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IFC to launch $10m tokenised carbon credits fund for nature

© Shutterstock / Billion PhotosTokenised carbon credits concept.

A new partnership between the International Finance Corporation (IFC), Cultivo, Aspiration, and Chia Network, is intended to catalyse new investment in nature-based carbon projects and provide traceability via blockchain.

IFC partners with sustainability-driven technology and data firms to create a blockchain-enabled investment platform for climate mitigation and adaptation.

The innovative model aims to ensure the quality of the projects it funds and sells is high with monitoring and evaluation processes in place.

Blockchain company Chia Network is a partner, showing the place for blockchain.

The partners are launching the Carbon Opportunities Fund, a global investment platform that will raise private capital for an innovative model to source, tokenise and sell high-quality, verified carbon credits. Reports suggest that it has $10 million in funds already.

Fintech is exploring new ways to digitise and deliver financial services

Cultivo and Aspiration are climate-focused fintech companies while Chia Network is a blockchain specialist.  As the Fund’s carbon credits are tokenised, they will be tracked by the World Bank’s Climate Warehouse, which was launched on Chia’s public blockchain. This will provide the foundational architecture to build market trust by enhancing transparency and securing the integrity of global carbon trading.

The carbon credits market has been an increasing point of focus for blockchain and fintech, because of the potential for tracking ownership stakes. Traceability is going to play an important role in addressing some of the concerns around voluntary carbon markets, from double counting, verification and associated benefits.

Market concerns about the credibility of carbon credits on blockchain

There have been market concerns about carbon credits on blockchain. This was partly driven by the growth in crypto linked to carbon credits in 2021, which seemed to drive the revitalisation of old credit generating projects and accusations of poor quality credits. Research from Carbon Plan identified some significant problems with the demand being generated by the Toucan platform.

Carbon Plan said: “Our analysis reveals two significant problems: (1) a suite of what we call “zombie” projects that were inactive until the economic incentive to generate BCTs [Base Carbon Tokens issued by Toucan] came along, and (2) a striking finding that nearly all bridged credits come from projects that have been excluded from major segments of the conventional offset market due to quality concerns. Both call into question the climate claims being made by Toucan and associated blockchain-based efforts, like KlimaDAO.”

For what it’s worth, in 2021 carbon credit registry Verra issued a statement making clear that it administered neither the crypto transaction or tokens. While Verra did say that it was prepared to work with new product developers on ensuring ‘transparent, robust and credible pathways’ for working with such instruments, there is clearly a lot of work to do.

Energy cost of blockchain

Another challenge to the use of blockchain has been the intense energy use of blockchain for coin mining. It’s been reported that the Bitcoin network takes 129 GWh per day to run. Proponents say that using ‘proof of stake’ versus the Bitcoin ‘proof of work’ is far less energy intensive, but that in turn raises arguments about the store of value.

According to the company, Chia does not run on proof of stake either, but rather something its founder Bram Cohn calls ‘proof of space and time’ or PoST. This is a proprietary consensus mechanism which uses hard drives and storage rather than single-use ASIC and GPU hardware. This in turn, significantly reduces energy usage needed to operate.

It was this approach that led to the Chia Network being selected to provide its public blockchain solution as a prototype for the World Bank’s Climate Warehouse. The prototype will facilitate transparent sharing and reporting of government climate project information and carbon credit issuances on the World Bank Climate Warehouse, effectively a climate project information analogous to the SEC’s EDGAR.

Credibility is going to be key to the development of credits on blockchain

The partnership with the World Bank provides credibility to the Chia approach. The respectability gained by association with the International Finance Corporation, a sister institution to the World Bank, within the investment community is another important step.

Such association could do a great deal to address the growing focus on market maturity. Issues around the vintage of credits (and whether they should be traded under the Paris Agreement’s Article 6 cut-off rules), the underlying project and the associated benefits are sure to be closely watched.

Partnership should broaden access to finance and identify quality projects

Overall the goal of the project is to broaden access to finance for nature-based projects certified by leading international standards bodies. Paulo de Bolle, Senior Global Director, Financial Institutions Group, IFC said: “Nature-based solutions can deliver up to 40% of the carbon removal required to combat the climate crisis. This new framework that 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.”

While discussing how Cultivo’s proprietary technology could ensure the identification of high-quality nature-based projects that meet the high benchmarks necessary for the tokens Dr Manuel Piñuela, Co-Founder and CEO of Cultivo added, “The platform will also provide an important source of sustainable income for local communities in emerging markets to protect and regenerate vital ecosystems that are essential for the communities and our planet’s health.”

As one of the anchor investors, Aspiration will advise on the selection of carbon credits projects and Fund investments.  Andrei Cherny, Co-Founder and CEO of Aspiration said, “We look forward to contributing the insight we have from the significant global investments we have made into carbon credits projects around the world to advise and guide this institutional-quality platform to accelerate near-term, scalable investments into nature-based solutions that can meet the growing demands of large corporate and government buyers.”

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