LToucan, a startup that was founded in 2017, had a bold vision. It would use blockchain technology to change the carbon credit system. The traditional voluntary carbon market—in which polluting companies can pay for credits that fund emission-reducing efforts—was disorganized, archaic, and lacked incentives, Toucan’s founders argued. By pushing carbon markets onto the blockchain—a public and decentralized database—they felt they could turbocharge the climate fight with crypto economics, provide a global infrastructure data layer, and force polluting companies to either pay higher prices for carbon credits or seek more environmentally friendly approaches to their businesses.
And upend the system they did—though not necessarily in the ways that they hoped. Toucan’s aim was to create infrastructure to facilitate the buying of carbon credits, which would be retired and then placed on-chain in the form of a new token. Tokens will be kept safe and publicly accessible. The tokens can then be purchased and traded just like other crypto assets. A campaign by KlimaDAO, a crypto-environmental group, saw millions of carbon credits arrive on the chain in October. But many of them were attached to low-quality, long-dormant projects that didn’t actually improve the environment, according to some scientists and watchdogs. Traditional carbon-credit buyers and issuers were a bit panicked by the sudden swing in market prices.
Now, after several months of deliberation, Verra, the primary carbon credits issuer and a standard-bearer for the industry, has taken a stand against Toucan’s activity. On May 25, Verra announced it would ban the conversion of retired Verra credits into crypto tokens, which is Toucan’s central mechanism. After just seven months, the first phase of the crypto’s supposed carbon-credit revolution is over.
Verra opened the doors to a new chapter in collaboration. Only Verra credit could be tokenized. Verra could have more control over how credits are distributed in the new markets. Robin Rix (chief legal, policy and markets officer at Verra) stated to TIME that his organization wants to expand the carbon-credit marketplace, but it’s now leaning toward bank-led initiatives such as Carbonplace.
Toucan will have to change its operational model. Toucan’s initial response about Verra’s news was cautiously optimistic: it believes that Verra’s actions show Toucan’s outsize impact, and that despite Verra’s rhetoric about preferring banks, Toucan will nonetheless somehow play a role in this next stage of innovation. According to carbon credit specialists, while crypto does have long-term benefits in fighting climate change, the system is still hampered by many hurdles and problems.
“Both crypto and carbon are pretty complex and difficult—And when you put them together, it’s like difficulty squared,” says Ollie Gough, strategy lead for the carbon-rating startup Sylvera. “Mistakes have been made—and we’re waiting to see how it pans out.”
A messy market can be streamlined
The voluntary carbon market was developed in the ‘90s as a means by which companies in industries ranging from air travel to banking to oil could, in theory, track and offset their CO2 emissions. This was done to establish a price for the environment damage caused by CO2 emission and to allow companies to offset that cost with carbon offsets. The cost would then be cost-assessed according to their environmental impact. These credits may be attached to projects such as a forestation project or a wind farm.
Three decades on, however, the carbon market remains largely unregulated, fragmented and conflicted. Interested parties are arguing over inclusion criteria and decision-making process. Numerous studies show that projects with little to no environmental impact have been over-valued by the system. A study that was done last year showed that Californian forest-growing carbon-reduction programs systemically exaggerated their climate benefits. “I am continually underwhelmed by the quality we’re seeing,” Grayson Badgley, a co-author of that study and a research scientist at the climate nonprofit CarbonPlan, says. “I think there are a lot of low-quality carbon-offset projects that are out there, and I think their usefulness has been exaggerated.”
The blockchain is being touted by crypto supporters as a way to maintain a public record that can be used to streamline the entire system. The blockchain, for example, could help solve the problem of “double counting,” in which two parties claim credit for the same emission-reducing action.
Many traditional carbon-world members were instantly intrigued. “It’s important to understand how untransparent the markets are,” Gough says. “This was really the first time ever you had some sort of indices roughly tracking the price at which the market was paying for carbon in a very public format.”
