At Toucan Core we spend a good deal of our time monitoring the voluntary carbon market in order to ensure the integrity and health of the on-chain markets our infrastructure has enabled.
We have become aware of the issuance of millions of carbon credits compatible with the BCT pool — credits that we believe were, until the launch of Toucan, basically stranded assets.
One of the core theses of KlimaDAO and Toucan is that a rising carbon price is necessary and important in order to drive more funding to carbon projects. The approach of “sweeping the floor” of low quality credits has been quite effective, but it is based on the premise that there is a finite amount of these low quality credits to remove.
Klima’s theory of change was that by removing these credits from the market and locking them away where they cannot be retired, actors entering the market must pay up for higher quality or newer credits over time.
The rising price of carbon serves two purposes. Higher prices give projects greater confidence that they will be able to break even, meaning they should initiate their impact projects. Higher carbon prices also mean that corporates need to pay more for offsets in order to meet net zero commitments, so they will be incentivized to do more to decarbonize operations and reduce the number of offsets they need to retire.
Issuing carbon credits costs money, and there is a certain amount of risk that projects must assume to complete the certification and issuance process.
Market conditions shortly after these vintage periods were most likely not favorable for these projects, and these projects for one reason or another did not complete this process. Now there is a liquid carbon market running on SushiSwap, due to the actions of KlimaDAO and Toucan. This, along with the increase in value of these VCUs (Verified Carbon Units), means it has become sensible for these credits to be issued.
We can see an example of this here:
The vintage can be understood as the monitoring period in which a carbon reduction has taken place.
The issuance date is the date on which credits are issued onto the Verra registry.
As we see now, these two dates can sometimes be wide apart, including when a project doesn’t complete the full certification lifecycle.
While there are a finite number of these credits that are issued, the sheer quantity of these unissued carbon credits based on energy methodologies out there is vast. They effectively represent a large supply source at a fixed low price — as on-chain price of BCT rises, it will continually make sense to issue these credits and take profit.
This RFC is intended to raise this issue and openly explore ways we might agree to adjust Toucan infrastructure so on-chain carbon markets serve the purpose of driving finance to the most impactful projects.
Goals we want to achieve include:
- Drive climate finance to projects that create new interventions that haven’t happened yet, rather than give money to projects that can clearly survive without the subsidy of climate finance, the basis of additionality.
- Expedite the rise in the floor price of carbon credits.
- Drive finance to high cost and high value credits.
We carefully reflect on climate justice when setting these goals, and ask the community to raise suggestions that enhance global equity.
Filtering at the bridge
One option is to apply a limit on the bridging of credits with a “delta” (Δ) of greater than n years between vintage start date and issuance date.
This will prevent the tokenization of old credits that were only issued recently. We are exploring setting the cut off at a 5 year delta, though we are analyzing delta patterns of various carbon credit classes to see if this would be an appropriate value across the board.
However, we understand that issuance patterns differ for different methodologies, and there are certain legitimate reasons why a project originator might choose to issue credits more than five years after the monitoring period.
Filtering at the pools
We are exploring the potential of applying this filter at the level of the carbon pools. This would require making the
issuance date accessible as an attribute on-chain. The delta value could be incorporated as gating criteria in future pools as well. Implementing this feature would take significantly longer than filtering at the bridge.
Toucan creates on-chain infrastructure for the world’s carbon markets — we are connected to off-chain, operating markets. This means we inherit many of the strengths and weaknesses of these markets. There is a case to be made that this situation is simply an aspect of the way these markets operate, and we should not intervene.
Our governance process
The only way to do this properly is with you, our community. Starting today, we are engaging in a two week governance process to gather community input on how to handle this situation. With this, we hope to find a long term solution. We would especially invite community members with insights into edge cases and situations where issuance dates long after vintages are part of the plan — that way we can co-design policies that best serve the market.
Once we’ve gathered feedback and discussed a final proposal, Toucan core will take a decision, informed by your input. This is necessary as we still don’t have a governance token — we will soon be sharing plans to further decentralize governance and put these decisions fully into the right hands.