The Problems With Carbon Credit Cryptos
Tokenizing carbon credits creates more problems than it solves.
Carbon credit cryptos like $MCO2, $BCT, and $KLIMA were created because the voluntary carbon markets “lack transparency.”
The problem is that these cryptos were created to solve an issue that doesn’t exist, and they’ve created more points of concern than they fixed in the first place.
In theory, the main benefit of tokenizing carbon credits is that it makes them easier to track, via the blockchain. This would eliminate the risk of double-counting, a scenario where two different parties might retire the same credit.
The primary concern behind double-counting is on a country level, though. An issue that’s already being addressed by Article 6.2 of the Paris Agreement…
Otherwise, carbon registries tend to do a good job of tracking whether a credit has been retired or not. So what are we actually solving here?
Another potential benefit is individual ownership of a carbon credit. This was previously unavailable to most investors until these cryptocurrencies were developed.
But is this really even a good thing?
Moss (MCO2)
Lets dive into how some of these cryptos work to get a better understanding of the issues they create…
You’re going to notice a common theme with the price action of these cryptos.
Currently sitting at a ~2.5M market cap according to CoinMarketCap, MCO2 has seen better days.
Moss was the first crypto token to be backed 1:1 with a carbon credit.
The kicker? The token is backed by REDD+ credits. If you follow the voluntary carbon markets, you know that the REDD+ methodology has been under fire and has since been reformed.
That means that the credits MCO2 was backed by were more than likely either overstated or rapidly losing value. The chart speaks for itself— although I’m sure the carbon markets losing all of their previous hype didn’t help either.
Their website links to three different carbon projects, verified by Verra:
There were more in Moss’ credit retirement reports, but we’ll just pick on these three.
Two of them, Florestal and Agrocortex, were rated a “C” by BeZero Carbon (a carbon project rating agency). This rating means that the projects likely overestimated their impact on reducing carbon emissions in their respective territory.
The MCO2 cryptocurrency you buy from either of these projects could easily be “fake.” None of this is unique to Moss, but these are the risks you take when buying credits from individual projects.
The funny part is that Moss knew the carbon credits they were buying were likely low quality. According to Reuters, Moss said they were low quality in private but claimed they were “among the highest quality possible” in their whitepaper.
Toucan Protocol (BCT)
Toucan Protocol, on the other hand, actively ran a campaign on buying up the lowest-quality credits possible. A process they called “sweeping the floor.”
In an attempt to raise the price of carbon credits and stop emitters from buying shoddy credits, Toucan bought up over 21M of them in 2022.
This absolutely backfired, creating a demand for old, low-quality credits when there previously wasn’t any. All leading to more supply coming into the market than before.
So that was a mess, but lets review how their cryptocurrency works. The Base Carbon Tonne (BCT). It has a market cap of around $5M currently.
As you can imagine, the chart of BCT doesn’t look any better than MCO2 did. Already low expectations at least lessened the blow.
BCT was created by retiring those low-quality credits and fractionalizing them onto the Polygon network as NFTs. Then, they’re deposited into the Toucan Base Carbon Pool and in return, you’ll receive BCT cryptocurrency.
Chances are, if you buy any BCT at this point, it’s low quality.
Toucan also offers the NCT token, which is similar to BCT, but is only backed specifically by nature-based credits.
This brings up another problem with tokenizing carbon credits though… are all of them low quality? Are all of them the same price?
Cryptocurrency introduces fungibility where there shouldn’t be. Every carbon credit has a variety of characteristics that can drastically change its pricing.
Location, vintage, type of project, corresponding adjustment approval under the Paris Agreement, project co-benefits… the list goes on.
With so many factors that can wildly change the economics from one carbon project to another, one singular price for a cryptocurrency is not adequate.
By the way, KlimaDAO (KLIMA) is primarily backed by credits under the BCT, NCT, or MCO2 tokens, so that is another popular and uninspiring project.
What Happens During Natural Disasters?
Even if the crypto does come from a credible project… what happens if a natural disaster wipes out the grouping of trees that accounted for the carbon credit that backs your token?
Typically, a carbon buffer pool (10-20% of total credits generated) is taken from a project to ensure that any unforeseen events are accounted for. A credit from this pool could replace any of the ones lost over time.
However, many of these crypto projects previously retired the carbon credits to tokenize them on the blockchain…
That means all of these credits have technically already been used. If we’re vastly overcrediting these projects then this becomes a problem.
Nowadays, Verra and other carbon registries have implemented a ban on tokenizing retired carbon credits. Instead, the carbon credits are “immobilized” in registry accounts until they’re officially retired from the blockchain.
But the vast majority of the credits on the blockchain right now are old vintages—credits created years ago. They’ve already been retired. I wouldn’t touch any of these cryptocurrencies with a ten-foot pole.
Are NFTs Better?
NFTs do solve the fungibility problem that the cryptocurrencies create… given they’re non-fungible tokens.
With that said, most of the same issues occur whether it's a crypto or an NFT.
There are projects putting out carbon credit NFTs, but by no means does that mean that the credit is any more credible than it was with these cryptocurrencies.
All they did was change the vehicle in which they were delivered.
Kakubi (KKB)
If you’re looking for a cryptocurrency that actually makes sense, then Kakubi is the only one I’ve seen.
The difference here is that KKB tokens are backed by European Union carbon allowances (EUAs) in their compliance carbon market, while all of the previous cryptos we’ve mentioned were in the voluntary carbon markets.
Allowances from compliance markets almost have an entirely different investment thesis, so keep that in mind.
Kakubi works because EUAs are fungible. They really only have one price at a given time. Best of all, credibility is not a point of concern because the EU handles its own registry and creates the allowances themselves.
So that’s a project with some merit in an otherwise bleak landscape.
In summary, carbon credit cryptocurrencies create the following issues:
In many cases, you don’t know where the credits came from, or if they’re credible.
Pricing fungibility for clearly non-fungible financial instruments.
Natural disasters or other events can invalidate your already retired carbon credits.
On top of all that, they don’t really solve any of the problems they originally set out to fix. This is an example of cryptocurrency trying to create a use case for itself when there wasn’t one— at least not at scale.
Most of the problems we see in the voluntary carbon markets today are with the creation of projects themselves. Not what happens with the carbon credits after they’re produced.
I would avoid these low-quality credits and projects like the plague. By contrast, I opt to invest in stocks run by management teams that know what to look for. I discuss them regularly, on both Substack and X.