Clean the floors
Toucan believed that others would be able to build upon its infrastructure. In October, an organization called KlimaDAO did just that, creating its own token, Klima, that could be acquired with Toucan’s token, BCT, with the hopes of turning carbon credits into an in-demand market commodity. If crypto traders got involved and started investing in these tokens, KlimaDAO’s team argued, they might drive the price of the credits up, forcing polluting companies to either pay for higher-priced, higher-quality carbon credits or find more energy-efficient production methods.
KlimaDAO’s first approach was what they called “sweeping the floor,” or rallying crypto enthusiasts to buy the cheapest carbon credits available via Toucan. (Cheaper credits often attach to projects the market considers of low environmental value like Chinese hydropower Dams. To make sure that the best and most expensive credits remained, the idea was to get rid of all the negative credit. And crypto traders eagerly jumped in: in Toucan’s first six months, more than a quarter of all carbon credits bought on Verra were done so via Toucan and transferred on-chain.
But there was one problem: most of these bad credits hadn’t been in circulation for years, because established carbon credit buyers already understood their lack of worth. Because of their age, many of these credits weren’t even eligible to be sold on some established trading markets. So instead, KlimaDAO’s tokens created fake value for worthless carbon-credits, worsening the situation. Many old projects, once considered unsellable, suddenly resurfaced, profiting from a gold rush, and offered themselves to new clients.
“We aren’t convinced that ‘sweeping the floor’ is doing anything but increasing churn in a market that needs fundamental reform, not new software platforms,” Badgley and Danny Cullenward, policy director of Carbonplan, wrote on the non-profit’s website in April.
The Toucan team, first excited by KlimaDAO’s entrance, now watched with alarm as scientists and carbon credit issuers like Verra began to criticize or distance themselves from crypto carbon projects. “I do think that hype ultimately wasn’t beneficial for everyone. It pushed expectations and prices into areas that made zero sense,” Raphaël Haupt, co-founder of Toucan, says. “And it’s really hard for an infrastructure provider like Toucan to suddenly have to play the police.”
The Toucan team debated for months on how to get rid of these poor credits. The Toucan team finally modified their criteria in May to expel low-integrity, old credits. However, the gaffe highlighted the risks of an aggressive approach to complex problems.
Haupt argues that Toucan had no choice but to take an imperfect approach—and that by doing so, they were able to both galvanize the crypto world’s interest while forcing issuers like Verra to adapt to their methods. “We don’t see retirement as the right way of doing things, but it was the lack of a clear system that forced us to take this route,” he said. “It was the first little door we could open to match the demand that exists right now.”
Carbon credits pose bigger problems
Toucan’s efforts exposed some of the baseline flaws of the carbon market: the lack of a single standard of quality, and the likelihood that many sub-optimal projects end up being valued even if they aren’t helping the environment. In 2020, Greenpeace even went as far as calling the entire system “a distraction from the real solutions to climate change,” like actually reducing the emissions from fossil-fuel energy generation.
Gough, at Sylvera, says it’s extremely difficult to establish a simple set of criteria for valuating carbon-offset projects because of all of the different factors in play. “You can try and do it by registry, age, or project type, but it doesn’t work: You will let some things in of low quality, and you will cut out actually high quality stuff,” he says.
This year, a carbon-offset task force of hundreds of companies and sustainability experts were forced to scale back their efforts because they couldn’t agree on how to define a high-quality project.
Many carbon-reducing plans that have been put in place raise questions as to their viability. TIME’s Kyla Mandel recently found that the current plans for reforestation would need nearly 1.4million square miles in order to achieve their goals. This is almost half the area of the United States. Even if all those trees get planted, there’s no guarantee of their long-term impact. “Trees can die, burn, or get chopped down,” says Badgley, all of which immediately negate any CO2 offsetting they’d offered.
