Crypto vs. Climate Change – tokenizing carbon sequestering assets
In a previous blog post titled “Crypto, blockchain, and the environment: the other side”, which is the first in a series looking at the positive use cases of blockchain and cryptocurrency in the fight against climate change, I highlighted some of the broader use cases of cryptocurrency and blockchain in combating climate change. In this blog post, I want to narrow in on one specific use case that has garnered incredible attention in recent months – tokenizing carbon sequestering assets.
Despite the bad rap that cryptocurrency gets when it comes to its environmental impacts, crypto projects around the world are disrupting climate finance by coming up with new and novel ways to incentivize a low carbon future. One of the primary ways this is being done, is through the tokenization of carbon sequestering assets. Simply put, this involves backing a token with a certain asset that helps combat climate change, such as trees, or carbon credits.
Tokenizing Carbon Credits
One of the most well-known projects that emerged in 2021, KlimaDAO, has gained incredible attention in recent months for its protocol which tokenizes carbon credits.
KlimaDAO takes an innovative approach to addressing climate change through the creation of a “carbon-backed, algorithmic digital currency,” with each token backed by one tonne of verified, tokenized carbon reduction or removal. In short, for each token that is minted, Klima DAO backs it through the purchase of carbon credits. By taking these carbon credits off the market, and locking them in the KlimaDAO treasury, the theory is, that it will help accelerate the price appreciation of carbon assets, making token holders a return, while helping incentivise companies to adapt more quickly to a low carbon future, and helping carbon removal projects become more profitable.
Carbon markets allow emitters to offset their carbon emissions through the purchase of carbon credits, with each credit corresponding with the removal of one metric ton of removed CO2. By buying up carbon credits, it reduces the number of available credits in the market, thus driving up prices. This incentivizes emitters to reduce their carbon footprint, as the purchase of carbon credits becomes more expensive.
At the time this blog post was published, KlimaDAO had locked up nearly 14.5 million tonnes of CO2 in its treasury, which is the equivalent of over 70,000 hectares of forest, 3.1 million passenger vehicles annually, and over 7.4 billion litres of gasoline.
As the world desperately attempts to stay under the crucial 1.5°C mark to avoid irreversible climate change, and as corporations and governments scramble to reduce their carbon footprints, many will make use of voluntary carbon markets, and it will be interesting to see the impact that KlimaDAO has on these markets.
Tokenizing Rainforests
Another innovative application of tokens in the fight against climate change, is to use them to tokenize carbon sequestering assets, such as trees and rainforests. This is exactly what the Celo Foundation is aiming to do with their new Climate Collective.
In October 2021, the Celo Foundation announced via Medium the introduction of a new Climate Collective with the goal of fighting climate change. The Climate Collective will be competing for XPRIZE’s $100M carbon removal challenge funded by Elon Musk’s Foundation.
The Climate Collective, which features 10 companies including Curve Labs, Kolektivo, Moss, and Regen Network, will take a community driven approach focusing on the tokenization of rainforests and other carbon sequestering assets. Over the next four years, the initiative will aim to add tokenized trees to the Celo reverse so that the Celo stablecoin is backed in-part by rainforests.
Rainforests are key in the fight against climate change, and it will be essential for organisations and governments to do everything in their power to protect them. The idea behind the Climate Collective is that as the demand for the Celo stablecoin rises, it enables the protection of greater amounts of rainforests, as more tokenized rainforest is added to the treasury. This, in essence, creates a carbon sink:
“As currency demand increases, the reserve programmatically preserves rainforests and other carbon sequestering assets. This provides for a monetary system in which any economic growth—any increase in money in circulation—would lead to a preservation and regeneration of natural resources.”
Over the next four years, the goal is for 40% of the Celo reserve to transition to tokenized rainforest and other carbon sequestering assets, which based on today's numbers, would allow for the protocol to own $340M worth of newly planted rainforest, representing roughly 135 million large rainforest trees.
Are tokens the answer?
One of the core purposes of any token is to change or incentivize certain human behaviours. This is exactly what both of the above projects are attempting to do, but will it really work? Through the rapid growth experienced by KlimaDAO, which only launched in October 2021 and has already racked up nearly 15 million tonnes of CO2, it is clear that they are onto something, and that there is the potential for tokenized assets to play an important role in the fight against climate change.
The tokenization of carbon sequestering assets, on its own, will not solve climate change. The efforts of the Celo Climate Collective, for example, would sequester enough CO2 to reach just 0.43% of the IPCC’s climate goal. Although this is incredibly significant, and it is, it demonstrates how it is only one piece of the puzzle, and that combating climate change will require a complex and coordinated global effort. That being said, the tokenization of carbon sequestering assets should be a part of this puzzle, and it will be exciting to see what new projects making use of this strategy emerge in the future.
Is the tokenization of carbon sequestering assets effective in the fight against climate change? Tweet us at @Crypto_Altruism, we would love to hear from you!
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