Climate Change x Crypto, what’s popping!
Hello all 👋 Following the previous article on ClimateCoin Investment,
let’s delve into what’s happening in the Climate Change x Crypto space today.
1. Carbon neutrality declaration between mainnets
Nowadays, L1/L2s are competing to advertise themselves as the most ‘Eco-Friendly’ chain. Celo, all heart and soul about Refi, declared themselves a “Carbon Negative Blockchain” (having reduced more carbon than emitted) a year ago. Celo highlighted that not only is its emissions level low since it runs on a PoS chain but even the small amounts of carbon that are emitted are negated thanks to the carbon credits purchased.
Moreover, Celo launched the Climate Collective in an effort to to accomplish Web3 x Climate Action initiatives by bringing together Refi projects that are on (or affiliated with) the Celo Chain. The Climate Collective plans to gradually fill 40% of Celo’s stablecoin reserve (cUSD, cEUR) over the next four years with “natural capital backed assets — like forest NFTs and Ledgard’s L-Marks”.
In other words, if stablecoins were created using the value of more traditional assets such as gold or USDC as collateral until now, Celo will gradually convert that value to ‘natural capital’ such as forest NFTs. Currently, 0.5% of the reserve is filled by MCO2 from Moss, a carbon credit token project in Celo.
All the while, Polygon is currently decorating their logo in green, and promoting its carbon neutrality (meaning the total amount of carbon emitted negate to “0”), highlighting that it strives to become carbon negative by the end of this year. For this, Polygon is known to have purchased KlimaDAO and Moss tokens which are ‘on-chained’ carbon credits on the Polygon chain.
Moreover, Polygon announced Green Manifesto and a $20mil Pledge aiming to tackle climate change proposed by a community initiative. To add to the awareness, Avalanche is known to have emitted 35,000x less carbon than Ethereum and 200,000x that of Bitcoin, and since the end of last year been carbon neutral. Solana has also been a carbon neutral chain since last year, and proved high energy efficiency through energy use reports.
2. Web3 Projects attempting to fight Climate Change
Each mainnet has its own sustainability project with its own characteristics. There are projects such as KlimaDAO, Flowcarbon, or ClimateCoin that seek to address the inefficiency of the existing carbon credit market by making carbon credits on-chain, or projects such as Nori that handle carbon credits specialized for agriculture (carbon credits created by absorbing carbon into the soil through “Regenerative Farming”). Polkadot’s Energy Web and Solana’s Powerledger are teams focused on energy grids and green energy, while Open Forest Protocol is focused on afforestation(planting trees!).
The above Web3 x Climate Map was made by the aforementioned Climate Collective. Click on the link to view Refi projects categorized according to each mainnet or project!
3. Exploring Carbon Credit x Blockchain Projects
1. KlimaDAO
Klimadao, launched on Polygon in 2021, is a project that appeared with the slogan that they “will become a black hole for carbon credits”. The plan was to increase the cost of carbon emissions by constantly absorbing tokenized carbon credits into the KlimaDAO Treasury. I will discuss why and how making carbon credits on-chain is a groundbreaking solution to climate change in more detail in the next article. For now, let us briefly discuss KlimaDAO.
The process of tokenization for Klimadao is shown in the figure below (source). First, when a project creates carbon credits (reduce or absorbs more carbon and thus produce carbon credits), the following emission permits are created after verification from a certification body (Carbon Standard) that can verify that carbon has in fact been reduced.
The verified carbon credits created in this way are tokenized on the connected blockchain, such as Polygon, through a carbon bridge — such as Toucan. It is here that the tokens generated for each bridge differ. When created with the Toucan Bridge, tokens become TCO2 and on Moss, tokens become MCO2. Hence 1 TCO2 token is created alongside the retirement of a real life carbon credit, and the carbon credit loses their value off-chain. In such manner, one TCO2 is minted as 1ton of carbon credits are “burned” and 1:1 pegging takes place.
Each TCO2 and MCO2 generated in this way, like NFTs, differ in characteristics and values depending on the region the carbon credits were generated and the method of certification. Therefore, these individual tokens are collected in a place called the Carbon Pool, and a fungible index token called BCT, which is pegged 1:1 with the tokens in the pool, is created. Here, 1 BCT corresponds to 1ton index(basket index) of carbon credits in the pool.
Then what is KlimaDAO’s $KLIMA token? It is a native token issued by absorbing this BCT token into their Treasury! This is the reason why KlimaDAO says, “We will absorb all carbon credits like a black hole!” Furthermore, KlimaDAO is a fork (sister product?) of OlympusDAO. Therefore, the KlimaDAO ecosystem is designed so that the protocol can absorb the token liquidity of the protocol, just like OlympusDAO. If you are curious about OlympusDAO (and further explanation on the content below), please refer to this video!
