Veridium Labs has been trying to solve a hard problem about how to trade carbon offset credits in an open market. The trouble is that more complex credits don’t have a simple value like a stock, and there hasn’t been a formula to determine their individual value. That has made accounting for them and selling them on open exchanges difficult or impossible. It’s a problem Veridium believes they can finally solve with tokens and the blockchain.
This week the company announced a partnership with IBM to sell carbon offset tokens on the Stellar blockchain. Each company has a role here with Veridium setting up the structure and determining the value formula. Stellar acts as the digital ledger for the transactions and IBM will handle the nuts and bolts of the trade activity of buying, selling and managing the tokens.
Todd Lemons, chairman at Veridium Labs, which is part of a larger environmental company called EnVision Corporation, says that even companies with the best of intentions have struggled with how to account for the complex carbon credits. There are simpler offset credits that are sold on exchanges, but ones that seek to measure the impact of a product through the entire supply chain are much more difficult to determine. As one example, how does a company making a candy bar source its cocoa and sugar. It’s not always easy to determine through a web of suppliers and sellers.
To partly solve this problem, another Envision company, InfiniteEARTH developed a way to account for them called the Redd+ forest carbon accounting methodology. It is widely accepted to the point that it has been incorporated in the Paris Climate Agreement, but it doesn’t provide a way to turn the credits into what are called fungible assets, that is an easily tradable one. The problem is the value of a given credit shifts according to the overall environmental impact of producing a good and getting it to market. That value can change according to the product.
Jared Klee, blockchain manager for token initiatives at IBM, says that buying and accounting for Redd+ credits on the company balance sheet has been a huge challenge for organizations. “It’s a major pain point. Today Redd+ credits are over the counter assets and there is no central exchange,” he said. That means they are essentially one-off transactions and the company is forced to hold these assets on the books with no easy way to account for their actual value. That often results in a big loss, he says, and companies are looking for ways to comply in a more cost-efficient way.
Putting it together
The three companies — Veridium, IBM and Stellar — have come together to solve this problem by creating a digital token that acts as a layer on top of the carbon credit to give it a value and make it easier to account for. In addition, the tokens can be bought and sold on the blockchain.
The blockchain provides all the usual advantages of a decentralized record keeping system, immutable records and encrypted transactions.
Veridium is working on the underlying formula for token valuation that measures “carbon density per dollar times product group,” Lemons explained. “That can be coded into a token and carried out automatically,” he added. They are working with various world bodies like the United Nations and The World Resource Institute to help figure out the values for each product group.
All of the details are still being worked out as the idea works its way through the various regulatory bodies, but the companies hope to be making the tokens available for sale some time later this year.
Ultimately this is about finding ways to help businesses comply with environmental initiatives and remove some of the complexity inherent in that process today. “We hope the tokens will provide less friction and a much higher adoption rate,” Lemons said.