There has been a meteoric rise in the adoption of cryptocurrencies over the past few years. The value of the same has risen significantly, like Bitcoin emerged to be the widely-traded cryptocurrency while it had started at a few cents per token in 2009.
The technology behind the existence or mining of crypto is the blockchain. It allows the transfer of digital money between the users without the intervention of any financial institution.
Blockchain is gaining popularity in other fields because of its nature of being a decentralized ledger that prevents the modification of records. Such technology has the potential to make financial transactions more secure, transparent and scalable.
But how does blockchain work? Blockchain is a system which records the transactions spread across a network of multiple users in the encrypted form called blocks. Users are responsible for creating new tokens and authenticating the records using mathematical equations, which is also called mining.
In the past some time, there has been an increased environmental concern around the massive energy consumption that goes into mining cryptocurrencies, resulting in a significant carbon footprint. The environmental cost of this digital currency on the blockchain has led companies across the world to explore opportunities to make cryptocurrencies more sustainable.
There are also attempts like reducing emissions or carbon offsets to decarbonize cryptocurrencies. Both ways strive to achieve carbon neutrality.
Are carbon offsets the answer?
At this point, connecting cryptocurrencies to carbon offsets seems like a suitable approach to mitigate the climate impact. The regenerative finance or ReFi movement has a diverse group of voices ranging from carbon industry veterans to environmental scientists and retail investors, accountants, etc., who are of the view that crypto can be leveraged to solve the current crisis.
Refi has proposed to address the climate crisis mainly with the global carbon credit market. Carbon credits or carbon offsets showcase environmental activities that reduce emissions or remove carbon dioxide from the atmosphere. It can include preserving forests, building wind and solar farms, capturing methane gas, etc.
One carbon credit is one metric ton of carbon dioxide that can be saved from the atmosphere. Whoever purchases one carbon credit, they have the permission to emit the same amount of carbon guilt-free and sometimes tax-free too.
The global carbon marker came into existence with the Kyoto Protocol in 1997. The international treaty had established carbon credits as a means to offset emissions. Countries could use the same to reach the United Nations Framework Convention on Climate Change (UNFCCC) limits.
Earlier, carbon offsets were being used by the countries but now the emergence of the voluntary carbon market has enabled companies and crypto mining groups to offset their emissions.
Carbon offsets are an interesting opportunity to make cryptocurrencies sustainable, especially when the volume of carbon credits in the voluntary market is more than twice as high as estimated carbon emissions from the Bitcoin network. Additionally, carbon offsets can increase the demand for carbon credits and consequently lead to an increased price.
We have to agree that cryptocurrencies are here to stay in spite of environmental concerns. However, there is also hope in investors’ willingness to pay a premium to offset environmental damage. Offsets are one hope to bring crypto closer to carbon neutrality and need to be widely publicized for increased adoption.
Lastly, there is a need to ensure the quality of offsets using technologies like remote-sensing, artificial intelligence and blockchain, which will lead to more accurate, transparent and timely reporting. It will take a lot of years to make crypto green but it will only happen with consistent efforts to mitigate its environmental costs and carbon offsets are a sensible option.
(Shailendra Singh Rao is Founder, Creduce-service provider in the field of climate change and carbon asset management.)