Cryptocurrency has become a boogeyman in conservation circles, but a growing corner of the industry is claiming to have a solution to the climate crisis: crypto carbon credits.
This article is part of Mining Week.
One of the ways these companies aim to achieve their emission goals is by purchasing carbon credits – certificates representing carbon dioxide that’s been kept out of the atmosphere by some act of conservation or removal.
While some point to carbon credits as a pragmatic solution to the planet’s climate woes, others say they make the problem worse – giving polluters free rein to emit more than they would otherwise.
Still, with leaf-green logos and websites emblazoned with pictures of the lush Amazon rainforest, a new cohort of crypto projects is embracing carbon credits.
Another project, KlimaDAO, aims to bump up the price of carbon credits by tapping into a corner of crypto where memes are gospel, Tesla (TSLA) CEO Elon Musk is king and everyone is on the hunt for sky-high returns. Klima’s pseudonymous founders present Discord-dwelling degens with a question: What if you can save the environment by holding crypto?
From carbon industry veterans and environmental scientists to retail investors and accountants, a diverse group of voices has found its way into crypto’s regenerative finance, or ReFi, movement, with seemingly everyone evincing a different view as to how – and to what degree – crypto can be leveraged to solve the defining crisis of our time.
If the past few months are any indication, making progress might mean stepping on some toes.
From the cryptosphere to the atmosphere
Both chains use energy-intensive proof-of-work (PoW) consensus mechanisms to keep themselves secure, wherein a horde of computers around the globe compete to process transactions in a practice called “mining.”
The mining comparison is apt. According to the Cambridge Bitcoin Electricity Consumption Index (CBECI), bitcoin mining consumes 135 terawatt-hours of electricity per year – more than is consumed in a year by the entire country of Norway. By CBECI’s estimate, bitcoin – crypto’s so-called “digital gold” – consumes more energy than the real-world gold mining industry.
Moreover, not all blockchains require the same amount of energy. Outside of Bitcoin and Ethereum, most major blockchains employ a more sustainable proof-of-stake (PoS) consensus mechanism. Ethereum is in the process of transitioning to its own PoS algorithm, which, according to the Ethereum Foundation, will cut the network’s energy use by ~99.95%.
Whatever crypto’s net carbon footprint, it will likely be a while before the general public comes to revise its view of blockchain technology as an ecological menace.
In the meantime, the ReFi movement is already presenting a new, eco-friendly face for crypto.
What are carbon credits?
ReFi’s proposals for addressing the climate crisis are wide-ranging, but most attention thus far has been directed towards reforms to the global carbon credit market.
Carbon credits – also called carbon offsets – represent projects that reduce emissions or remove carbon dioxide from the atmosphere, such as preserving forests, building wind and solar farms, or capturing methane gas.
In general, one carbon credit represents one metric ton of carbon dioxide that has been saved from the atmosphere. To a purchaser it represents permission to emit that same amount of carbon guilt-free (and in some cases, tax-free).
A global carbon market emerged in 1997 with the Kyoto Protocol, an international treaty that established carbon credits as a way for countries to offset their emissions to reach limits set by the United Nations Framework Convention on Climate Change (UNFCCC).
Since then, several international bodies have emerged to regulate the registration and sale of carbon credits. In more recent years a “voluntary” carbon market has sprung up to enable eco-conscious companies – including some crypto mining groups – to offset their emissions beyond what is required by any government.
The challenge with carbon accounting
Advocates of market-based solutions to the climate crisis say turning carbon into a commodity aligns the interests of the planet with the interests of corporate bank accounts.
Luis Felipe Adaime, the founder of the Brazil-based ReFi company Moss, is one such advocate. Moss buys up carbon credits from forest preservation projects in places like Costa Rica and the areas bordering the Amazon rainforest. It then incorporates those credits into a popular token, MCO2, which is listed on major cryptocurrency exchanges like Coinbase (COIN) and is marketed as a way for crypto investors to help preserve the planet.
“Carbon credits have become a way to make forested land expensive,” Adaime told CoinDesk. “People who were considering, you know, burning the [forest] down to plant soy start thinking ‘Oh, wow, I can actually make more money protecting the forest than by burning it down to raise cattle.’”
