This founder is using blockchain to fight carbon credit fraud

In this Q&A series, we suss out the opportunities, thinking, and motivations behind some of Asia’s promising startups. You can also catch our full startup coverage here.

More companies are looking to go green by buying carbon credits. A big deterrent though is that carbon offset markets are rife with fraud.

Takeshi Nojima, founder and CEO of Xels / Photo credit: Xels

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To address this, Takeshi Nojima started the company Xels in 2018 with the goal of building a blockchain-based platform where corporations and individuals can buy tokenized carbon offset credits easily and transparently (His responses have been translated from Japanese).

Tech in Asia: What’s the problem that your startup is trying to solve?

Nojima: The core goal of Xels is to promote a greener, healthier planet. We’re working toward that by increasing both participation and transparency in carbon offset markets.

Carbon markets are complex and standards can vary wildly, but generally there are two main kinds of credits.

“Compliance” credits are heavily regulated and required under cap and trade systems.

“Voluntary” credits, meanwhile, are available to anyone and are popular with companies who want to show consumers they are serious about tackling climate change. They are also attractive to individuals who want to decrease their carbon footprint and simply do right by nature. We are initially focused on boosting access to the latter, while also protecting people and businesses from fraud.

Since the birth of carbon offset markets in the wake of the Kyoto and Paris agreements, fraud has been a serious problem. Bad actors have been known to sell fake or expired carbon credits. Such credit “recycling” fraud can lead to double spending of unretired carbon credits (see here for an example of one of the biggest fraud cases to hit carbon credits, which had even ensnared Deutsche Bank).

Blockchain’s distributed ledger technology is the perfect use case for carbon credits, as it cannot be changed, reversed, or double spent. Digital assets can also be “burned,” along with a transaction hash that proves the associated credit has been retired forever.

We’re initially launching the eponymous Xels token as a platform token to access a future suite of stable tokens that are pegged 1:1 to various industry-standard voluntary carbon offset credits – think of these as being the USDT of carbon credits.

Who is your target customer?

Anybody can get involved in carbon offsetting, from individuals right up to the largest global corporations. Carbon offsetting is now a major goal of companies such as Amazon, Microsoft and Nike, who are no longer interested in waiting around for governments to take the lead. They’ve set out to neutralize their current carbon footprint, or even their entire historical footprint, on their own initiative.

Retail brands in particular have been pushing for greener measures, such as using fabrics made from recycled plastics, because consumers are increasingly demanding that they address climate change. Making it easy for companies to transparently offset their carbon emissions without fear of fraud will make them even more willing to enter the fray. And of course, normal people who want to offset their carbon footprint can also get involved. The platform is open to all.

How is your startup solving the problem?

Tokenizing carbon credits would allow the industry to maintain open, transparent records — from generation to sale to retirement. Xels will be able to provide both corporates and individuals with official certificates that can be used as proof of their carbon offset initiatives, backed by immutable blockchain transactions that can be viewed by anyone.

Why is this the right time to do for your startup?

According to the World Bank, humanity compensates for just 22% of global emissions through the purchase and retirement of carbon credits, yet the proportion of countries operating regulated carbon markets has risen from 40% in 2016 to 70% in 2020. The result is a wall of demand that may far outstrip the issuance of new carbon credits, which is constrained by the slow and expensive process of carbon project certification.

n To practice what we preach, Xels will migrate to a proprietary low-energy blockchain.n

Since fraud is already an existing issue, it’s important that the increased demand for carbon offsets is met with a better platform to protect those entities that want to do the right thing by investing in carbon offsets in the first place. The climate crisis is dire – sadly the “right time” has already long passed, but we hope that Xels will increase participation and get us on a better path toward carbon neutrality.

Why is your team best positioned to solve this problem over others?

We have spent a lot of time finding the right people and getting as many of them to Tokyo as possible, thankfully before Covid struck. Japanese startups tend to be rather homogenous, but we’re proud of our diversity. We currently have team members from seven countries who speak more than 10 languages. Our chief technical officer obtained a PhD in Blockchain from the University of Memphis, we’ve got advisors from some of the biggest domestic and international tech firms, and we’ve built strong relationships with the Japanese and regional governments.

What are the major comparable companies that have a similar solution to yours? And how different is your startup from them?

There are a number of blockchain infrastructure players for carbon markets that have folded; a few others are taking the credit tokenization approach.

