IBM has partnered with an environmental tech start-up to turn carbon credits — tradable instruments aimed at reducing greenhouse gas emissions — into digital tokens.
The tech giant announced on Tuesday that it is working with Veridium Labs, a firm that creates environment-related cryptocurrencies, to make it easier to trade carbon credits using blockchain technology.
Blockchain, also known as distributed ledger technology, is most popularly known as the tech that underpins cryptocurrencies like bitcoin. It enables participants to register transactions across a vast network of computers.
But, increasingly, firms in other sectors are showing an interest in distributed ledger because of its ability to handle massive amounts of data within a transparent, immutable network.
Veridium will use IBM's technology to issue and manage carbon credit-backed tokens on the blockchain network created by Stellar, another start-up IBM has been working with. IBM said the carbon credit tokens will be fungible, meaning that they can be exchanged for another asset of the same type.
What are carbon credits?
Carbon credits are permits that allow governments and other organizations to emit a limited amount of carbon dioxide with the aim of reducing their carbon footprint. The certificates limit emissions to the equivalent of one ton of carbon dioxide.
While environmental credits are already traded, IBM and Veridium said that the current structure of the market creates too much friction.
"Right now, if you look at the carbon credit market — specifically the voluntary carbon credit market — they're traded through bilateral agreements which means there's a lot of friction involved," Jared Klee, director of digital asset registry at IBM, told CNBC in a phone call.
"They're not fungible assets, you see that in pricing that one can be very different, the same asset with large price fluctuations between two of them. And we see that reflected in other places like secondary volumes and what not."
The initial carbon credit tokens will include Triple-Gold Certified REDD+ credits from InfiniteEARTH, a company owned by Veridium's parent organization EnVision.
IBM and Veridium also plan to eventually let traders hedge potential environmental impacts using the blockchain platform, Klee said.
IBM's bet on blockchain
Big Blue partnered with blockchain start-up Stellar in 2017 on a payments platform that uses the latter's lumens tokens to rapidly clear and settle cross-border payments.
Several cryptocurrencies, including Stellar's, shot up in value late last year, with bitcoin's price coming close to nearly $20,000 a coin. Stellar's cryptocurrency is currently the eighth-largest in terms of market value, according to industry website CoinMarketCap. Rather than functioning as a cryptocoin like bitcoin, Stellar's digital token lets users exchange government-backed currencies.
But IBM has said is not interested in the cryptocurrency aspect of blockchain technology. IBM's blockchain is permissioned, meaning it only allows a limited number of trusted parties to access it. This is different to bitcoin's blockchain, which lets any user access it.
The company has been investing heavily in the technology, forging partnerships with the likes of Walmart and Nestle on tracing food contamination, and creating a joint venture with shipping giant Maersk on trade.