DeFi for Climate Action - Tokenization of Carbon Credits

Jennifer Abel
Published in
11 min readAug 18, 2022


The earth is heating up. According to research one of the biggest drivers is the huge amount of carbon dioxide (CO2) and greenhouse gas (GHG) equivalents which are emitted into the atmosphere. Modern life is causing deforestation, monocultures and overfishing which reduces the earth’s capacity to absorb CO2 and GHG equivalents.

If we continue with our current practices, it will not be possible to limit the temperature rise to 1.5 - 2.0 degrees and prevent a climate crisis.

One ambition to prevent the crisis is a transition to a net zero world where CO2 emissions are reduced dramatically and those emissions which cannot be reduced or avoided are offset. One way to offset one’s carbon footprint is by using carbon credits.

One carbon credit represents one metric ton of carbon dioxide or GHG equivalent (1 tCO2e). Carbon credits are issued by projects which are removing or avoiding carbon dioxide or their equivalents. By purchasing carbon credits projects like these can be financed and climate-friendly practices should be incentivized.

A way to get carbon credits are voluntary carbon markets (VCMs). There are also mandatory carbon markets, but these can only be accessed by certain regions and industries.

Driven by COP26 and activities from organization like Science Based Targets Initiatives or Taskforce on Scaling Voluntary Carbon Markets the primary voluntary carbon market grew by 190% to just under $1billion in 2021 and is expected to grow by 50–80% in 2022 to $1.5 — $1.7 billion.[1]

With VCMs being on the rise this also attracts a lot of innovation and new businesses. Especially as legacy VCMs come with a lot of shortcomings. They are mostly paper based, it is not clear if underlying projects even receive proper money or reduce/avoid the calculated tCO2e, there are a lot of intermediaries like carbon credit registries with standards to verify and validate carbon credits (e.g., Gold Standard, Verra), brokers, retailers and traders which are costly, greenwashing, double spending of carbon credits, difficult price discovery, quality control of carbon credits and so on.

To truly move funds to environmental projects by utilizing carbon credits it is important that they have a proper price tag. The average price for carbon credits is currently at around $3.00.[2] To really finance climate action and incentivize net zero emissions until 2050, experts estimate that the price should now already be at least $100.00 per carbon credit.[3]

These topics attract a lot of projects from the blockchain and decentralized finance (DeFi) space. In the past year a lot of new projects were initiated to utilize the transparency, security, and traceability blockchain technology provides with its nature of a distributed ledger. DeFi brings a lot of tools to eliminate intermediaries further and create more complex financial oriented use cases on top of the blockchain technology by using smart contracts.

Let’s have a look at how blockchain and specifically DeFi can be used to tokenize carbon credits to tackle some shortcomings of legacy VCMs. For this we will have a closer look at Moss.Earth and Toucan.

Moss.Earth: offset your carbon footprint

Moss.Earth is a company founded in 2020 with the mission to make it easy and safe to preserve the planet by offsetting the carbon footprint of individuals and companies.

To accomplish this with high quality carbon credits, Moss.Earth focuses on the Amazon rainforest. As 40% of the forest is in Brazil, it was just sensible for Moss.Earth and its Founder Luis Felipe Adaime to start there. In this way Moss.Earth did not only want to bring more transparency and ease in offsetting carbon dioxide by using carbon credits, but they also see a great chance for Brazil itself as it is possible to certify around 1.5 billion carbon credits per year which could lead to an equivalent of $60 billion available for environmental projects. This would also have a positive impact on the communities in Brazil running these projects, creating jobs and improving their social, economic, and environmental prosperity.[4]

Moss.Earth introduced their ERC-20 utility token MCO2 (Moss Carbon Credit) to take advantage of the security and traceability of on-chain carbon credits. Another benefit is the programmability, so MCO2 tokens can be used in DeFi as collateral, for trading on decentralized exchanges etc. One token represents one tCO2e. Holders of MCO2 tokens represent the virtual ownership of carbon credits to a 1:1 relation.[5]

To bring carbon credits on-chain, Moss.Earth buys these credits themselves. These credits are issued from environmental projects related to the Amazon rainforest and are certified by Verra a standard verifier in VCMs. Moss.Earth receives the certificates and contracts of their purchases and stores them in their database. In this way Moss.Earth holds custody of the carbon credits.

