Flowcarbon's Core Tenets for the Tokenization of Voluntary Carbon Offset Credits

May 23, 2022
Flowcarbon's Core Tenets for the Tokenization of Voluntary Carbon Offset Credits
Flowcarbon is using blockchain technology to promote the efficient and optimal flow of capital back to project developers in the voluntary carbon market. As part of this, we are tokenizing carbon offset credits to facilitate liquidity, price transparency, and accessibility in the buying and selling in the voluntary carbon market

In consultation with a wide range of stakeholders in the VCM, including longtime VCM legal specialist Peter Zaman and his team at HFW, and as active participants in the discussions of the International Emissions Trading Association’s (IETA) Task Group on Integrity in Digital Climate Assets, Flowcarbon has long been committed to the following Tenets, which govern our token design and are intended to optimize the structural, environmental, and financial integrity of tokenized carbon offset credits from the VCM.

1. There is a one-to-one correspondence between tokens and underlying credits:
Each token is backed by a unique corresponding carbon offset credit, which must be held in a dedicated, secure account at the time of token minting. Each token created represents a verified removal or reduction of one tonne of carbon dioxide equivalent from a specific project and year (known as the "vintage"), as represented by the underlying offset credit. 

2. Underlying offset credits must be certified by credible standards:
Each carbon offset credit that backs a token must be certified by market-accepted standards. Carbon offset credits used by Flowcarbon to issue digital tokens originate from projects that are validated, verified, and registered under standards endorsed by the International Carbon Reduction and Offset Alliance (ICROA), government-approved carbon crediting schemes, or other market validated crediting mechanisms.

3. All underlying credits are not canceled and unretired:
All carbon offset credits underlying Flowcarbon tokens are as-yet-unretired. Inherently, a carbon offset credit in the VCM represents the right to claim the achievement of a GHG emission reduction or removal in an amount of one ton of CO2e, and the right to the benefit of an offsetting claim at the point of retirement in accordance with a standard's rules. Flowcarbon's tokens retain those same rights and the full value they represent to token holders. Tokens will only be minted for issued, ex-post verified carbon offset credits, never for canceled or retired offset credits, thereby ensuring that the token are backed by the real-world value of the underlying offset credits.

4. Tokens can be redeemed for underlying offset credits (the "two-way bridge"):
Any holder of a Flowcarbon token can redeem the token for an underlying carbon offset credit. This creates a "two-way bridge" that brings carbon offset credits onto the blockchain in the form of tokens and allows them to be taken back off-chain via the redemption process. This creates a stabilizing link between offset credits trading as tokens and those trading in traditional markets.

5. Token holders can retire underlying offset credits on-demand:
As tokens represent issued carbon offset credits, token holder claims relating to carbon neutrality, offsetting, and/or compensation of emissions may only be made after the token is retired. This occurs when the token holder elects to permanently change the state of the token to "retired" via a web interface. No offsetting claim may be made for simply holding, without retiring, tokens. In the future, APls may be developed in partnership with carbon registries to automate this process.

6. Robust processes ensure security and transparency for supply partners:
Flowcarbon works closely with supply partners, who provide credits to be tokenized via the Flowcarbon bridge, to lower the technical burden and ensure optimal security and accountability in the tokenization process.

7. Similar credits may be bundled to facilitate liquidity and ease of purchasing:
Flowcarbon's token architecture includes the creation of bundles, in which primary tokens representing offset credits from different projects may be deposited, with a set of separate fungible tokens minted to represent participation in the bundle and with the primary tokens locked away for the benefit of bundled token holders. The bundles track market segments. For example, any credits that qualify for the Carbon Offsetting and Reduction Scheme for International Aviation ("CORSIA") may be deposited into a corresponding bundle and sold as fungible CORSIA-eligible tokens. This introduces a degree of market standardization where appropriate, thereby facilitating liquidity, price transparency, and reducing transaction costs.

8. All Web3 operations are pursued in line with a commitment to sustainability:
Flowcarbon's technology is deployed in the most sustainable way possible, following principles based on inclusiveness, resiliency, and security, as well as by maintaining a low carbon footprint and working with partners that are determined to achieve their respective sustainability objectives. 

By enabling carbon offset credit-backed tokens in accordance with these tenets, blockchain technology is a tool that can improve data governance, liquidity, and inclusivity amongst all VCM participants. Digital assets can improve market access for project developers by affording a transparent and liquid off-ramp for credits as soon as they are issued. Digital assets can further expand the market through improved price transparency and market participation, improving access for buyers. Spot and futures markets have the potential to increase investments into climate action through more transparent pricing, resulting in increased liquidity to project developers and returns to investors. Through blockchain integration in the VCM—that is implemented with integrity and respect for the underlying purposes of the VCM—a viable and more inclusive asset class can be created, with environmental benefits and value protection for buyers and sellers.