It’s extremely difficult to quantify exactly how much CO2 a given project keeps out of the atmosphere, and poor quality credits have the potential to actively harm the environment by enabling companies to superficially offset their emissions whilst emitting more than they would have in the first place.
Some companies are happy to gobble up cheap credits from questionable conservation projects in exchange for a quick public relations boost, meaning voluntary credit retailers arguably have less of an incentive than their compliance-oriented peers to engage in high-quality measurement, reporting, and verification (MRV) practices.
A more transparent carbon market
At a high level, the pitch for on-chain carbon is simple: By moving the voluntary carbon market onto a blockchain and publicly tying each credit to metadata attesting to its quality and origin, those wishing to offset their emissions will have access to a transparently priced, highly liquid offset market unlike any that exists today.
Even better, watchdogs will be able to track claims of carbon neutrality directly back to the source.
“Markets are efficient if they’re open, transparent and fair,” Raphaël Haupt, CEO of the carbon-to-crypto startup Toucan, told CoinDesk. “Currently, this is just not the case with the [legacy] carbon market.”
When it launched in October, Toucan made waves for a fruitful, albeit controversial partnership with KlimaDAO – a new blockchain protocol built and governed by a pseudonymous community of KLIMA token-holders. With Klima’s help, Toucan “bridged” an impressive 20 million tons of carbon onto the Ethereum sidechain Polygon, tokenizing 5% of all credits on Verra, the largest voluntary credit registry.
Bridging a credit onto Toucan’s blockchain protocol means first “retiring” that credit on its parent registry so it can’t be double-counted as an offset. Once a batch of credits has been retired, Toucan issues a non-fungible token (NFT) representing them virtually.
The NFT holds data relating to the specific offset project it represents. It can be sold on the open market, or it can be fractionalized into Tokenized CO2 (TCO2) tokens. These carbon-based tokens can trade like any other cryptocurrency on a decentralized exchange (DEX).
Just as in the traditional carbon credit system, Toucan envisions on-chain retirements as a way for companies and individuals to offset their carbon footprint. Retiring an on-chain credit involves “burning” it by locking it away in a blockchain address that no one has access to.
Carbon markets meet DeFi
The main advantage of projects like Toucan is in opening up the carbon market to the broader decentralized finance (DeFi) ecosystem.
In an ideal world, buying and selling carbon credits should be as easy as trading stocks, but one challenge with the legacy carbon market is that credits from different projects are not directly interchangeable.
“We don’t believe that each ton of carbon is the same,” Haupt explained to CoinDesk, “because there are clear differences in how these credits have been created. … There’s a difference whether or not it’s a reduction-based project – because you have a wind farm somewhere – versus a direct air capture project in Switzerland … they just do very different things.”
In other words, some types of projects are thought to be more effective than others at keeping carbon out of the atmosphere. These differences tend to be reflected in a credit’s price.
This fragmentation of the carbon credit market has led to a legacy system whereby most companies and governments are forced to purchase credits through complicated broker agreements or direct partnerships with project developers rather than through an open marketplace.
Even with a blockchain-based open marketplace, Toucan’s TCO2 tokens remain difficult to trade since each token represents a specific project. Without a ton of other TCO2 tokens floating around on the market, it can be difficult for people to buy and sell specific credits.
In market-speak, TCO2 – and carbon credits in general – suffer from a lack of liquidity.
Toucan aims to add liquidity to the illiquid carbon market using a variation on a staple tool of DeFi called a “liquidity pool.”
Toucan users can add their TCO2 tokens to pools containing a mix of TCO2 tokens representing similar projects. In exchange for locking their credits in one of Toucan’s pools, users receive a new token, this one representing a slice of the whole pool rather than one specific offsetting project.
This fungible, index-like token, because it is far more numerous than any project-specific TCO2 token, is much easier to trade.
The first pool introduced by Toucan was the Base Carbon Tonne (BCT), which accepts a wide variety of credit types issued by the Verra registry. The pool’s BCT token is highly liquid and trades around the average price of BCT-qualifying carbon credits sold off-chain.
