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ReFi: Carbon Offsets Tokenization and Incentives

11 Oct 2023 updated
11 min

Table of content

Climate change and global warming are the reality of modern living. In part a result of natural evolution, in part an outcome of exploitative human activities, they cause massive disasters and gradually make life on Earth harder. Natural calamities, floods, fires, and desertification are just a few consequences of these global changes, and the good news is that we can contribute to slowing these processes down. 

There are many ways to mitigate climate change, ranging from environmental conservation to renewable energy initiatives, sustainable transportation, net-zero emission, and direct carbon capture. However, most of them are far from realizing their full potential, unlike that of direct investment in ReFi and, more commonly – carbon credits.

ReFi makes use of blockchain to realize its sustainability potential. For those of you asking yourself a question, “How can blockchain support sustainability efforts?” I have prepared this handy, comprehensive guide introducing you to ReFi. 

I’ve applied years of my experience in blockchain programming and expert opinion of leading tech and blockchain giants (Coindesk, Ethereum, McKinsey) to introduce you to the world of ReFi and reveal how businesses can embrace the innovative technology to monetize their care for the environment.

What Is Regenerative Finance (ReFi)? 

ReFi is a branch of decentralized finance (DeFi) focused on environmental sustainability initiatives and community well-being. ReFi projects are meant to generate revenue for ecological initiatives and generally presuppose environmentally friendly and conscious finance use. ReFi use cases involve: 

  • Encouraging investment in carbon assets and other eco-friendly asset classes 
  • Sustainable mechanisms for public goods’ funding 
  • Secure local currency setup 
  • Carbon credit tokenization 

In other words, ReFi is one of the forms of sustainability efforts in Web 3.0, where blockchain technology helps unify environmental initiatives, technology, and finance, creating a single ecosystem with multiple benefits for users and stakeholders. Businesses can use asset tokenization to allow traceable and transparent movement of verified assets across the ReFi platforms, thus contributing to more meaningful and effective carbon offsetting.

Another potential benefit of ReFi is the integration of various finance sources, like grants, loans, and investments, allowing sustainability-focused businesses and initiatives to take advantage of them and deliver more tangible value. The ultimate goal of ReFi is to build transparent and resilient financial systems with positive social and environmental impacts. 

Adopting Regenerative Economic Models in Web3 

The clue to understanding how ReFi works in Web3 is the concept of a circular, regenerative economy. Such systems are envisioned as zero-waste ones, emphasizing social well-being and progress instead of extraction and consumption. This way, greater investments in natural assets are expected to increase community demand, fuel fair profit distribution, and produce a broader positive impact on end users and the environment.

Regenerative economic systems

This way, Web3 ReFi projects teach people to balance their financial interests and broader sustainability goals and help integrate long-term, eco-friendly thinking and circular economy principles into consumer decision-making. Unlike extractive practices that aim for linear resource use without return, ReFi focuses on resource utilization with sustainability and returns in mind, benefiting both the company and the environment.

Web3 ReFi projects

After the magnitude of climate change was understood and the global community stepped on the path of sustainability, a voluntary carbon market (VCM) was created to fund projects with a positive CO2 impact. Once a business or organization proves they have reduced CO2 emissions or eliminated CO2 already emitted, they receive carbon credits – a remuneration for their efforts that can be sold to other market participants wishing to contribute to environmental activities. These carbon credits have operated for a long time in tandem with government-set carbon caps and regulations, but the system proved pretty slow and reactive to address the ongoing climatic challenges in the world. It is characterized by: 

  • High trading fees 
  • Slow speed 
  • Limited scalability 
  • Low liquidity and fragmentation 
  • Confusing and non-standardized mechanisms for carbon credit transactions. 

Environment-related assets, like carbon credits or green bonds, can be tokenized on Web3 platforms and enter into circulation on ReFi platforms, where they can be bought and sold with profit, giving their holders and investors active and passive income. This way, the tokenization of carbon credits creates liquidity in the ReFi market, standardizes the creation, verification, and circulation of green assets, and ensures more transparency, traceability, and, consequently, trust in this sphere.

Another way ReFi can work on Web3 is through decentralized autonomous organizations (DAOs). These blockchain-based governance systems allow every member to partake in decision-making, giving every holder of green bonds or other ReFi assets to contribute to sustainable initiatives and green organizations’ progress.

Carbcoin_case_4IRE

Tokenization in the Financial Sector

Given the VCM drawbacks discussed above, ReFi is one of the promising trends in sustainable finance. It provides a variety of tokenization solutions that work to the benefit of businesses, environmental organizations, and regenerative finance projects. Here are some examples of how tokenization happens in this sphere: 

  • Investment in carbon credits 
  • Proof-of-impact certificates 
  • Community-based tokens 

The use of blockchain solutions can help the global economy transition from the classical but flawed VCM to a more modern and functional digital carbon market (DCM), a blockchain-powered ecosystem allowing easy and transparent carbon credit validation, consumption, and transactions.

