s a daily news podcast that comes out Monday through Friday. We’ll throw a link to that in the show notes. This episode was edited by John Buckley. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco, and Cheryl Brumley is the global head of audio here at the FT. Thanks for listening. Your normal host, Michela Tindera, will be back next week.

This transcript has been automatically generated. If by any chance there is an error please send the details for a correction to: typo@ft.com. We will do our best to make the amendment as soon as possible.


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