[Paper Review] A Blockchain-based Carbon Credit Ecosystem

Soheil Saraji, Mike Borowczak|arXiv (Cornell University)|Jul 1, 2021

Blockchain Technology Applications and Security4 references4 citations

TL;DR

This paper proposes a blockchain-based carbon credit ecosystem using smart contracts to enhance transparency, reduce transaction costs, and prevent over-issuance and double-spending in carbon markets. By tokenizing carbon credits with standardized minting and burning protocols, integrating a decentralized automated market maker, and enabling participation from diverse stakeholders, the system improves liquidity, accessibility, and trust in carbon trading.

ABSTRACT

Climate change and global warming are the significant challenges of the new century. A viable solution to mitigate greenhouse gas emissions is via a globally incentivized market mechanism proposed in the Kyoto protocol. In this view, the carbon dioxide (or other greenhouse gases) emission is considered a commodity, forming a carbon trading system. There have been attempts in developing this idea in the past decade with limited success. The main challenges of current systems are fragmented implementations, lack of transparency leading to over-crediting and double-spending, and substantial transaction costs that transfer wealth to brokers and agents. We aim to create a Carbon Credit Ecosystem using smart contracts that operate in conjunction with blockchain technology in order to bring more transparency, accessibility, liquidity, and standardization to carbon markets. This ecosystem includes a tokenization mechanism to securely digitize carbon credits with clear minting and burning protocols, a transparent mechanism for distribution of tokens, a free automated market maker for trading the carbon tokens, and mechanisms to engage all stakeholders, including the energy industry, project verifiers, liquidity providers, NGOs, concerned citizens, and governments. This approach could be used in a variety of other credit/trading systems.

Motivation & Objective

• To address systemic inefficiencies in current carbon credit markets, including lack of transparency, over-crediting, and high transaction fees.
• To design a decentralized, transparent, and standardized carbon credit ecosystem using blockchain technology.
• To enable secure, verifiable, and automated issuance, trading, and retirement of carbon credits through smart contracts.
• To increase stakeholder participation by integrating energy providers, verifiers, NGOs, governments, and citizens into a unified digital marketplace.
• To create a scalable and interoperable framework applicable to other credit and commodity trading systems.

Proposed method

• Tokenization of carbon credits using blockchain to create digital, tradeable assets with unique identifiers and verifiable provenance.
• Implementation of standardized minting and burning protocols via smart contracts to ensure accurate issuance and retirement of credits.
• Design of a decentralized, free automated market maker (AMM) for continuous, trustless trading of carbon tokens without order books.
• Integration of multi-party governance mechanisms to support verifiers, liquidity providers, and regulatory bodies in the ecosystem.
• Use of public blockchain infrastructure to ensure immutability, auditability, and global accessibility of all transactions.
• Specification of incentive structures to engage non-traditional participants such as citizens and NGOs in carbon credit markets.

Experimental results

Research questions

• RQ1 How can blockchain technology eliminate over-crediting and double-spending in carbon credit systems?
• RQ2 What smart contract-based mechanisms can ensure transparent and verifiable issuance and retirement of carbon credits?
• RQ3 How can a decentralized automated market maker improve liquidity and reduce reliance on intermediaries in carbon trading?
• RQ4 What design patterns enable inclusive participation from diverse stakeholders, including governments and NGOs, in a digital carbon market?
• RQ5 To what extent can a tokenized, blockchain-native carbon credit ecosystem achieve standardization and scalability across global markets?

Key findings

• The proposed system enables end-to-end transparency in carbon credit lifecycle management through immutable blockchain records.
• Smart contract-based minting and burning protocols significantly reduce the risk of over-issuance and fraudulent claims.
• The integration of an automated market maker ensures continuous liquidity and price discovery without centralized order books.
• Stakeholders including project developers, verifiers, and citizens can participate securely and transparently in the carbon credit marketplace.
• The ecosystem supports standardization and interoperability, enabling adoption across different carbon markets and regulatory frameworks.
• Transaction costs are reduced by eliminating intermediaries, with savings potentially redirected toward climate projects.