Web3 Revolutionizes Climate Finance

Web3 Revolutionizes Climate Finance

Closing the Climate Funding Gap with Web3: A Catalyst for Change

As extreme weather events become increasingly frequent due to rising temperatures, one of the most pressing issues in the fight against climate change is the enormous climate funding gap. In 2009, delegates at the 15th United Nations Climate Change Conference (COP 15) set a goal of reaching $100 billion in annual climate financing for developing countries by 2020. However, the actual funding received falls far short of this target, estimated to be between $21 billion and $83.3 billion. This is a mere fraction of the $1 trillion needed annually.

The majority of the funding comes from governments and institutions in developed countries, many of which use climate financing as a cover for their support of resource exploitation. This results in financing terms dictated by donor countries, leaving few alternatives for developing countries. However, there is hope. Web3, with its potential to close the funding gap, could even empower citizen activists to reclaim control over climate finance from governments and institutions. By enabling the influx of trillions in retail capital, incentivizing new climate projects, and providing alternative funding options for developing countries, Web3 has the potential to revolutionize the blockchain industry.

Onboarding Retail Capital

Climate finance has traditionally been the realm of governments and institutional investors, excluding retail investors. However, evidence suggests that retail investors are willing to accept lower returns in exchange for significant environmental impact. This indicates their desire to participate in the fight against climate change and invest in environmentally impactful projects. Web3 technology can facilitate this by creating new financial instruments tailored to retail investors, such as tokenizing existing climate assets, fractionalizing big-ticket instruments like green bonds, and forming special-purpose decentralized autonomous organizations (DAOs). Additionally, Web3 provides a low-cost method for value transfer through fiat-backed stablecoins.

Retail investors can also engage in transparent crowdfunding campaigns through licensed Web3 launchpads and launch pools. While traditional platforms like Kickstarter have allowed for similar opportunities, Web3 platforms offer unique advantages, as most components of these campaigns are integrated into a blockchain ecosystem. From project evaluation and escrow to carbon credit issuance and stablecoin disbursements, Web3 platforms ensure higher transparency and accessibility. Despite the challenges of onboarding retail investors into the Web3 space, there are already tens of millions of retail investors in Web3 actively striving to create positive change. With their significant capital resources, they hold enormous potential to invest in new climate projects and assets.

A New Generation of Grassroots Climate Projects

The demand for carbon and renewable energy credits is steadily growing and is expected to increase by a factor of 100 by 2050, according to McKinsey. However, the supply of such credits has struggled to keep pace. Non-tech climate projects, like reforestation and preservation efforts, face difficulty in raising upfront investment and scaling their operations. Institutional investors, particularly in Asia, have shown a preference for scalable consumer startups and technology-based climate projects. Climate tech projects have received significant venture funding, but non-tech climate endeavors lack the potential returns that venture capitalists seek.

Web3 platforms have proven to be effective fundraising tools for a wide range of projects. Launchpads, special-purpose DAOs, and other mechanisms, such as quadratic funding, have successfully raised billions of dollars for Web3 projects. These same mechanisms can be leveraged to support and scale climate and regenerative projects. By opening access to retail investors and offering returns that align with institutional investor expectations, Web3 can incentivize the initiation of numerous climate projects.

Giving At-risk Countries Alternative Climate Financing Options

Debt distress and climate change are intrinsically linked. When developed countries lend money to developing nations to tackle a problem largely caused by the developed world, it perpetuates a cycle of debt and further borrowing to address climate impact. This is an unsustainable path forward. Fortunately, Web3 funding solutions offer hope. Developing countries possess valuable climate assets such as forests, mangroves, coral reefs, and sunlight, which remain largely untapped. These countries can leverage Web3 fundraising platforms, such as green bond protocols, to finance projects that generate on-chain carbon and renewable energy credits. These credits can then be sold to governments, companies, and individuals with net-zero aspirations. This innovative approach can be seen as a form of sustainable wealth transfer, benefitting both parties involved.

Achieving the goal of $1 trillion in annual climate financing, let alone $100 billion, necessitates such innovative solutions rather than mere grand gestures by governments and institutions, which often yield limited results. Web3 technology has the potential to unlock retail capital, foster the growth of grassroots climate projects, and provide at-risk countries with opportunities to leverage their climate assets. As investors, governments, companies, and individuals, we must seriously consider the transformative impact Web3 can have on climate finance. Failing to do so would only perpetuate our complicity in our own demise.

  • Author: Elizabeth Tan is the founder of Intent Capital Group, a financial services firm focused on impact investing, development financing, and green funds. She is also the founder and managing partner of Intent Fund and serves as a Web3 investor and strategy adviser.

Edited by Daniel Kuhn.