Based on the amount of purchased carbon credits MCO2 tokens are minted to the Ethereum blockchain. When a token holder wants to offset their carbon footprint, they burn MCO2 tokens and Moss.Earth takes care about retiring the underlying carbon credits. This leads to an update in the Verra Registry where the carbon credit is then retired indicating that it is used for offsetting emissions.

To facilitate this process, Moss.Earth uses different smart contracts. The Carbon Credit Registry Contract stores information related to the carbon credits like projects, vintage, and batch. The Carbon Control (CC) Contract mints and burns CCI (Carbon Credit Inventory token) and MCO2 ERC-20 tokens. CCI tokens are used to keep track of the total supply of active carbon credit tokens and uses the Credit Inventory Contract. Then there is also a smart contract for the MCO2 token.[6]

The MCO2 token was launched in March 2021 with a token price of $17.40 and a volume of $230,372. Until August 2022 the price dropped to around $4.00. MCO2 is also available on the Polygon and Celo blockchain.

KlimaDAO’s newly introduced carbon dashboard gives a good overview of the projects Moss.Earth used to purchase carbon credits. Each project listed has a direct link to the Verra Registry. It also states that so far Moss.Earth bridged around 3 million carbon credits to the blockchain as MCO2 tokens and around 230 thousand credits were retired (offset) by burning MCO2 tokens on-chain.[7]

MC02 price development

Toucan: make DeFi work for the earth

The Toucan Protocol is all about creating an infrastructure to bring legacy VCMs onto public blockchains to utilize DeFi for financing climate action.

There are three steps needed to bring carbon credits from a legacy carbon registry on-chain and make it DeFi ready.

First carbon credits need to be bridged from the legacy VCM to the Polygon blockchain as BatchNFT, which is an ERC-721 non-fungible token. Initially the Toucan Protocol only supports verified carbon credits from Verra so called VCUs (Verified Carbon Units) to make sure only verified and active carbon credits are onboarded. To link specific VCUs from a project with the same vintage from the Verra Registry to the BatchNFT on the Polygon Blockchain, these VCUs must be retired with the retirement reason “Other”. In Toucan’s rationale the carbon credit itself is still active and not offset. With this retirement event the unique identifier of the minted BatchNFT is permanently linked to the corresponding VCUs in the Verra Registry. In this way double spending of the carbon credit offset should be prevented.[8]

The second step is about fractionalizing the BatchNFT into Toucan carbon offsets tokens (TCO2s), which are ERC-20 tokens. In this way one TCO2 represents one tCO2e.[9]

In a third step the TCO2s can be pooled to carbon pools using carbon reference tokens introduced by the Toucan Protocol. Currently there are two carbon reference tokens available: base carbon tonne (BCT) and nature carbon tonne (NCT)

Metadata of TCO2 tokens hold describing information about the underlying project like some attributes and vintage. As the quality and price of carbon credits strongly rely on the type of projects and their vintage, TCO2 tokens of different projects are not comparable and liquid. Therefore, the Toucan Protocol introduced carbon reference tokens (currently BCT and NCT), so that TCO2 tokens from comparable types can be pooled together. In this way more liquid carbon index tokens are created, which are more comparable and make price discovery easier.

To guarantee comparability between BCTs and NCTs respectively, TCO2s must fulfill certain criteria. This means attributes listed in the meta data of TCO2 tokens must match the criteria of BCT pools or NCT pools depending to which pool specific TCO2 tokens should be added.

BCTs and NCTs are ERC-20 tokens, and each token represents one carbon credit. These carbon index tokens can then be integrated to the DeFi market like decentralized exchanges, lending or used as carbon collateral (e.g., Klima DAO).[10]

In October 2021 the Toucan Protocol was launched and got quite some traction. Since then, it claims to have bridged a total of almost 22 million TCO2 with a total carbon supply of a little bit over 21 million meaning the total number of BCTs and NCTs deposited from underlying carbon tons. Almost 180,000 tCO2e were offset.[11]

To offset carbon emissions, BCTs and NCTs must be redeemed to receive the underlying TCO2 tokens. In this way the TCO2 tokens of specific projects will be taken out of the pool and circulation, so that they cannot be used anymore.[12]

BCT pools were launched in October 2021 and NCT pools joined in March 2022. As you can see from the price charts below their prices decreased over the course of time. BCT started at $5.17 with a peak of $8.23 in November 2021 and is currently right below $2.00. NCT started at $7.79 with a peak in April 2022 of $8.09 and is now a little bit above $2.00.

