People who care about the environment don’t like the idea of cryptocurrency, but a growing part of the industry claims to have a solution to the climate crisis: crypto carbon credits.
“Carbon neutral” is a term that makes people feel good. Companies like Procter & Gamble (PG) and Nestle (NSRGY) say they will keep as much carbon out of the air as they emit.
It’s one way these companies try to meet their emission goals. They buy carbon credits, which are certificates that show how much carbon dioxide has been kept out of the air through some kind of conservation or removal.
When it comes to the world’s climate problems, some people think carbon credits are a practical way to deal with them. Others say they make things even worse because they let polluters be able to emit more than they would otherwise.
There are still crypto projects that have leaf-green logos and websites that look like the lush Amazon rainforest. A new group of crypto projects is using carbon credits.
Projects like Toucan, Regen, and Moss say that on-chain carbon credits will make the carbon credit market more transparent and make it easier for people to buy and sell carbon credits.
The KlimaDAO project wants to raise the price of carbon credits by taking advantage of an area of crypto where memes are the norm, Tesla (TSLA) CEO Elon Musk is the king, and everyone is looking for big returns. KlimaDAO is a project that wants to do this. People who aren’t Klima’s real founders ask: What if you could save the environment by owning crypto?
Crypto’s “regenerative finance,” or “ReFi,” movement has attracted a wide range of people, from carbon industry veterans and environmental scientists to retail investors and accountants. They all have different ideas about how and how much crypto can be used to solve the biggest problem of our time.
Making progress might mean stepping on some toes if the last few months are any guide.
Cryptosphere to Atmosphere
Today, it’s hard to find a news story about crypto and the environment that doesn’t talk about how much energy it takes to run the two biggest blockchains, Bitcoin and Ethereum.
Both chains use energy-intensive consensus mechanisms called proof-of-work (PoW) to keep themselves safe. A horde of computers around the world compete to process transactions in a process called “mining.”
In this case, the mining analogy is right on the money. If you look at the Cambridge Bitcoin Electricity Consumption Index (CBECI), bitcoin mining uses 135 terawatt-hours of electricity every year. This is more electricity than Norway uses in a year. If you look at how much energy it takes to mine gold in the real world, you’ll see that bitcoin – crypto’s “digital gold” – uses more energy than that.
Many people in the crypto world say that simple comparisons like these can be misleading, especially when one takes into account how much of the energy used to mine crypto comes from renewable sources (though this, too, is debated).
Also, not all blockchains use the same amount of energy. Outside of Bitcoin and Ethereum, most major blockchains use a more long-term consensus mechanism called proof-of-stake (PoS). To put it another way: Ethereum is moving to its own PoS algorithm. This will cut the network’s energy use by a lot of money, according to the Ethereum Foundation.
Anyhow, it will be a long time before people start to think of blockchain technology as bad for the environment, no matter how much CO2 it emits.
It’s already putting on a new, more eco-friendly face for crypto thanks to the ReFi movement.
What are Carbon Credits?
ReFi has a lot of ideas for how to deal with the climate crisis, but the most attention so far has been on changes to the global carbon credit market.
Carbon credits, also called carbon offsets, are for projects that reduce or remove carbon dioxide from the air, like preserving forests or building wind and solar farms.
In general, one carbon credit is equal to one metric ton of carbon dioxide that has been kept out of the air. To someone who buys it, it means that they can emit that same amount of carbon without feeling bad about it (and in some cases, tax-free).
In 1997, the Kyoto Protocol, an international treaty, was signed. It set up carbon credits as a way for countries to offset their emissions to meet limits set by the United Nations Framework Convention on Climate Change. The Kyoto Protocol was signed in 1997. (UNFCCC).
Since then, there have been a number of international bodies have been set up to make sure that carbon credits can be registered and sold. In recent years, there has been a “voluntary” carbon market that allows eco-friendly businesses, such as some crypto mining groups, to offset their emissions above and beyond what is required by any government. This market is called a “carbon credit.”