Advantages of Tokenized Carbon

Tokenizing Carbon Offsets: Advantages and Challenges 

The transition to DCM discussed above comes with many advantages, many of which are unique to blockchain: 

  • Liquidity. The blockchain-based carbon assets are all standardized and pooled into a handful of existing liquidity pools where any interested buyer or seller can access them without geographical limitations. There are no entry barriers in the form of entry fees or tedious registration, which simplifies access and speeds up these assets’ circulation. 
  • Transaction speed. While a traditional VCM transaction may take from several days to over one week to transfer the bought carbon credit from one person to another, DCM operations are instant and safe. 
  • Traceability and transparency. Blockchain utilizes a public ledger technology that allows any interested user to see the list of all transactions. This arrangement adds transparency and trust to the ReFi field, with no manipulations or fraud possible. 
  • Decentralization. The VCM industry suffers from high fees associated with intermediary participation. ReFi is fully decentralized, meaning that all transactions occur on a peer-to-peer basis and don’t involve extra fees. 
  • Scalability. ReFi projects are infinitely scalable due to the blockchain architecture, so they can be matched with any business’s needs, from a small startup to a huge corporation, and grow together with the ecosystem’s expansion.  

Yet, it is vital to keep in mind that carbon credit tokenization is still a young and immature field facing many challenges. One of them is greenwashing – the abuse of the carbon credit mission by fraudulent companies selling empty words instead of a real environmental impact. The carbon credit market is prone to deception, with many credits having no verified CO2 reductions in their base.  

Another challenge is security, which is often lacking in immature Web3 projects, causing breaches, hacks, and exploits. Smart contract auditing services can be of value for all startups joining the ReFi niche, as the smart contract’s code logic and immutability to hacks should be checked before the project’s deployment.

Connect with us to set up a meeting with our expert 

We’ll explore project milestones, budget specifics, and technical requirements for GreenFi project development. Let’s collaborate to make your GreenFi initiatives more accessible and impactful.

Successful ReFi Use Cases

Let’s take a look at how ReFi projects are implemented to understand the variety of ReFi use cases and practical applications. 

  1. Toucan. Toucan is currently the world’s leading ReFi project that pioneered the ReFi area and has already tokenized 50+ environmental projects using its Ethereum-powered climate action system. The startup began with the CO2ken launch in 2020 and then quickly expanded by launching its Base Carbon Tonne (BCT) token. The KlimaDAO platform operates on Toucan’s Web3 carbon market technology, and all interested projects can use the BCT token to build their apps and join the Toucan carbon market. The company already enjoys $4+ billion in carbon trading volume and helps new projects enter the ReFi sector with the help of asset tokenization. 
  2. Flowcarbon. This project uses blockchain to ensure accurate, transparent records of carbon projects’ carbon lifecycle stages. The company was founded in 2021 and currently provides end-to-end support to ReFi projects, ranging from project development and setup to carbon credit sales, financing, and credit portfolio services. 
  3. CarbonX. This platform uses innovative technology to allow users to take ultimate control over their environmental impact via proper measurement of emissions and analysis of obtained data for proper reorganization and offsetting of the current carbon footprint. It helps businesses embrace all emissions data and employ advanced analytics to reduce their environmental impact. CarbonX can also help businesses prepare for BCorp, GRI, TCFD, and Net Zero accreditation. 
  4. Treetrio. The largest reforestation project in Ukraine with which 4IRE partnered for restoring ecosystems in the Rivne region in 2022. The company is actively engaged in CO2 sequestration and partners with businesses wishing to offset their carbon footprint, gain carbon credits for environmentally beneficial efforts, or become carbon neutral.

REFI MARKET MAP 2022

Challenges and Considerations 

Though the carbon credit market is not new, there are still numerous regulatory limitations for the international exchange of carbon credits. Different countries have different regulations and carbon credit caps for businesses, so a company buying CO2 credits from an overseas seller may face challenges with their use or verification in its jurisdiction. Besides, there is a loose link between a tokenized carbon credit and an actual one, as the industry is still in the gray zone, lacking a comprehensive legal framework. 

These issues also extend to the technical complexities of integrating the innovative Web3 ReFi ecosystem with the mature Web2 system of carbon credit operations and sustainable finance. ReFi projects are mostly blockchain-based, which is a source of their strategic advantage and, at the same time, a technical barrier many Web2 businesses may be struggling to overcome. 

