CARBON CREDIT TOKENIZATION AS AN INSTRUMENT FOR ENHANCING MARKET LIQUIDITY
Abstract
The paper investigates the tokenization of carbon credits as a systemic innovation to overcome structural dysfunctions of the Voluntary Carbon Market (VCM). Despite rapid growth, the VCM remains critically fragmented, non-transparent, and illiquid, posing significant barriers to scaling climate finance. The study conceptualizes how Distributed Ledger Technology (DLT) and blockchain infrastructure offer a fundamental architectural shift, transforming isolated off-chain registry entries into programmable on-chain digital assets. The research focuses on the proof-of-concept model developed by Toucan Protocol and KlimaDAO. It details three primary stages: (1) "Bridging" – off-chain credits (e.g., from Verra) are verified, retired, and minted as on-chain TCO₂ tokens; (2) "Pooling" – individual non-fungible tokens are aggregated into standardized fungible composite tokens like Base Carbon Tonne (BCT), creating a benchmark asset; (3) "DeFi Integration" – tokens become tradable on decentralized exchanges and used as collateral in algorithmic reserve currencies. The analysis highlights the model's initial success: KlimaDAO mobilized over 17 million tokenized tonnes of CO₂ (18% of annual VCM volume in December 2021), demonstrating the potential for creating on-chain liquidity. However, three critical challenges limit institutional adoption: asset quality verification issues (tokenization automates but does not solve underlying environmental integrity problems), extreme speculative volatility of protocol tokens (KLIMA lost 99.9% of value), and fragmented regulatory landscape (MiCA in EU, SEC scrutiny in US) creating compliance uncertainty. The article concludes that while tokenization provides powerful proof-of-concept for transitioning VCM from fragmented network to integrated liquid ecosystem, its future depends on solving quality verification, speculative volatility, and regulatory clarity challenges.
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