If you want to own $KLIMA tokens, you can bond BCT (or other carbon credit tokens such as MCO2 or LP tokens such as KLIMA/BCT) to the KlimaDAO treasury. The value of Klima tokens is guaranteed by the value of BCT and its underlying carbon credits! Meaning at the price of locking for a certain amount of time in the bond, you can obtain Klima tokens at a price lower than the market price. Also, staking these KLIMA tokens will give you a staking reward (automatically increasing $sKLIMA). Of course, then there is also the option of just buying Klima from a DEX.
2. Flowcarbon
Flowcarbon is a tokenization project for carbon credit 2.0. The main difference from KlimaDAO, which uses a Toucan bridge, is that the on-chain bridge is not one-way. (Keeping in mind, KlimaDAO could also change the bridge to something other than the current method of retiring.) As shown in the figure above, Flow Carbon’s bridge is a Special Purpose Vehicle (SPV) so when carbon credits are deposited, a third party verfication will act as an oracle for 1:1 pegging of off-chain carbon credits and on-chain GCO2 tokens.
One GCO2, an ERC token, can be understood as an on-chain ‘wrap’ of 1ton of carbon credits like other carbon credit tokens. Thereafter, you can ‘unwrap’ it again through SPV and receive it as off-chain carbon credits.
Why do we need to be able to bring on-chain carbon credits back to the real world? Shouldn’t the carbon credit black hole just haul the entire supply, raise the cost of carbon emissions, and thus increase the penalty for companies emitting carbon and ultimately reduce their carbon emissions as much as possible? Flowcarbon explains why through the table below. There is price decoupling between tokens and off-chain carbon credits, and carbon credit investors need a ‘two-way bridge’ so that they can trade according to the market conditions.
Just as you can make BCT with TCO2, GCO2 also has a fungible pair. The GCO2 token also has NFT-like qualities for each project where a carbon credit is created (methodology of creating carbon credit, certifying institution, how the carbon is reduced, vintage -year of issuance, etc.) Therefore, there are means to increase liquidity by making it a fungible token like BCT. It is ‘bundling’ GCO2 by tying it into a smart contract. The first token to be launched in this fungible bundle is $GNT. A ‘bundle’ should share characteristics that can be bundled together like the NFT series, and GNT, the first bundle token, has the following in common.
- Institutional-grade, carbon credits produced by certified companies recognized in the market
- Nature — Based carbon credits (NBS)
- Vintage (the year the carbon credit was issued) it must be a carbon credit issued within the last 5 years
Through these standards, each platform strives to tokenize emission credits that possess real value in the market.
3. Climatecoin
ClimateCoin strives to create a Cli-Fi ecosystem rather than the current ReFi of Web3. But you may ask how do they differ? Well, simply said, Climatecoin is interested not only in the on-chain carbon credits, but even more in the economic ecosystem that will follow.
ClimateCoin also has a two-way carbon bridge like Flow Carbon, and thanks to ClimateTrade’s network, a carbon credit trading platform on Web2, ClimateCoin has secured carbon credits that are “worth investment for companies and individuals”. The tokenized carbon credits, $ClimateCoin, are also pegged to 1ton of carbon credits. Up to this point, it is similar to the average carbon credit project.
But the difference is that the start of the Cli-Fi ecosystem that I am discussing is in fact a crowd-lending platform. A chronic challenge that environmental projects face is the limitations found with financing. For example, let’s say you have an environmental project that creates carbon credits by planting mangrove trees. This project may have a large initial investment, but it takes a relatively longer time to retrieve any profit. For one to guarantee how many years it will take for a forest to measurably reduce carbon emissions, certify its reduction through a third party verification, generate a carbon credit, then find a buyer and trade the credit is extremely difficult.
In order to realistically combat climate change, many more climate-related projects need to receive investment, but as we saw with the current structure, it is difficult to receive loans from traditional banks. That is why ClimateCoin strives to become a “Green Bank”. The team’s vision is to build a ‘Cli-Fi Ecosystem’, based on tokenized carbon credits ($ClimateCoin). Then using $ClimateCoin as collateral, or the Treasury and staked $ClimaT as collateral, distribute loans to climate projects. $ClimaT as the governance token of the Climatecoin ecosystem, will give holders the authority to decide which projects receive loans first and the appropriate rate of interest.
The Cli-Fi ecosystem has made it possible for direct investments in carbon credits, but it goes beyond simple ownership to now providing loans and create added value on a crowd-lending platform for climate projects. Those who help climate projects receive a loan by staking their ClimaT will be given the opportunity for an initial investment in carbon credits. Similar to an initial investment in a startup, investors be given the opportunity to invest in carbon assets early into the project, that is, years before the final production of carbon credits and thus before the market price is established.
4. Final words
We briefly reviewed the reaction of the crypto scene to climate change and the mechanisms of on-chain carbon credit projects. In the next article let us take a deeper look into the carbon credit market, its current limitations, and why blockchain is an appropriate solution.
All questions and feedback are welcome! @nonceclassic
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