Tokenization of Green Bonds and Carbon Credits

Protecting the environment has now become paramount, and corporations are exploring different methods to ensure sustainability and become environmentally friendly. Tokenization of bonds and carbon credits is one such method. This article provides details on the tokenization concept, the process of tokenization and its benefits.

Definitions of Green Bonds and Carbon Credits

Green bonds – Green bonds are debt instruments issued by public and private companies. These bonds are for investing in environment-related projects and aim to make earth more sustainable. Like other bonds, they offer a return rate and invest the proceedings in projects relating to decarbonization, solar and wind energy, pollution control, wastewater management, etc. They target customers that focus on investing in green projects and are conscious of the impact of their funds on the environment.

Carbon credits – Carbon credits aim to reduce pollution and carbon emissions and enable companies to produce a certain amount of carbon dioxide or other such gases in lieu of carbon credits. These credits are then sold by companies or governments to projects focused on saving the environment by reducing pollution. Carbon credits can be purchased by companies whose business is harmful to the environment. The US government adopts a cap-and-trade program, allowing companies to produce a defined amount of greenhouse gases (GHGs). If a company emits gases beyond this limit, it is required to buy carbon credits. In the event it buys excess credits, these can be sold back to the carbon market.

What is tokenization?

Tokenization is the process of digitalizing environmental assets in the form of tokens via blockchain, meaning that carbon credits are represented as tokens: one carbon credit equals one token. Tokenization facilitates digital trade of carbon credits: it reduces the number of intermediaries involved and helps validate claims made in the token pertaining to the reduction of GHGs. It also results in real-time updates on the availability of green bonds and carbon credits.

For example, ABN AMRO Bank and Aircarbon are both leveraging blockchain technology to tokenize financial assets. ABN AMRO Bank, in partnership with Tokeny, issued green bonds on a public platform, ensuring their security and accessibility through Tokeny’s technology. Aircarbon, on the other hand, is developing a platform for tokenized carbon credits, aiming to create a trading exchange where these credits can be traded like traditional commodities.

Benefits of tokenization

  • Increased liquidity: Tokenization helps increase availability of the bonds and carbon credits, as it has a wider reach. Traditional bonds are not easily available. Tokenization breaks down bonds and credits into smaller units, enabling purchase by more investors.
  • Enhanced transparency: Tokenization uses blockchain technology; this ensures transparency, as the tokens are listed online on a decentralized ledger. This ensures no misrepresentations and that the data recorded is legitimate, increasing investor trust.
  • Higher security: The sophisticated technology used in the process of tokenization is highly efficient. This ensures that the tokens are safe and secure and cannot be misused or altered, making them an attractive investment option.
  • Lower costs: Traditional investment involves higher costs due to the number of intermediaries and paperwork involved. Tokenization reduces the time required to complete transactions, and online transactions help reduce costs.
  • Efficient markets: The technology uses smart contracts; this helps enforce agreements, reducing fraud and increasing clarity of agreements. Automation also helps build market efficiency and strengthen investor trust.

 

The future

Tokenization has a bright future around sustainable finance. As the technology improves and laws on green finance become clearer, demand for tokenized green assets is likely to increase. Amid the challenges relating to environmental change, such instruments are much needed to ensure the improvement of the environment and to move companies towards net-zero emissions. Tokenization leverages blockchain technology, ensuring a transparent system and making financial instruments accessible to investors at fair prices. Challenges remain, as the process is still evolving, but once it is stable, it would benefit both shareholders and investors.

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