Using nonfungible tokens (NFTs) as carbon credits or carbon offsets reveals an outlet for Web3 technology to foster a more environmentally friendly future.
NFTs as carbon credits are a slow-rolling trend in the regenerative finance (ReFi) and decentralized finance (DeFi) markets. Most of this activity currently takes place on the Polygon blockchain, as it has already offset its entire carbon footprint. However, the way these digital assets work with carbon credits differs from other ventures in the space.
Rather than a store of wealth or a piece of unique digital art, carbon credit NFTs serve as a repository of information related to a specific batch of carbon offsets.
This information could include, but is not limited to, the total number of offsets (i.e., how many metric tonnes), the vintage year of the removal, the project name, the geographical location or the certification program utilized.
Such NFTs are then fractionalized into Ethereum-based ERC-20 tokens, fungible with each other.
However, unlike the majority of NFTs available to consumers, a properly functioning carbon credit NFT comes with a catch. In order for it to serve its true purpose — verifying and standing in for carbon emission offsets — it must be burned. In off-chain settings in the carbon market, this is called “retirement.”
A core member of KlimaDAO, a decentralized organization using DeFi to fight climate change, explained to Cointelegraph how this works both on- and off-chain:
“Retirement means that someone is essentially taking that carbon offset and claiming it for its environmental benefit, meaning that they’re basically offsetting their emissions. Then that carbon offset is permanently taken out of circulation and can no longer be traded or sold to anyone else.”
However, when it comes to retiring these carbon offsets in an on-chain setting, one must burn the token once the retirement certificate is obtained. In other words, it must be removed from the database and no longer available for trades.
“It’s very important…..