Tokenization of carbon assets: blockchain protocols, on-chain traceability, and fractionalization

The tokenization of carbon credits is based on a layered technological architecture that ensures interoperability between traditional carbon credit registries and blockchain infrastructures. The typical protocol involves: (i) the verification and custody of carbon credits in a traditional registry account; (ii) the issuance of representative tokens on a public or permissioned blockchain, with a 1:1 parity ratio or an over-collateralization mechanism; (iii) the programming of the credit’s attributes into the token’s metadata; (iv) trading on centralized or decentralized secondary markets; (v) retirement via the destruction of the token and the corresponding cancellation of the credit in the source registry.

This architecture creates a registry duality—traditional carbon registry and blockchain registry—which has major tax implications. Determining the jurisdiction for taxing capital gains realized on Tokenized Carbon Credits (TCCs) depends on the legal qualification of the transaction: transfer of ownership of an intangible asset, assignment of a claim, or execution of a smart contract. French case law regarding intangible assets and income from immaterial sources provides a preliminary interpretive framework, but the lack of specific administrative guidance on carbon tokens maintains an area of uncertainty that our modeling treats as an additional legal volatility parameter.

Fractionalization, made possible by tokenization, lowers minimum investment thresholds from $100,000 (standard lot on the OTC market) to a few dollars, democratizing access to the carbon market. This democratization, however, introduces tax complexity: the holding of fractions of ECC by non-professional investors raises questions of qualification (income from securities versus industrial and commercial profits) and tax jurisdiction, which are particularly acute under Pillar Two where determining the constituent entity holding the GloBE income conditions the application of the QDMTT.