Will a carbon-backed digital currency be adopted and used? A South African case study

Abstract

Background: Voluntary carbon markets represent an opportunity to increase the flow of finance to climate change mitigation measures, as espoused in the Paris Agreement, but remain modest in their capital mobilisation efforts. Aim: The study aims to explore whether a private-sector-led carbon-backed digital currency will be adopted and used. Increased adoption will channel more capital to fund the estimated $7.4 trillion in annual climate finance required to achieve net zero by 2050. Setting: A pilot carbon-backed digital currency was launched in South Africa in 2022, and the entrepreneurs provided trading data to the researchers. Method: The pilot provided empirical evidence and impetus to explore the adoption and usage trends of this blockchain-based innovation through a case study methodology. Results: The adoption of a carbon-backed digital currency, underpinned by intensive activation activities, shows promise. Usage is influenced by increased awareness and socialisation in the market. Merchants hold the currency as assets, and individuals take advantage of incentive opportunities. Conclusion: Explicit incentivisation will increase adoption of a carbon-backed digital currency. An increase in price encourages adoption and use, and tax incentives to reduce capital gains can further increase adoption, and, thus, increase climate finance flows. However, decentralised digital currencies pose several financial stability concerns for regulators, and consumer protection is paramount. Contribution: This study contributes to the emerging body of knowledge on the market mechanisms of digital currencies that yield positive environmental outcomes by exploring what drives adoption and use in an emerging market context.