Crypto & Carbon: A Story About Self-Righteousness In Writing
The overlap between people working in crypto and people working to contain climate change is small. But the reality is that the future of cryptocurrencies and the future of our planet’s climate are closely intertwined.
The carbon market is an initiative that places an economic cost on carbon emissions. This monetization of pollution aims to encourage countries and businesses to reduce their CO2 emissions. Currently, governments set a price for CO2 emissions, incentivising businesses to pollute less. Otherwise, they need to pay for the CO2 they release.
Eager to capitalise on rising prices and wider calls for a global transition to cleaner economies, crypto traders have scoured the carbon market for older, cheaper offsets to buy and tokenise — uniting the two unregulated markets of digital assets and carbon offsets.
Carbon Credits: Carbon credits, also known as carbon allowances, work like permission slips for emissions. When a company buys a carbon credit, usually from the government, they gain permission to generate one ton of CO2 emissions. With carbon credits, carbon revenue flows vertically from companies to regulators, though companies who end up with excess credits can sell them to other companies.
Carbon Offsets: Offsets flow horizontally, trading carbon revenue between companies. When one company removes a unit of carbon from the atmosphere as part of their normal business activity, it can generate a carbon offset. Other companies can then purchase that carbon offset to reduce their own carbon footprint.
KlimaDAO is nothing if not ambitious. Built on the common crypto carbon model of tokenized carbon offsets, Klima is also a DAO. As a Decentralized Autonomous Organization, KlimaDAO aims to boost the price of offsets on the VCM. This is done by purchasing carbon offsets, tokenizing them, and then selling or burning them to influence the market.
What sets Klima apart is its stated goal to be a carbon-backed currency, rather than simply a marker for credits held in reserve. To that end, all KLIMA tokens are backed 1:1 by reserve holdings in BCT, tokens issued by Toucan.
Put more simply, to mint more KLIMA tokens (and increase supply), KlimaDAO needs to lock away BCT (Basic Carbon Tonne) in the treasury. KLIMA is backed by one BCT 1:1, and BCT is pegged to real-world offsets. Klima’s treasury functions as a blackhole for BCT and carbon offsets, removing them from the market and pushing the real-world carbon price higher.
The DAO structure allows holders of KLIMA to participate in Klima’s governance. Holders can propose new measures and vote on their passage.
Since October, almost 20mn carbon offsets — units that companies use to compensate for greenhouse gas emissions — have been converted into digital tokens. The tokens can be used to offset emissions or converted into a new cryptocurrency, Klima.
KlimaDAO’s pseudonymous founder presents Discord-dwelling degens with a question: What if you can save the environment by holding crypto?
Toucan Protocol is a blockchain project that aims to bring the carbon market into everyone’s reach. To ensure that it doesn’t cause more harm than good, Toucan runs on Polygon, an energy-efficient and eco-friendly layer 2 solutions for Ethereum.
With Toucan, individuals and businesses recognizing the importance of reducing their GHG emissions can buy tokenized carbon credits on the blockchain. The goal is to make these carbon credits more liquid and easily interchangeable between companies that create them and companies that want to buy them for offsetting.
A few crucial yet moving parts in the Toucan protocol make it what it is. Let’s understand them:
Toucan Carbon Bridge: The Toucan Carbon Bridge is the backbone of the protocol, enabling users to bring their registered carbon credits onto the blockchain. Toucan is in partnership with the Verra registry and has worked out a set of rules on how bridging verified carbon tokens can be done using its protocol.
Carbon Tokens: Toucan Carbon Tokens or TCO2 represent 1 unit of carbon offset, which equals one tCO2e (tonne of carbon dioxide equivalent). every TCO2 can be traced back to the Verra registry entry and use the distributed ledger to verify every transaction where it has been used.
Carbon Pools: Carbon Pools solve this issue by regrouping multiple project-specific tokenized carbon tonnes (TCO2 tokens) into more liquid carbon index tokens. This allows for better price discovery for different classes of carbon assets and removes the issue of discrimination against different TCO2 types. Users can deposit their TCO2 tokens in these pools and receive pool-specific tokens. They will be able to trade these index tokens on the DeFi marketplace like any other token.
Moss is two projects in one: a popular token (MCO2) and a climate-based NFT project. Both projects rely on the concept of tokenization to incentivize carbon offset production and emissions reduction.
The MCO2 token is available as an ERC-20 token on popular exchanges such as Coinbase. Purchase of the token (trading at $11.46 at time of writing) funds carbon offset projects. Most are based in and around the Amazon rainforest.
Moss doesn’t administer offset projects directly. Instead, they source high-quality offsets from other providers and tokenize them. Each project results in a given amount of offsets; Moss produces a set amount of tokens based on the projected offsets. One MC02 token = an offset for one tonne of CO2.
By burning MC02 tokens, Moss locks in offset projects permanently, reducing the overall supply of offsets in the market and boosting the price of remaining offsets.
The Moss Amazon NFT project operates a bit differently. Moss purchases portions of the Amazon that are at risk for deforestation. That land is then divided into 1-hectare portions, each roughly the size of a football field. The rights to those portions are digitized and tokenized as NFTs (Non-Fungible Tokens). Each NFT is unique and tied to a unique piece of property.
The Moss Amazon NFTs are actual land sales; proceeds from the sales fund further purchases, with 30% going to a preservation fund. That fund pays for patrolling and physically protecting the Amazon NFT holdings.
The Carbon Crypto Utopia
The holy grail of this endeavour is the idea of a “meta-registry” – a long-term vision espoused by Toucan, Regen, and other players in the carbon-bridge space – whereby anyone can add a carbon credit to the blockchain. Rather than a few establishment gatekeepers like Verra and Gold Standard verifying most voluntary credits, this meta-registry approach would theoretically lead to the proliferation of a new class of offsetting projects for whom existing verification methods are too restrictive.
But to ensure credit quality, Regen’s meta-registry would label credits with tags that can only be issued by trusted, on-chain entities that are essentially auditing entities. The problem is that the process would always require trust in someone and blockchains' core proposition sticks to its belief in trustlessness.
Also, it’s important to understand that on-chain records might ensure accountability, but does it ensure initiative? That’s for time to tell.
Projects like Toucan and Klima have proven that blockchain technology can positively impact the carbon market, and they’ve persuaded industry players to take the tech seriously.
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