The Challenge With Carbon Accounting
They say that turning carbon into a commodity aligns the interests of the planet and corporate bank accounts, which is good for both groups.
Luis Felipe Adaime, the founder of Moss, is one of these people. Moss buys carbon credits from forest preservation projects in places like Costa Rica and the areas near the Amazon rainforest. These projects help keep forests healthy. Afterwards, it turns those credits into a popular token called MCO2. This token is traded on major cryptocurrency exchanges like Coinbase (COIN) and is marketed as a way for crypto investors to help save the world by investing in it.
Addie said that “Carbon credits have become a way to make land in the forest more pricey.” Burning down the forest to plant soy makes people think “Oh, wow, I can make more money protecting the forest than I can by burning it down to raise cattle.”
Critics of carbon accounting point to research that shows that some carbon credits aren’t as green as they say they are, with many cases of fraud, double-counting, and creative accounting making a lot of carbon credits untrustworthy.
It’s very hard to figure out how much CO2 a project keeps out of the air, and poor-quality credits can actually harm the environment by allowing companies to “offset” their emissions while still putting more CO2 into the air than they would have done in the first place.
Moss is a company that sells carbon credits. Because the company only buys carbon credits that have been verified by established carbon credit registries like Verra and Gold Standard, any person who wants to start a conservation project and sell credits could do so.
Some companies are willing to buy cheap credits from questionable conservation projects in exchange for a quick PR boost. Voluntary credit retailers, on the other hand, may not have as much of an incentive as their compliance-minded peers to use high-quality measurement, reporting, and verification (MRV) practices.
The voluntary carbon market had $1 billion in turnover last year, which isn’t much compared to the $850 billion compliance market, but it’s a record because more companies are putting voluntary credits on blockchains.
A More Transparent Carbon Market
Putting the voluntary carbon market on a blockchain and publicly tying each credit to metadata that proves its quality and origin will make it easier for people who want to offset their emissions to find a transparently-priced, highly liquid market that isn’t like anything else out there. This is the basic premise of on-chain carbon:
Even better, watchdogs will be able to follow claims that a company is carbon neutral all the way back to the company that made them.
In order for markets to be efficient, they need to be open, transparent, and fair. Raphael Haupt, CEO of the carbon-to-crypto startup Toucan, said this to Coindesk. “At the moment, this is not the case with the carbon market.”
When Toucan came out in October, it made a lot of noise because of a successful, but controversial, partnership with KlimaDAO, a new blockchain protocol built and run by a group of people who don’t want to be named. “Bridged” 20 million tons of CO2 to the Ethereum sidechain Polygon with Klima’s help, which made 5 percent more of the credits on Verra, the largest voluntary credit registry.
To use Toucan’s blockchain protocol, you first have to “retire” a credit on its parent registry so it can’t be used as an offset twice. Toucan creates a non-fungible token (NFT) when a batch of credits is finished being used. This token is a virtual representation of them.
The NFT has information about the offset project that it represents. It can be sold on the open market, or it can be broken down into Tokenized CO2 (TCO2) tokens, which can be bought and sold. On a decentralized exchange, these tokens can be traded just like any other cryptocurrency (DEX).
In the same way that carbon credits work, Toucan thinks on-chain retirements could be a way for businesses and individuals to reduce their carbon footprint. Retiring an on-chain credit means “burning” it by putting it in a blockchain address that no one can get to.
Carbon Markets meet DeFi
The main benefit of projects like Toucan is that they make the carbon market more accessible to the wider world of decentralized finance (DeFi).
In an ideal world, buying and selling carbon credits should be as simple as trading stocks. One problem with the legacy carbon market is that credits from different projects can’t be used to buy or sell each other.