Aircarbon is one that offers an exchange platform, but you must be an accredited investor to use it, thus normal folks are barred from participation. Poseidon is another that was working with IBM, but I don’t think they have released anything publicly yet. They appear to be focused on offsetting at point of sale, kind of like a voluntary tax when you buy something at a shop. There’s Nori, which uses blockchain to verify removals, but it doesn’t enable credit purchase. I think our platform plus our use of a “stable coin” for a carbon credit approach make us unique in the space.

I also wanted to mention how we differentiate ourselves from typical crypto players, especially with the space often criticized for its wasteful energy use. While Xels intends to launch publicly on the Ethereum blockchain, we are very cognizant of concerns over the high energy consumption associated with existing DLT infrastructure. In order to practice what we preach, Xels will migrate to a proprietary low-energy blockchain in the near future.

The Xels chain takes a hybrid proof-of-stake (think Ethereum) and proof-of-work (think bitcoin) approach, enabling users to run it on a standard laptop without the need for electricity-hungry mining rigs with high-powered GPUs.

How big is the market opportunity?

Our initial focus is on Japanese companies looking to go carbon neutral. Japanese clean energy initiatives lag behind those of the UK by 50%, so the potential is massive. We’re supporting Prime Minister Yoshihide Suga’s target of reaching net zero emissions by 2050, which is something all big Japanese companies will want to get on board with, or else face backlash from the government and consumers alike.

Two-thirds of companies we have apprised have a long-term emissions reduction goal or will have one by the end of this year. A modest carbon offset goal of 200,000 tonnes per year is equivalent to about US$2 million in investment per company – and Japan alone has over 3,700 companies listed on the Tokyo Stock Exchange.

Pressure from stakeholders – both consumers and investors – will be the main driver of voluntary carbon reduction action, and Xels is ready to support any company or individual wanting to go green.

How do you know you’ve found product-market fit?

A growing number of firms and individuals are choosing to offset their carbon footprints voluntarily, and despite not being “live” yet, we’ve had a number of inbound requests for carbon offset strategies. In addition to the five listed companies that have already expressed keen interest in working with us, we’ve got another 20 we’re meeting with this month.

What’s your revenue model?

For each transaction that occurs on our platform, Xels takes a small commission. As mentioned, we’re in advanced discussions with five major listed companies here in Japan that are interested in using Xels to voluntarily offset their carbon footprints, even though it’s not required by the government.

One of them has specifically expressed the intention of offsetting 200,000 tonnes of carbon dioxide (CO2) per year – that’s equivalent to more than 43,000 cars being driven for a year, or nearly 34,000 households’ combined annual electricity usage.

Voluntary carbon credits vary in cost, but they average around US$10 per credit, with one credit being equal to 1 tonne of CO2 – that would be a US$2 million investment, or roughly US$10 million if all five companies decide to offset a similar amount. We could capture a percentage of that amount.

What’s your distribution strategy?

The company is seeking a worldwide user base. Xels tokens will be made available to the public via digital asset exchanges, allowing both corporations and individuals to transparently reduce their carbon footprints.

We’re listing on Bittrex Global on April 7, which will make Bittrex the first platform where individuals and companies will be able to purchase Xels tokens. We intend to launch Xels Chain by the fourth quarter of this year, along with the additional “stable” tokens pegged to industry-standard voluntary offset credits.

How do you plan to defend your startup against competition?

We don’t really see anyone in this space as competition but more as allies fighting toward a common goal. However, almost all of these projects are developing on the Ethereum blockchain, which is power-hungry. We hope to attract organizations and developers to switch over to the Xels Chain and develop their own solutions on our bespoke low-energy infrastructure.

What’s your fundraising history?

We’ve raised US$14 million so far. We’re not fundraising at the moment.

What’s the most memorable and/or pivotal moment of your startup journey so far?

It was definitely when we were welcomed into the Climate Chain Coalition (CCC), an open global initiative to advance blockchain to mobilize climate finance.

This means we are working shoulder to shoulder with the likes of the United Nations Framework Convention on Climate Change and the World Bank Group. It really showed us that what we are working on can have a huge, global impact – even from Tokyo, which is not a city that’s considered at the forefront of green initiatives, especially compared to EU countries that are compelled to buy carbon credits to avoid being hit with massive tax burdens.