Web 3 Series #11: Regenerative Finance - The Path to Environmental Redemption?
November 16th, 2022

Author(s): olokoji#8748

Editor(s): FINE#8385 & faevy#6563

Last updated: 16th Nov 2022

Imagine you are feeling the hottest summer and wondering whether all your blockchain transactions, mining, etc aren’t part of this. Then you wonder, what can I do? One word comes to mind; "Regenerative Finance (ReFi)".

More than 80% of the world agrees they want to impact their environment positively, and although there are lots of frustrations, we ultimately think we can.

You might have heard about the term “ReFi” as it is getting as hot as the earth's atmosphere in web3.

What is ReFi?

Regenerative Finance (ReFi) is the process of using various forms of capital to drive systematic, sustainable, and positive change for all participants. It is coined to resemble the term “DeFi”- Decentralized Finance. ReFi means Regenerative Finance for blockchain, whose core ethos is using the blockchain finance as a direct investment to the regeneration of environmental and societal systems while making profit is an afterthought.

It employs crypto as a means to solve the systemic problems of traditional finance; by using capital to create healthy and fair social and environmental systems.

ReFi protocol leverages blockchain technology to reduce fraud, track outcomes, promote involvement and produce a positive impact on the people and the planet.

Due to the failure of industrial companies to take into account the negative externalities of carbon emissions and inefficient resource allocation, humanity is currently playing catch-up in the face of an impending environmental crisis. ReFi works to correct this by facilitating the intelligent allocation of resources.

How did we get here?

Decades of decadence since the industrial revolution have caused the earth's atmosphere to degrade. Prior to this, the release of carbon into the atmosphere and the amount of carbon being stored were in equilibrium.

Human activity especially the burning of fossil fuels and deforestation have shifted the paradigm drastically which has led to global climate change.

Note: Climate change is caused by increased levels of carbon dioxide (CO2) compared to the surface air temperature.

According to the Intergovernmental Panel on Climate Change (ICPC), to avoid a cataclysmal level of global warming, we must act now to halve carbon emissions by 2030.

ReFi in Action: Carbon Offsets

Born from the concerns of climate change, the world saw a drastic increase in carbon dioxide emission into the atmosphere in the 1990s, Carbon offsets and carbon credit (offset credits) were introduced which was thought to be a good way to make companies with large carbon footprint reduce it, Three decades later some faults have been found which brought about Vegetation based offsetting.

  • Carbon offsets

It is the reduction of emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions made elsewhere. They are the primary type of Refi instrument in use today.

Note: Offsets are measured in tonnes of carbon dioxide-equivalent (CO2e). One ton of carbon offset represents the reduction or removal of one ton of carbon dioxide or its equivalent in other greenhouse gases.

Carbon offset credit functions as a marketplace with intermediaries connecting credit buyers(companies) and credit producers (a tree planting community). These intermediaries verify regenerative actions by the credit producer. While the credit buyers don’t necessarily change their organizational models but pay the credit producers to create an equilibrium for the CO2 released.

  • What types of carbon offsets markets are there currently

There are two types  of carbon offsets, they are; Compliance and voluntary

Compliance (mandatory) carbon offsets

Compliance markets are those in which credit are traded based on compliance with the Legal emission cap. United Nations Convention on climate change (UNFCCC) has put in place caps for carbon dioxide a company can legally emit per year. These compliance markets like European Union Emission Trading Scheme, the Kyoto protocol, and the California carbon market regulate them with schemes like Clean Development Mechanism, Mandatory  Carbon Credit Maker, etc**.** It was reported that the credit market size was about $261b  in 2020.

Note: One of the flexible mechanisms of the Kyoto Protocol, the Clean Development Mechanism (CDM), enables large emitting nations to reach their emission reduction goals by funding emission-reduction initiatives in other nations. The CDM is a project-based mechanism, which means that individual projects produce Certified Emission Reduction (CER) credits that may be traded for money to nations who are committed to decreasing their emissions. Strict reporting and verification requirements are part of the necessary compliance.

  • Voluntary markets

This is used by companies that aren’t legally obligated to lower their carbon footprint but are motivated by corporate social responsibility, public relations or stakeholder pressure.

Carbon credits can be purchased directly from projects, businesses, or carbon funds by both businesses and people. All VERs must be established and calculated in accordance with one of the current VER standards, just like in the regulated market, and they must be independently confirmed.

The primary distinction is that, unlike CERs (mandatory market), VERs (voluntary market) cannot be used to fulfill responsibilities under the Kyoto Protocol compliance regime. A CER can be accepted by organizations though if they want to voluntarily offset their carbon footprint.

The voluntary markets are usually regulated by compliance entities like Verra and Gold Standard. It was reported that the voluntary market cap was over $900 in 2021 but it is growing rapidly.

Types of Carbon credits

  • Carbon avoidance

This involves paying organizations to not do an action that would increase Co2, such as paying a logging company not to cut down a particular section of trees. Carbon avoidance is the most common of the two types as it has accounted for the 96% of issued credits in 2020.