Neither Haupt nor his company believes that each ton of carbon is the same because there are clear differences in how these credits have been made. Because you have a wind farm somewhere, it makes a difference if it’s a reduction-based project or a direct air capture project in Switzerland. “They just do very different things.”
In other words, some types of projects are thought to be better at keeping carbon out of the air than other types of projects. These differences tend to show up in the price of credit. Read more; How to Stay Sane During a Crypto Crash
This has led to a legacy system where most businesses and governments have to buy carbon credits through complicated broker agreements or direct partnerships with project developers, rather than through an open market like the one we have now.
Even with a blockchain-based open market, Toucan’s TCO2 tokens are hard to trade because each token is linked to a specific project. If there aren’t a lot of other TCO2 tokens on the market, it can be hard for people to buy and sell certain credits.
People who talk about the market say that TCO2 and other carbon credits don’t have a lot of value.
Toucan wants to add more liquidity to the carbon market by using a “liquidity pool,” which is a type of tool that DeFi has used for years.
Toucan users can put their TCO2 tokens in pools with other TCO2 tokens from different projects. Users who put their money in one of Toucan’s pools get a new token in return. This token represents a slice of the whole pool, not just one specific project.
There are a lot more fungible tokens like this index-like one than there are project-specific tokens. This makes it much easier to trade them.
Toucan’s first pool was called the Base Carbon Tonne (BCT), and it accepts a lot of different types of Verra credits. The pool’s BCT token is very easy to buy and sell, and it trades for about the same price as BCT-qualified carbon credits sold off-chain.
The Carbon Black Hole
Toucan was able to build the infrastructure for a liquid carbon market, but until Toucan could get people to hand over carbon credits, that infrastructure was worthless. Most organizations, including Verra, aren’t willing to accept Toucan-bridged credits because they are technically “retired” by the time they make it on the chain.
KlimaDAO, a meme-fueled, Mark Cuban-funded “carbon black hole,” came in and got 40,000 “Klimates” to help Toucan’s on-chain carbon ecosystem get the CO2 it needed.
Klima, a company that helps the crypto carbon market, was founded on the idea that the higher the price of carbon, the better for the environment.
Simple: If carbon is more expensive, companies and governments should not pollute because it will cost them more to compensate for their emissions. This is why carbon should be more expensive. In addition, more expensive carbon credits make it more likely that people will start projects to reduce emissions and remove them.
To meet the Paris Agreement’s goal of net-zero emissions by 2050, we need to quickly reach an average price of $100 per metric ton of CO2 on the market, a poll by Reuters found.
According to the International Monetary Fund (IMF), the average price of carbon around the world is just $3.
In order to raise the price of carbon, KlimaDAO used game theory techniques that were first used in the controversial Olympus DAO (OHM) project. Klima wants people to keep as much carbon out of the market as possible by putting it in their own savings. With fewer carbon credits in circulation, the price of CO2 should go up, right?
Dionysus, one of KlimaDAO’s main contributors, said that Klima’s goal is to be a “liquidity engine” for the on-chain carbon market.
“We use bonds to get people to deposit carbon offsets from different types of projects into our treasury,” Dionysus told CoinDesk. That’s why we’re giving back this carbon-backed currency (KLIMA) in exchange. Read also; How Much to Invest in Cryptocurrency, According to 5 Experts
It’s like owning an “index” of the carbon market, Dionysus said. As more carbon credits are bridged on the blockchain, that will happen more and more often.
Klima’s plan to raise the price of carbon worked for a while. BCT was worth a lot more in October when KlimaDAO and Toucan were both launched. The protocol managed to get a lot of real-world carbon into its virtual coffers.
In its first week, the price of KLIMA went from a little under $2,000 to more than $3,000. It was also making new KLIMA tokens for its stakers, people who put their tokens in smart contracts where they can’t be sold because selling them could hurt the value of KLIMA. When you had KLIMA staked, it would have grown your balance by 300-fold in a year if you kept it that way.