The Carbon Token Ecosystem White Paper: A decentralized P2P self-organizing consensus mechanism and marketplace for carbon offset lifecycle management using blockchain tokens.
There is a lot of conversation circling right now around climate change and ways to effectively mitigate our greenhouse gas emissions while contributing to strong economic growth both in the developing world as well as in developed countries. I don’t think it would be a productive discussion to descend into the politics of the matter but obviously climate change is real and is one of the most significant problems that our generation faces. Further, we most note that the vast majority of green-house gas emissions comes through the energy sector globally.
However, after a decade in renewable energy, I am more optimistic than ever that today we have all of the tools to solve this challenge and more importantly that we are well on the path to solving our pollution problem. Further, as a techno-libertarian, I believe firmly that the solution lies primarily in the powerful nexus of technology and free markets. Thus the solution I propose, the Carbon Token Ecosystem, is a free market driven by the convergence of extremely compelling technologies.
I have been thinking for some time about ways that my life’s two passions — blockchain and renewable energy — could intersect to help solve the grand challenges of our time. There are many interesting ideas floating around the blockchain ecosystem today and recently I gave a talk about blockchain and energy at Rice University.
In the wake of that talk, a number of people reached out to understand more about the tokenization of carbon credit markets I proposed. So I decided to clean up the draft white paper I wrote in 2015 on this subject and share it with the Web3 community. I am confident that our community of thoughtful technologists, entrepreneurs and economists will be able to offer productive feedback and move this concept forward.
Below is the full Carbon Token Ecosystem White Paper but I offer the abstract and a simplified example here:
Carbon Token Ecosystem: Abstract
Globally, carbon offset markets suffer from fragmented implementation, lack of cross-market exchange of value and quite often incorrect parameterization of the carbon ratio of given projects such that carbon credits granted and/or retired often do not actually reflect their true environmental effect, creating demand-supply imbalances. This has resulted in hyperinflation in carbon credits (see below diagram) therefore not incentivizing the correct behavior in emitters or propagating trust in carbon credit markets generally.
I propose a multi-layer, peer-to-peer carbon credit marketplace using blockchain tokens whereby a cooperative of “Verifiers” who are accredited, globally distributed, technically competent consultants are incentivized to appropriately parameterize and on-board projects to an open architecture marketplace that matches interested parties generating and retiring carbon credits. Both “Generators” (i.e. wind farms, tree-planting operations, Co2 sequestration projects, etc.) and “Consumers” (i.e. carbon emitters or polluters of any kind) as well as other stakeholders such as regulators or concerned citizens, have a way to verify carbon token life cycle in an open public blockchain. The primary objective is that carbon offsets are generated and subsequently retired based on a rational, verifiable formula of the actual environmental effect of respective industrial activities. The Verifiers have strong incentives to police the Carbon Token Ecosystem and ensure that parameterization is coherent across all Generators and Consumers globally.
Building such a carbon credit system on Ethereum allows for an open source, arbitrary programming language where the “Collective of Verifiers” can create a platform and consensus mechanism to arrive at a globally accepted “Carbon Algorithm” — a formula for comparing the actual environmental effect of different projects with different inputs in different regions. These same Verifiers would be responsible for onboarding respective Generators and Consumers to the marketplace as well as managing the demand-supply balance and being held responsible by peers through a distributed tokenized reputation system. Generators and Consumers would then be automatically tied into the blockchain via an API connecting their respective SCADA systems of their operating assets. Thus, Generators effectively “mine” the Carbon Tokens gradually over time based on the given project’s parameterization in the Carbon Algorithm, known as the project’s Carbon Ratio which has been defined and agreed to by the global collective of Verifiers. In turn, Consumers acquire and “retire” Carbon Tokens as an offset of their emissions within certain rules set out for Consumers on the platform.
A Simplified Example:
Anyone is free to take the Carbon Token Ecosystem concept, modify it as they see fit and implement it under the CC-BY license. I would be overjoyed to support a project such as this and encourage energy executives to start to think about how blockchain solutions can help their business. However, I note that such an ambitious endeavor would be a significant undertaking and take many years to implement, especially given the slow adoption rates among utilities and independent power producers that I cite in my talk above. Further, my personal interest in blockchain-energy solutions does not necessarily constitute any interest on behalf of Polychain Capital in these topics or related projects.
It is my belief that we will start to see many self-organizing distributed networks whereby workers leverage decentralized consensus mechanisms to self-filter for competence, then reward contribution in an open-sourced community and self-regulate through tokenized reputation systems. This will encompass many types of work and not just software development.
Any constructive feedback or commentary is more than welcome.
 The term “carbon” here shall encompass all types of pollutants. I recognize and appreciate that this is a technically a misnomer as other chemical pollutants and GHGs have a significant negative effect on the planet.