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Indonesia weighs blockchain-powered carbon trading scheme

Indonesia wants to direct the blockchain craze toward greener use. The Indonesia Stock Exchange (IDX) has signed a memorandum of understanding with Metaverse Green Exchange (MVGX), a Singaporean startup that specializes in digital exchange technology. The intended collaboration centers around IDX's emission trading scheme that is slated to launch in 2025, and MVGX's job is to help IDX build a carbon registry and exchange with blockchain as the infrastructure layer.

Using blockchain in carbon trading solves what's called the double-counting problem, where two entities or an entity and a country lay claim to the same climate action, Bo Bai, executive chairman and co-founder of MVGX, tells TechCrunch. Founded in 2018, MVGX is licensed by Singapore's finance authority to provide securities and custodial services. Offering SaaS to commercialize carbon credits, the startup's focus is on "emerging markets seeking to offer access to their emission reduction projects internationally."

"The infrastructure also provides an immutable record of the creation and ownership of the credit, as well as a tamper-proof record of the performance of the green project with which the carbon credit is associated, to date," explains Bai. The carbon registry will run on Ethereum.

Indonesia has joined a raft of countries ramping up their environmental accountability with a financial mechanism. As of July, 46 countries are pricing emissions through carbon taxes or emissions trading schemes (ETS), according to the International Monetary Fund.

"The Indonesian government has recognized the vital role that the financial services industry can play in strengthening the country’s sustainability commitments. IDX is currently preparing for the possibility of becoming a carbon exchange in Indonesia and started discussions with several parties to deepen our knowledge," says Jeffrey Hendrik, director of business development at IDX, in a statement.

Carbon trading isn't a panacea for climate change. The mechanism incentivizes carbon emitters to be less polluting or they'd need to buy from those with excess carbon credits to offset their carbon footprint. The capital generated from the sales of carbon credits can then go toward financing conservation efforts, at least in theory. But one of the biggest criticisms of the mechanism is that offsetting allows entities to claim carbon neutrality without making a significant effort to reduce emissions in the first place.

While blockchain is believed to help create a streamlined public record for carbon trading, it doesn't address the incentive issues around offsetting. Nor does it ensure the quality of emission reductions from credit issuers or whether these claims hold up in the long term.

Crypto's reception in the carbon trading world isn't particularly warm, either. Startups that work to tokenize carbon credits have soared in popularity in the past year as they promise to entice more investors into the world of carbon exchange. One of the buzziest projects is Toucan, which started out late last year by bridging credits issued by Verra, the carbon trading industry's standard bearer, onto the blockchain and "retiring" the credits as tradable tokens. In May, Verra banned the conversion of retired credits into cryptocurrencies "on the basis that the act of retirement is widely understood to refer to the consumption of the credit’s environmental benefit."

The backlash of Toucan hasn't stopped countries from embracing blockchain carbon trading. Aside from the potential partnership with Indonesia, MVGX has also worked with carbon trading initiatives in China, including the Guizhou Green Finance and Emissions Exchange, and is in advanced conversations with relevant authorities in Malaysia and Taiwan to collaborate on infrastructure projects, according to Bai.