The carbon black hole
Toucan managed to create infrastructure for a liquid carbon market, but that infrastructure was worthless until Toucan could convince people to hand over carbon credits – a tricky proposition when most organizations, including Verra, are reluctant to recognize the legitimacy of Toucan-bridged credits, given that they are technically “retired” by the time they make it on-chain.
In addition to providing liquidity to the crypto carbon market, Klima was founded on a fundamental principle in carbon accounting: the higher the price of carbon, the better for the environment.
The logic for more expensive carbon is simple; if carbon is more expensive, companies and governments should pollute less since it will cost them more to offset their emissions. Moreover, more expensive carbon credits mean more incentive for people to start emission-reduction and removal projects.
A recent Reuters poll of about 30 climate economists suggested that to reach the Paris Agreement’s goal of net-zero emissions by 2050, we must quickly reach an average minimum price of $100 per metric ton of CO2.
According to the International Monetary Fund (IMF), the average global price of carbon is currently a meager $3.
KlimaDAO’s approach for increasing the price of carbon used game theory mechanics trailblazed by the controversial Olympus DAO (OHM) project. At a high level, Klima incentivizes people to sweep as much carbon off the market as possible by locking it up in their treasuries. With fewer carbon credits circulating, the thinking goes, the overall price of CO2 should increase.
One of KlimaDAO’s core contributors, the pseudonymous “Dionysus,” explained Klima’s strategy as a “liquidity engine” for the on-chain carbon market.
“Essentially, we incentivize people through bonds to deposit carbon offsets from various different types of projects into our treasury,” Dionysus told CoinDesk. “And then, in return, we're issuing this carbon-backed currency (KLIMA).”
“Holding the KLIMA token is essentially like holding an index of the carbon market in a way that will increasingly be the case as new carbon offsets are bridged on-chain,” said Dionysus.
For a little while, Klima’s strategy for pumping the price of carbon was working. In October, when KlimaDAO launched alongside Toucan, the returns for handing over BCT to Klima were sky high, and the protocol managed to suck up a huge amount of real-world carbon into its virtual coffers.
In its first week, the price of KLIMA shot up from a bit below $2,000 to above $3,000. Meanwhile, KlimaDAO was printing out new KLIMA tokens by the ton for its stakers – people who locked up their tokens in smart contracts where they can’t be sold (since selling could risk tanking KLIMA’s price). At one point, keeping your KLIMA staked would have increased your balance by 300-fold over the course of a year.
The crazy returns incentivized more and more people to hand over their CO2 credits in exchange for KLIMA. Billionaire Mark Cuban even got in on the action, telling his over 8 million Twitter followers he’d been “buying 50K in offsets every 10 days or so, verifying them and putting them on-chain as BCT.”
At its peak, the price of BCT reached $8, higher than the $3 average for similar off-chain credits and proof that Klima was, at least for the moment, fulfilling its goal of pulling enough carbon into its orbit to increase the price of offsets.
Back to Earth
Many observers of Olympus DAO, which spearheaded the bonding/staking model adopted by Klima, were quick to call it a Ponzi scheme – a criticism not unfamiliar to crypto as a whole, but one particularly hard to rebut given the rate at which new tokens were being printed out to Olympus (and Klima) stakers.
The thinking went that if enough people decided to sell their KLIMA tokens, feedback loops would quickly send the price spiraling downwards, leading to a game of chicken in which everyone would eventually be forced to sell their tokens or risk holding the bag once things drop to zero.
The anti-Olympus fearmongering was eventually realized. Within a couple of months of Klima and other Olympus-inspired projects shooting up in value and igniting a frenzy within DeFi circles, the Ponzinomic rocket ship crashed back to Earth.
The price of KLIMA, once above $3,200, now sits at $20.
Yet, it’s hard to call Klima a failure. While the Klima treasury is no longer growing at the rate it was before the crash, it has still absorbed an enormous amount of carbon credits – representing 20 million tons. according to its official dashboards. (Verra has confirmed these numbers to CoinDesk.)
Even if Klima didn’t cause a major spike in the price of carbon, it at least played a major role in bootstrapping the fledgling crypto carbon ecosystem by introducing it to tens of thousands of investors and injecting it with much-needed liquidity.