More crypto confusion
Crypto volatility is also an issue for carbon market professionals and environmentalists. Crypto markets are fueled by speculation. This is the urge to quickly make quick money on tokens with wildly fluctuating values. “If [carbon-offset] prices keep fluctuating as widely as some of the crypto assets have been fluctuating, that makes it difficult…to plan and develop” carbon-reduction projects, says Ben Rattenbury, vice president of policy at Sylvera.
In recent weeks, values have been depressed across the crypto world, and carbon crypto projects are no exception: As of writing, Toucan’s BCT token is less than half of what it was in February, and KlimaDAO’s token is a third of what it was in March. The number of credits coming on chain through those two projects has essentially grinded to a halt; with prices so low, there’s very little incentive for people to enter the market. Haupt, at Toucan, says he’s fine with this slowdown. “We’re in the consolidation phase. We came out guns blasting more than we thought,” he says. “We’re building this long-term, and it’s cool to have the opportunity to speak with different people on how they see the world and make sure we build a functioning system.”
Toucan, however, isn’t the only company in this sector. The space has seen a flood of venture capital funding since last year. A number of crypto carbon projects were launched. Every one competing for attention is unique and offers a new perspective. There’s Chia, an independent blockchain that’s forged a partnership with the World Bank’s Climate Warehouse; Flow Carbon, which is backed by WeWork founder Adam Neumann and just raised $70 million; Open Forest Protocol, Moss, and many more.
Some projects are collaborative and work well together; some aren’t. Although there are many players within the industry, not everyone is sure how consolidation might occur. “Now we have like a trillion carbon projects that all want to bring carbon to web 3 that all use their own tokens and are not compatible with each other,” Haupt says.
And then there’s the question of the climate harm of these blockchain projects themselves. A March executive order by President Biden requested research to determine the possible climate effects of digital assets. A letter written in response, penned by a climate-focused blockchain committee that included members of Toucan, conceded that “currently, Blockchains do have an energy problem,” before pledging to make the entire crypto industry net-zero in terms of greenhouse gas emissions by 2040, in part by switching completely to renewable sources of energy. (Some critics question whether this can be achieved.
Verra halts Toucan’s activity
Verra’s decision to stop the tokenization of retired credits means Toucan’s main activity will halt for the foreseeable future. Meanwhile, it’s unclear what will happen to 22 million retired credits that have already been placed on chain, and whether they will be worth anything going forward. Both the Toucan and Klima tokens dropped severely in price following Verra’s decision. The Twitter user who goes by Rez and is the head of protocol for the climate-crypto community Solid World DAO wrote on Twitter that Verra’s announcement sent the climate-crypto markets “into a sort of existential limbo.”
Crypto carbon proponents hope they will be able to help Verra build a new system of tokenizing “live” credits as opposed to retired ones. But Verra’s legal officer Rix told TIME that Verra is leaning toward working with a project like Carbonplace, which was created by a consortium of banks including CIBC and UBS. Toucan’s similar goals are shared by Carbonplace, which aims to organize and scale carbon markets. It operates in a proprietary closed system. This is unlike the blockchain which allows anyone to view its code and contribute to its governance. Verra chose to make Carbonplace a more centralized project, which would give Rix greater control over credit purchases. Rix also expressed concerns about cryptocurrency tokens being misused or used for illicit purposes such as money laundering.
“Banks have sophisticated KYC [know-your-customer]In place processes They’re regulated entities,” Rix says. “That strikes us as a very good model to follow and a way to work with credible leading financial institutions.”
When asked if crypto projects could play a role in this next stage of development, Rix didn’t rule it out, and said Verra would begin a public consultation process. “It doesn’t have to be banks. It could be any entity that has sophisticated KYC checks and the infrastructure to be able to do this,” he said. “But [banks] are probably the direction things are going.”
In an interview Wednesday morning Haupt expressed hope that Toucan, and other cryptocurrency entities, would get involved in the future. “Given the point we are in this climate crisis, I don’t think restricting the amount of innovation you can have around this is the right way to go,” he says. “I personally think this is unstoppable: I don’t see a world in which only banks will have the monopoly over carbon.”
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