  • Carbon removal

This is the most effective of the two types of carbon credits. Instead of avoiding you create to remove existing carbon dioxide. Like planting a tree instead of not cutting one, using sustainable methods to keep carbon in the soil while farming etc. Carbon credits are produced for every metric ton of net GHG reduction. Carbon credit buyers are net GHG emitters due to their business activities. These companies can buy carbon credits from carbon credit marketplaces and use them to "offset" their operations, making them net carbon neutral.

Note: GHG means Greenhouse Gas, they are compounds that trap heat or longwave radiation in the atmosphere. Examples are Co2, methane etc

Where did Carbon Offsets go wrong?

You might be wondering, this initiative seems to be a good idea, but what has gone wrong?

Everything that has its merit has its disadvantages, in this case, Carbon offset failed to address the elephant in the room. Most carbon offset initiatives aim to ‘neutralize’ actual emissions, either by investing in a project that avoids/reduces a future emitted amount (such as renewable energy production), or one that actively captures the carbon already in the atmosphere (such as reforestation).

Why has this failed?

This approach has failed because the conversation about climate change and its effect on the environment has largely been focused on carbon emissions. However, reducing the Co2 footprint is just one part of the fight against climate change.

There are areas and practices on earth that are contributing to a reduction in carbon.

  • Vegetation and Biodiversity Offsets

The main failure of Carbon offsets is not recognizing the “elephant in the room” that is not acknowledging mature growth forests as “projects” which address carbon emissions because they have not been specially created to do so. So communities responsible for managing these forests choose to leave them and therefore not worth incentivizing through the carbon offset.

This brought about vegetation and Biodiversity offsets.

Vegetation and Biodiversity offsets are attracting increasing interest as governments and the private sector seek to address biodiversity loss that occurs through development projects and activities. First used in the United States in the 1970s to mitigate damage to wetlands, biodiversity offset programs have more recently been introduced in a number of countries. More than 100 countries have laws or policies in place that require or enable the use of biodiversity offsets or are currently considering their use. It is therefore timely to examine what has been learned from experience with biodiversity offsets programs to date, and how they can be improved.

But additionality presents us with the absurd circumstance that reforestation or sustainable agriculture projects must be started in regions that have already been devastated in order for a region of the Amazon rainforest to qualify as a carbon offset project. Similarly to this, if the Avatime community in Ghana chooses to protect their pure local ecosystem, their virgin forest is ineligible for conventional carbon offset schemes. This is what Vegetation and biodiversity offsets solve.

Refi and Blockchain

Blockchain technology is continuing to grow popular and wax stronger, it is becoming a powerful industry as its market cap in 2021 was estimated to be $5.9 billion and it is projected to hit $69 billion in 2030. Just like every big industry people are demanding action from governing bodies to integrate sustainability plans into their operations.

However, the traditional finance system has been proven not fit to satisfy the level of financing and transparency required to make these drastic changes.  This is because it is based on a limited set of profit criteria for the benefit of shareholders; incentives are not aligned in a way that makes sponsoring comprehensive investments appealing to stakeholders.

ReFi is a financial structure that leverages the power of blockchain to determine investment opportunities based on Environmental, Social, and Governance (ESG) criteria.

ReFi employs crypto as a means to create raise capital and use it to create healthy and fair social and environmental systems. DeFi participants can contribute to the resolution of pressing social issues such as injustice, inequity, and ecological crises.

How does ReFi work with Blockchain?

Considering the fact that crypto is gaining trust among institutional investors and big businesses, DeFi supporters are currently tasked with regenerating the crypto economy. given that large businesses and institutional investors are starting to believe in cryptocurrencies. By making investments and taking actions that are pertinent to the real economy, regenerators aim to use crypto mechanisms in a way that can benefit the environment.

One of the most compelling examples of innovation that is currently being unlocked is the regenerative finance sector, which is currently being played out in a variety of ways. Carbon offsets are being bridged directly from registries like Verra by organizations like Toucan Protocol, Kilma DAO, Return Protocol, etc.

Credits can be tracked to prevent double-spending by being bridged from a solid and transparent database on-chain. Toucan can also make use of the DeFi infrastructure that already exists to make it easier to create new financial products based on carbon credits. As an illustration, KlimaDAO has made use of this technology to establish a treasury backed by carbon credits. By reducing the supply of carbon credits, this financial instrument raises its price. This makes delaying changing their practices very costly for polluters.


Pricing of these kinds of acts had always been challenging. However, by reusing the current DLT infrastructure, regenerative acts can be priced using the same methods as tokenized assets. Avano, BasinDAO, and Regen network are a few of the first companies to start developing resources for more general regenerative actions. This trend will only get worse as the financial prospects around these enterprises expand. It assembles the components for something potent by providing creative new financing options and assets. The involvement of Blockchain gives the future of the world and our environment a chance if it continues to follow this trend.

Do your Own Research and be part of the various ReFi protocols, projects, and platforms on the web3. Good places to start are the ReFi podcast, you can also support climate-focused projects through the Gitcoin grants.

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