At a minimum, the Klima experiment has proven that crypto’s culture and tools, if wielded creatively, can potentially make a dent in the carbon trade.
Not everyone agrees that Klima’s success in bootstrapping the crypto carbon ecosystem was worth the cost – alleging that questions around transparency, carbon quality and the legitimacy of on-chain retirements have undermined the degree to which it has had an impact.
Sarah Leugers is the chief strategy officer at Gold Standard, one of the major off-chain carbon credit registries.
Leugers allows that Klima likely had a positive impact on the overall price of carbon credits, telling CoinDesk, “I don't know if it was so much the fact that they reduced supply as the PR … but I think it’s a good impact.”
But Leugers echoed a concern raised by others interviewed for this article: “Why are the founders not interested in sharing what their identities are?”
According to Leugers, Klima’s embrace of anonymity – commonplace in the “meritocratic” world of decentralized autonomous organizations – seems to contradict its supposed goal of bringing transparency to the carbon credit market.
Dionysus defended the project’s use of pseudonyms to CoinDesk as, among other things, an effective marketing ploy.
“For some of the off-chain players – the traditional people in the market – there is sort of this mystery and allure to what KlimaDAO is doing because they're seeing people like Archimedes, Dionysus, etcetera,” he said. “I tend to believe that like, any type of like, attention … is just overall beneficial, right? Even if it raises eyebrows, it's still attention from the types of industry players that we want looking at what we're doing.”
He clarified further:
Whatever its rationale, Klima’s commitment to anonymity set off additional alarm bells with the massive rise and fall of the KLIMA token price.
“I find the precipitous drop in KlimaDAO to be interesting,” Leugers said. “... I’d like to know who made money there, and who lost.”
“It might just be, you know, an innovation that needs to be calibrated,” she added. “... I hope that's the case.”
In general, Leugers would have liked to have seen closer partnerships between Klima and industry players from the get-go.
“They call me and Gold Standard ‘dinos’ … they say we don't know what we're talking about,” Leugers said. She was referencing a recent Twitter thread started by Moss’s Luis Felipe Adaime that was critical of an article Leugers authored about the blockchain carbon market.
Dionysus chimed in on the thread, saying, “I think it's important for players like [Gold Standard] to be a bit more critical of the highly opaque, [over-the-counter] trade-dominated market that they're currently a part of rather than attempt to undermine new players who are bringing a wave of innovation to the space.”
According to Leugers, Klima was “a bit arrogant and just plowed ahead and said, ‘We know how to fix this problem,’ not being cognizant that there are a lot of people who have been at this problem for a long time.”
As a result, said Leugers, “I think they were blindsided by some issues that they just didn't know about.”
Perhaps more troubling than Klima’s price charts or its embracing of anonymity are concerns around the underlying quality of the credits it brought on-chain.
In December, Toucan and Klima were reported to have bridged 600,000 tonnes of credits from Chinese gas projects that, in 2014, were widely determined to have used fraudulent methods.
“[Toucan and Klima] didn't know that there were still credits sitting on Verra’s registry that were totally bunk,” said Leugers, “...[E]veryone knew it and no trader would sell them because everybody knew it.”
A statement from Toucan said that it has “blocklisted” the projects to prevent them from being tokenized in the future, but the event called into focus the lax criteria for credits allowed into Toucan’s BCT pool.
Gregory Landua, the founder of Regen – a carbon credit bridge like Toucan – was a supporter of Toucan and Klima’s effort to jump-start the crypto carbon ecosystem, but he said launching Klima with BCT was a mistake.
Aside from the credits that were known to have been fraudulent, “the dominant assets that make up BCT are, like, these crappy Chinese natural gas grid replacement projects where they're replacing coal with natural gas or hydro,” he told CoinDesk. “There wasn’t really a market for them. Nobody was buying them.”
Toucan’s Raphaël Haupt echoed Landua’s sentiment, noting that he launched BCT as Toucan’s first pool at the urging of his launch partners at Klima.
“I would have loved to launch Klima with a higher quality credit in the back,” said Haupt. “If you're trying to back currency… you also want to have collateral that’s, like, great collateral.”
