Carbon credit NFTs are only effective if burned, experts say

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 refinance market and decentralized finance (DeFi). Most of this activity currently takes place on the Polygon (MATIC) 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, 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. Or 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, 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 that if there is any type of environmental claim being made regarding the offset being embedded in an NFT, that NFT is actually burned in some respect, and a specific entity or individual is named to claim that environmental incident.

There are a large number of projects popping up in the space which claim to implement NFT technology for carbon offsets, including carbonABLE and MintCarbon.

However, with a market value of over $850 billion, the carbon credit industry is not a small one. Like other profitable markets, it is susceptible to scams. As NFTs continue to rise in popularity, NFT scams become more prevalent. 

Related: Scams in GameFi: How to identify toxic NFT gaming projects

KlimaDAO stressed that projects which claim NFTs as carbon credits should also carry accreditation from internationally recognized standards. Principally, an endorsement from ICROA - International Carbon Reduction and Offset Alliance.

If not, projects with this claim should be looked at carefully before investing under that pretext. Although the carbon credit market is valuable, the way it operates is still very unknown to the masses.

“The thing is, you're combining Web3 with a market that isn't very well known. So, unfortunately, you do have various actors that are taking advantage of people.”

Nonetheless, these carbon offset NFTs could be really useful if fully disclosed that they’re doing what they promise to do. These offsets provide an injection of capital from some other source to maintain and develop a project. This could range from renewable energy generation to forest protection or reforestation.