Tokenization of Carbon Credits (Emission and Offset Rights)

A proposed solution for forming a new market for carbon neutrality is the tokenization of carbon credits (emission and offset rights). The tokenized carbon emissions and offset rights, recorded on a distributed ledger, enhance market transparency and facilitate efficient operation. This is because each tokenized record becomes publicly verifiable and traceable.

What is Tokenization? Tokenization is the digital representation of assets recorded on a distributed ledger. Tokens recorded on the ledger are established through consensus protocols and transparently disclosed to all participants. The data contained in these tokens becomes tamper-proof. These characteristics of tokenization are essential in expanding the carbon market for achieving carbon neutrality. To regulate carbon emissions and trade emission rights efficiently, a transparent environment that allows for the tracking and verification of transactions is necessary.

Carbon trading data recorded on the distributed ledger is transparently disclosed and verified by all market participants, enhancing trust among them. This means eliminating unnecessary resource wastage among all market participants – individuals, companies, institutions, and nations – thus leading to market efficiency.

Tokenization Model The tokenization of carbon credits can be formed in various ways depending on the environmental goals or targeted directions. Typically, it is implemented as either a Custodial, Non-Custodial, or Native Issuance model.

Item	Custodial Issuance	Non-Custodial Issuance	Native Issuance
Structure	Centralized	Decentralized	Platform
Development Environment	Hybrid Ledger	Hybrid Ledger	Protocol
Features	Transaction Security/Regulation Advantage through Intermediaries	Reliability/Transparency Ensures Efficient Transactions	Integrity Ensures Efficient Transactions

The Custodial model is a centralized system approach to tokenization, where the actual ownership of carbon credits is entrusted to a trusted intermediary or institution. These intermediaries manage token issuance and trading, securely holding the assets for owners. This model is familiar to those accustomed to centralized systems, offering additional reliability in security and regulatory aspects.

The Non-Custodial model emphasizes decentralization and autonomy, core principles of blockchain. Here, the ownership of carbon credits is directly granted to individual users who manage their token issuance and trading. This is facilitated through smart contracts and distributed ledgers, ensuring reliability and transparency. The Non-Custodial model eliminates the need for intermediaries, offering efficiency and privacy benefits.

Tokenization can also be implemented as Native Issuance. This involves directly issuing tokens for carbon emission rights and offset rights through a dedicated blockchain platform or protocol. Native Issuance maximizes blockchain functionality and technical features to enhance transaction efficiency and speed in the carbon market.

Carbon Credit Tokenization Currently, carbon credits are managed through national agencies. Managing and verifying the various data involved in carbon trading requires significant resources. Tokenizing carbon credits through a distributed ledger can prevent unnecessary resource consumption and enhance efficiency.

Particularly, carbon credit tokens issued in the form of STOs (Security Token Offerings) comply with regulations and rules, allowing entry into a trustworthy regulated system. Carbon credits recorded on the distributed ledger enhance market efficiency and reliability, leading to market activation. This signifies the creation, connection, and expansion of a global carbon market towards achieving carbon neutrality.