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Voluntary carbon markets & green coins

Companies with minimal environmental impact tend to benefit in terms of both brand value and financing costs. Consumers appreciate environmentally friendly companies and rating agencies give them higher scores. Given all this, it should not be surprising that in 2023, Microsoft announced the goal of becoming carbon negative by 2030. The same year, Delta Air Lines announced it had gone fully carbon neutral in March 2020.  


How can firms with a high-emissions core business set such ambitious goals? Part of it is about limiting emissions. Another part, however, is about committing billions of dollars to “green projects” which help the environment by either offsetting emissions (e.g., investing in renewable energy sources and or reforestation) or sequestering them (e.g., storing CO2 underground). These projects are often implemented by third parties located far away from the headquarters of the corporation. For example, a US-based company might finance a reforestation plan in a remote area in Asia.  


The increasing corporate demand for green projects has created a new private market that is taking advantage of innovative tools developed in the context of Decentralized Finance (DeFi). Specifically, we have many players offering “green coins,” i.e., tokens created on a blockchain and backed by green projects. Some of these players are well-known international institutions, such as the UN, which use their carbon offset platform to finance many environment-related projects.  


Other players are fully private, such as ForestCoin. With its app, this company allows users to finance micro-reforestation projects. Here’s how it works. Users create new coins by planting trees and verifying their location through their smartphones; each coin is associated with an estimated amount of CO2 reduction. These coins can be traded on exchanges and sold to corporations, so that they can reach their desired zero-emission goal.  


There is no doubt that this innovation is a source of opportunities. Monetizing the benefits of CO2 absorption facilitates the inclusion of countless individuals in the green transition, which explains the incredible growth that this market has experienced. In fact, in 2021, the voluntary carbon market grew at a record pace, reaching $2 billion—four times its value in 2020. 


Yet, there are reasons to be concerned. How do we distinguish real green projects from fake ones? How do we certify CO2-reducing projects? And how do we make sure that the same project is not reused to sell more credits without any additional benefit for the environment? Without trust, this market may stop growing.  


One way to proceed is to let the private sector deal with this issue. The Verified Carbon Standard Program by Verra (previously called the Voluntary Carbon Standard) is the world’s most widely used greenhouse gas (GHG) crediting program. Gold Standard is another big player supported by well-known institutions such as the WWF, the UN, and other NGOs.   


Another way forward is selecting verified participants. In October 2023, the Tokyo Stock Exchange (TSE) began trading government-certified carbon emissions credits as more Asian countries have been employing market mechanisms to meet national climate goals. The TSE has signed up 188 companies, financial institutions, and local governments to trade so-called J-Credits earned through domestic activities that cut emissions. However, both solutions might be unsatisfactory.  


First, in markets where there is a growing demand for green projects, what prevents private entities from lowering their verification standards in order to maximize profits? This question is extremely relevant for the sustainability of the abovementioned markets. In the last few months, voluntary carbon markets started to suffer as companies reduced their buying (among others, the food giant Nestlé and the fashion house Gucci). Simultaneously, studies found several forest protection projects did not deliver promised emissions savings. In late May 2023, Delta Air Lines became the target of a proposed class action lawsuit in the US after advertising itself as “the world’s first carbon-neutral airline.” Without externally verified, accurate standards, mistrust will prevail and the decentralization of green projects may simply fail.   


And here’s a second relevant question. Assume that green projects are verified by trustworthy government authorities. In the absence of common global standards, what prevents different countries from attracting more funds by relaxing verification standards on green projects deployed on their territory? Since CO2 emissions are a global concern, the verification standards should be global too. Monitoring the creation and trading of coins backed by green projects around the world is a top priority for the global economy.  


In a recent study entitled “Green Coins,” in collaboration with N. Guinez, T. Nguyen and C. Tebaldi, we address these issues and try to shed light on the opaque functioning of voluntary markets. We propose the creation of a “Global Green Central Bank” (GGCB), i.e., an institution tasked with the verification of new green projects that are used in order to create green coins. Similar to what common central banks do with liquidity, by controlling the supply of green coins available to the private markets, the GGCB can stabilize the market price of CO2 emissions. In the context of a general equilibrium model, such a system can overcome market inefficiencies, for example, due to credit frictions.  


The setting described above may have a realistic application because it assumes that emissions and green coins are “recorded” on a trusted blockchain with environmental criteria that are pre-established by the GGCB and verifiable in a decentralized way on the blockchain. While many central banks around the world are working on the adoption of Central Bank Digital Currency (CBDC), we propose an alternative way to leverage FinTech tools. Namely, blockchains can be used to safely trade a GGDC, that is, a global green digital currency backed by verified green projects. In this setting, green firms can be included in the transition process and monetize the positive spillovers of their environmental-friendly investments. Simultaneously, “brown” firms can buy trustworthy green tokens and credibly convey their commitment to environmental best practices.