Another challenge is the ethical side of quantifying and verifying the scale of carbon offsetting for which credits are awarded to businesses. A recent Verra investigation revealed the troubling statistics of over 90% of carbon offsets’ inefficiency or foundation on false claims. Therefore, with the remaining lack of oversight and transparency in this area, many companies fall prey to manipulations and buy “empty” carbon credits with no positive environmental contribution behind them. You can learn more about this issue and explore the significance of emerging carbon credit registries in the blockchain space from our new blog article condensing the 4IRE team’s research insights. 

Steps for Individuals and Businesses to Get Involved 

So, how can you partake in the setup of the ReFi industry and contribute to positive environmental change? The benefit of this sector is easy entry for investors and ReFi ecosystem supporters without large startup capital or specialized access to the carbon credit business.

As an individual, you can buy carbon credits and invest in verified, transparent ReFi projects with a clear, well-articulated ecology-related mission and purpose.  

If you’re a business owner considering joining the Web3 industry with a ReFi project, you generally have many options to explore. Some of them are launching your own tokenization solutions, such as the ones I’ve described above, or creating your carbon credit marketplace. The 4IRE team is ready to help you with this business idea – we have a functional and feature-rich carbon credits white label marketplace that will save you much time and money while delivering a safe, robust, and user-friendly product with a unique design. Talk to us today to find out how a white-label carbon credit marketplace works, and you’ll be one of the first to embrace the potential of the emerging ReFi business niche.

Conclusion 

This was my opening discussion of the ReFi concept, introducing you to the basics of this DeFi sector and examining its key value, peculiarities, and relevance of tokenized solutions for sustainable finance in Web3. Next, I’ll walk you through the nuances of GreenFi and familiarize you with the broad potential and variety of possibilities in the emerging DeFi niche. 

As you can see, blockchain and renewable energy go hand in hand, with the Web3 sector having immense potential for ecologically conscious businesses to contribute to climate change offsetting. Carbon credits, though facing criticism and concerns because of numerous greenwashing abuses and a lack of oversight and transparency, still have the sound potential for the struggle against climate change. 

Thus, partaking in the establishment of the ReFi sector in any way is your contribution to the planet’s health and environmental conservation. You can support existing projects or create your own; any effort will be rewarded by a cleaner planet for future generations.

FAQ

What is ReFi (Regenerative Finance) and how does it differ from traditional finance and DeFi?

ReFi is a branch of DeFi with a specific focus on a positive environmental impact and social well-being. It is meant to rethink the way people use finances and how they can employ finance for positive environmental and social change. This way, ReFi projects aim to use finance to the benefit of the environment and teach people to incorporate environmental concerns in their financial decisions and activities.

How do carbon offsets contribute to combating climate change?

The concept of carbon credits was initially introduced to help businesses monetize their environmentally friendly activities and contributions. One carbon credit equals one ton of CO2 emitted to the atmosphere, and every company has its own limit of carbon credits for one year. If the company operates in an environmentally friendly manner and doesn’t exhaust its carbon credits, it can sell them to more CO2-intensive enterprises to gain profit. This way, carbon credits are used to cap the global volume of CO2 emissions and limit those volumes to the set threshold.

Why is there a need to tokenize carbon offsets, and what are the primary benefits of doing so?

Carbon credits are actively traded in the VCM market, which allows more CO2-intensive companies to use more credits than they have and avoid legal penalties. However, VCM is slow, fragmented, and largely ineffective, which limits the effect of the carbon credit practice. Tokenization allows a quick, standardized, and transparent circulation of carbon credits in the Web3 space, allowing companies to trade these credits without intermediaries. 

What types of incentives are present in the ReFi ecosystem to encourage participation and adoption?

Users acquiring green bonds and carbon credits can earn a passive income from holding those assets and receiving dividends. Other variants are carbon credit and green bond trading for a profit – some dealers buy carbon credits from one company and find interested buyers in another location, reselling the credits with a surplus.

What are the potential challenges and criticisms associated with the tokenization of carbon offsets?

The major criticism of carbon offset use is the lack of transparency and verification of tangible activities behind each traded carbon credit. This way, over 90% of carbon credits are a result of the greenwashing practice and have no solid basis in the form of environmentally friendly activities. 

What white-label solutions can businesses use to tokenize carbon credit assets?

Businesses can employ a variety of means for tokenizing their carbon credits. One of the most popular solutions is the Toucan project, which helps businesses tokenize their assets and enter its Web3 carbon market. 4IRE also offers a white-label carbon credit marketplace product with the asset tokenization feature. 

How cost-effective are white-label solutions for businesses looking to enter the ReFi and carbon offsets market?

Modern white-label solutions are highly cost-effective for businesses of all sizes and types, interested in joining the ReFi niche. The principle behind white-label software products is the use of a ready-made back-end environment and plenty of customizable features, which speeds up the development process and cuts development costs by half. 

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