Dionysus – who says his professional background is in the carbon market – recognized the quality issues with BCT, but defended Klima’s choice to start with lower-quality credits. “BCTs criteria for acceptance was very, very wide,” he explained, “because we were worried that we would not be able to have enough liquidity to move on-chain… we wanted to ensure that there were a lot of options for people.”
Klima now allows users to add other assets into its treasury – including Natural Carbon Tonnes (NCT), a new pool from Toucan restricted to higher quality Verra credits (although BCT still accounts for 90% of Klima’s treasury).
In a controversial move at odds with Klima’s stated goal of sucking offsets into a carbon “black hole,” the project’s community recently approved a governance proposal to allow for “inverse bonding.” This would theoretically enable the KlimaDAO treasury to sell carbon credits back to the market if the KLIMA token price falls below a certain threshold.
Haupt characterized the proposal as a mistake, saying that “the ‘black hole’ now becomes, like, potentially the biggest emitter of carbon,” since it would enable KLIMA to push low-quality BCT assets back out into the marketplace.
This would have the effect of decreasing the price of BCT credits – the opposite of Klima’s original goal of increasing their price.
Even if the capability is there, Dionysus says that Klima’s decentralized community currently has no plans to sell BCT or any other carbon credits in its treasury.
Finding trust in trustlessness
While Klima and Toucan managed to create a new, liquid market for carbon credits (no small feat), they have yet to address a fundamental challenge to the global carbon market: the actual quality of underlying credits.
Mars Garza, an investor at XYZ Venture Capital who focuses on the intersection of climate and Web 3, told CoinDesk that she’s looking forward to a shift towards projects “working with carbon projects versus carbon credits.”
While adding credits to the blockchain can lead to certain efficiency and transparency improvements, the success of on-chain carbon will require improvements to the existing, off-chain systems that generate and verify offset projects.
Haupt admits as much himself. “The carbon value chain is [screwed], that’s just a reality,” he said. “We have to accelerate the development cycles of carbon projects. … Toucan is just one piece of the infrastructure that is needed to deliver that at scale.”
Some ReFi founders point to 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.
To ensure credit quality, Landua says that Regen’s meta-registry would label credits with “tags that can only be issued by trusted, on-chain entities that are essentially auditing entities.”
While Leugers praised the idea of a meta-registry as “ambitious” and a “great future vision,” she also warned that “it's not going to be easy.”
“It’s really more difficult than people assume to ensure quality,” Gold Standard’s Leugers explained. “It’s not just about reading a meter. It’s like, how was that project set up? Were stakeholders engaged or not? Were safeguards properly followed? I mean, bad things can go really wrong in these projects.”
While a meta-registry would take advantage of the collaborative benefits of Web 3 – the future decentralized internet some believe crypto will foster – it still faces a dilemma that is particularly hard to solve with blockchain technology: Carbon credits will always require trust in someone.
Whether it’s Toucan relying on Verra to back its Base Carbon Tonne, or Regen relying on a new class of crypto-native verifiers, it is difficult to see how a meta-registry can fundamentally reform the carbon credit system without relying on the same kinds of imperfect verification schemes that exist off-chain.
On-chain carbon is not, as some skeptics might claim, a grift meant to exploit environmental fears in exchange for personal profit. Projects like Toucan and Klima have proven that blockchain technology can have a positive impact on the carbon market, and they’ve persuaded industry players to take the tech seriously.
But a blockchain carbon market is not a silver bullet for solving the climate crisis.
The limits of ReFi come down to the limits of crypto as a whole. Just as DeFi is trying to overhaul a corrupt financial system, ReFi is trying to fix a flawed system of climate accounting.
Both movements herald the “trustless” nature of blockchains as a way to remove power from gatekeepers, thereby improving access and increasing transparency. And yet both movements, along with their undeniable successes, have found limits effectuating the whole of their visions without falling back on more traditional structures of trust and centralization.
Most of ReFi’s supporters recognize the limits of crypto for saving the climate, but they remain optimistic in their great experiment.
As Haupt puts it, “You know, if looking back 10 years from now, we realize … we’ve contributed to starting this movement, and it’s not taken off … whether or not we’re still part of that, I honestly don’t care … I think it’s the most impactful work that I could do as a human being right now.”
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