BCT price development
NCT price development

Starting in May of this year the Toucan Protocol got a lot of critics and bad press. The major issues were on the one hand the confusion around only using retired carbon credits and on the other hand bridging low-quality carbon credits to the Polygon blockchain.

When you speak about retirement of carbon credits in VCMs, then this means the consumption of such credits. When a carbon credit is retired, then they are used and therefore must not be sold anymore. As the Toucan Protocol uses the retirement event of carbon credits to link it directly to an NFT on the blockchain it is not consuming the carbon credit, but the fact retired carbon credits are used as active carbon credits is completely counter intuitive for VCMs and brings a layer of disorientation and distrust. Therefore, Verra itself stated in May 2022 that they “prohibit the practice of creating instruments or tokens based on retired credits” and that they want to start a public consultation on how to utilize blockchain where especially the possibility of “immobilizing” credits in accounts in the Verra Registry will be explored.[13]

This statement does not prevent the Toucan Protocol to continue, although they currently cannot bridge any Verra carbon credits anymore, but other functions of the protocol are still intact. In general, they are excited about Verra moving forward. The question is only how fast.[14]

After having a closer look at the carbon credits which were bridged to the Polygon network using the Toucan Protocol, it was discovered that around 28% of credits were not only of low quality, but that they were created from zombie projects. Grayson Badgley and Danny Cullenward define them as projects which “either (1) hasn’t recorded a single public retirement for two years prior to a Toucan-related retirement, or (2) has made over 95 percent of its publicly recorded retirements through Toucan.”. Examples they list are VCS949 or VCS191.[15]


Moss.Earth and Toucan give two different approaches on how to open VCMs to the market by using public blockchains and DeFi.

Moss.Earth emphasizes on providing MCO2 tokens which are high quality and 100% backed carbon credits. With its introduction of the governance token MOSS in May 2022 it is on the way to decentralize the process of tokenizing carbon credits from selected Amazon rainforest projects to engage more people and perspectives.

Toucan emphasizes on bringing infrastructure so anyone can tokenize carbon credits and bring them on-chain. By using carbon reference tokens Toucan developed a mechanism to make carbon credit tokens comparable by classifying them. In that way they can be easily used in the DeFi space.

Especially KlimaDAO utilizes MCO2, BCT and NCT to back their token KLIMA and create liquidity pools.

Bringing DeFi to the VCM is still in an early stage, but Moss.Earth and Toucan showed how fast new dynamics, levels of transparency and access can be created, when innovations are rolling out.

There are still a lot of questions and challenges with VCMs and cannot be solved by simply bringing blockchain technology into the equation. Current projects like Moss.Earth and Toucan are developing their services further and are in close cooperation with traditional players of the VCMs.

This article was just a spotlight on two blockchain projects working on carbon credits. A lot of other tokens are already launched and a lot more are in the pipeline. It is a hot topic, and it does not seem to cool down soon.


[1] Throve “Voluntary Carbon Market: 2021 in Review and 2022 Outlook”. Ecosystem Marketplace report.



[4] Moss.Earth “White Paper Carbon Credit MCO2 Token V1.0”.


[6] Armanino “Agreed-Upon Procedures Report. Prepared for: Mos Management & Authorized Users”. 26.01.2021.











The structure of the voluntary carbon market:

Overview Moss CO2 Token Model: Armanino “Agreed-Upon Procedures Report. Prepared for: Mos Management & Authorized Users”. 26.01.2021. Page 7.

MCO2 price development:

Overview Toucan Carbon Bridge, Carbon Pools, and DeFi Integration:,

BCT price development:

NCT price development:

New to trading? Try crypto trading bots or copy trading



Jennifer Abel

Product Management | Entrepreneurship | Agile Coaching | FinTech | HealthTech | Blockchain Enthusiast | DeFi | DAO | NFT