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DLT and Carbon Markets – Can a balance between risk and opportunity be struck?

Market Insight
22 June 2022

In this paper, we consider some of the benefits and detriments associated with the use of DLT in the carbon markets.

There is potential for a broad range of use of DLT in the carbon markets. DLT is agnostic to its usage but how it is used is key to whether that technology provides a positive or negative benefit to carbon markets. Given the greater challenges associated with the deployment of DLT in the context of carbon financial products, the paper focuses on the association of DLT and carbon in that context.

Given the potential real-world connection between a carbon token and a carbon offset unit, it is crucial that a market participant understands the carbon token that is being issued and what rights they acquire as a token holder. In some ways, DLT-based tokens and carbon offset units each represent a complex world and the intersection of the two (i.e. carbon tokens) would result in complexity-squared. These complexities can be broken down and made more understandable through disclosure and the dissemination of information to ensure that market participants are fully informed of the consequences of their choices. Transparency, disclosure and clarity is key here. 

The underlying issues and concerns about carbon tokens (including those discussed in this paper) should be made known to investors and market participants alike. The highly jargon-filled voluntary carbon markets being combined with the equally jargon-filled crypto and DLT markets, are a recipe for obfuscation and subterfuge in the hands of bad market actors. This therefore requires market participants to collectively enhance understanding of this still nascent space. Yet, failing to carry out proper due diligence is no excuse for naivety or ignorance on the part of the investor. However, if behaviour is allowed to go unchecked, there would be pressure to regulate. 

The danger for the voluntary carbon markets is that it brings regulation upon itself through its association with poorly structured and ill-considered tokenised carbon offset products. It will be important for the market to identify and distinguish carbon tokens that are carefully structured and bring utility to the market from those which have not been so well thought through, or have limited market utility.

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