Tokenizing Real-World Assets: The Opportunity and Impact of Carbon Credits as Financial Tools

The tokenization of real-world assets (RWAs) is one of the most enduring use cases for blockchain and digital assets. According to recent reports, Boston Consulting Group puts the total estimated value of the tokenized RWA market at upwards of $16T by 2030. 

Tokenizing a real-world asset refers to the process of placing the ownership of tangible assets – including equities, bonds, precious metals, investment funds, real estate mortgages, carbon credits, and other financial instruments – on blockchain ledgers as digital assets. This enables 24/7/365 buying and selling of those assets and unlocks significant liquidity from many of the world’s most valuable and often illiquid asset classes.

Tokenizing Carbon Credits

Carbon credits are one promising tokenization use case to not only increase liquidity, transparency and open new revenue streams, but simultaneously support the reduction of carbon emissions and contribute to a greener, more sustainable future.

A carbon credit is a tradable unit that represents one metric ton of carbon dioxide equivalent gas that has been reduced or removed from the atmosphere. It is a financial tool that provides its seller with capital to scale their ecological project and allows the purchaser to offset one metric ton of pollution that has been emitted in the atmosphere. There are two types of carbon markets: the regulated carbon market driven by compliance, and the voluntary carbon market.

The voluntary carbon credit market today is extremely fragmented with many intermediaries extracting value, opaque and slow verification of claims, and complex transactions and market access. The market currently lacks efficient, accurate and reliable ways to define, monitor and verify carbon credits. While carbon credits can play a vital role in the transition to a nature-positive world, today’s inefficiencies paralyze buyers, and new projects struggle to obtain financing.

Blockchain technology is well suited to solve some of these persistent pain points for carbon markets. Many of the basics—or primitives—required to make that real-world-to-chain connection already exist today. This includes knowing how blockchains operate, understanding how to enforce rules for decentralized transactions and how to issue and represent tokens on-chain. 

Tokenized Carbon Credits as Financial Tools

Tokenizing carbon credits as digital assets on the blockchain can foster a transparency-driven approach to:

• Log project measurement and reporting data directly on-chain for buyers, auditors and crediting bodies to review
• Enable fairer, higher price discovery and directly connect suppliers with buyers and investors
• Facilitate the creation and trading of green bonds
• Apply this unlocked capital not only to currently available credits, but also to future production to increase supply, liquidity and market dynamism.
• Provide the needed early financing for early-stage projects through carbon credit pre-purchase agreements
• Code royalty schemes into smart contracts that enable additional revenue streams for project developers each time the credits are traded 
• Create new use cases for more affordable, real-time microtransactions 

Applications and use cases like these are being developed and tested, with support from forward-thinking, progressive leaders and initiatives. With the promise of greater liquidity, transparency, and more efficient market infrastructures, tokenizing carbon credits could support unlocking capital at the pace and scale required to meet global climate goals. 

Since 2022, Ripple has been supporting innovative companies building the infrastructure to scale the voluntary carbon market, including Thallo, Carbon Title, Xange, and more, with a commitment to driving sustainability in crypto, finance, and the global economy.

Download Ripple’s latest Block Stars podcast to learn more about how enterprises, developers, and financial institutions can tap into the tokenized real-world asset market today.

This post is commissioned by Ripple and does not serve as a testimonial or endorsement by The Block. This post is for informational purposes only and should not be relied upon as a basis for investment, tax, legal or other advice. You should conduct your own research and consult independent counsel and advisors on the matters discussed within this post. Past performance of any asset is not indicative of future results.