Sep 14 2022

A response to KlimaDAO’s analysis of Base Carbon Tonne tokens

Danny Cullenward 
Danny Cullenward

Last week, KlimaDAO published an analysis of the Base Carbon Tonne (BCT) — a tokenized “pool” of conventional carbon offset credits that we criticized earlier this spring. This post responds to KlimaDAO’s analysis, which presents sunny conclusions that KlimaDAO describes as “in tension” with CarbonPlan’s findings on credit quality.

Contrary to KlimaDAO’s framing, none of the data presented rebut our main finding: that the projects underlying the BCT carbon pool are very old and of such a low quality that they do not represent robust climate benefits.

As we pointed out in our original article, 99.9% of BCT’s tokenized credits come from projects that are so old they are ineligible for the international aviation industry’s CORSIA program, and nearly 85% would be ineligible for trading under Article 6 of the United Nations’ Paris Agreement. While we don’t think that CORSIA or the Article 6 rules set a sufficiently high bar for quality, the inadequacy of the BCT credit pool in relation to these much-discussed standards is striking.

Quality isn’t a popularity contest

Instead of addressing our quality concerns directly, KlimaDAO quibbles with what it means for these credits to be “excluded” from key market segments and emphasizes how some corporate buyers have transacted in off-chain credits from the same projects.

In essence, KlimaDAO argues that these low-quality credits are popular. That may well be true, but it’s not responsive to the criticism that the credits lack environmental integrity.

KlimaDAO even goes a step further and suggests CarbonPlan erred in comparing BCT credit quality to the CORSIA standards in the first place:

As the CORSIA requirements are specific to the aviation industry, rather than a general-purpose group of credits for corporate carbon offsets, the comparison does not appear to be sincere.

Setting aside the fact that we used the CORSIA standards to illustrate how real-world restrictions on project age disqualify the entire BCT pool — including by excluding these credits from standardized futures contracts that are traded outside the aviation industry — this response is deeply ironic.

According to KlimaDAO, the largest corporate user of carbon credits from the offset projects represented in the BCT pool is Delta Airlines. As an airline, Delta is presumably very mindful of CORSIA eligibility criteria and would be well advised not to use BCTs for any future carbon offsetting claims.

Standards of convenience

KlimaDAO also repeats the usual bromides about quality control practices among the incumbent carbon offset registries, which are supposed to ensure that all carbon credits represent high-quality, additional climate benefits:

Clearly, Verra-issued carbon credits are not ‘excluded’ from the market as businesses and consumers are free to purchase and retire these credits – and they do. These ICROA-endorsed standards are typically the most transacted, and most trusted, in the market due to the decades of work done by leading organizations like Gold Standard and Verra to establish rigorous methodologies around the issuance of carbon credits.

It’s a nice idea, but even a cursory look shows that real-world market practices fall short of these ideals. Take the experience with low-quality HFC-23 credits, which Europe famously banned from its compliance market in 2011. Verra ultimately followed suit several years later and barred the development of new HFC-23 projects in 2014, but stopped short of prohibiting the issuance of new credits from existing projects.

Although quality concerns with HFC-23 projects were extensively documented and effectively ended demand for these suspect credits, this market history escaped the attention of BCT’s designers. Carbon traders noticed that BCT’s eligibility rules were lax and took advantage of the opportunity to dump worthless HFC-23 credits on the blockchain, where they commanded substantially higher prices. More than 600,000 HFC-23 credits were tokenized before BCT’s designers put HFC-23 credits on a blocklist that prevents future tokenization.

KlimaDAO mentions this episode in passing, but fails to acknowledge that it undercuts their blanket reliance on registry standards for quality control. And as much as they might want to sweep the HFC-23 experience under the rug, it’s just the tip of the iceberg. The biggest quality problems come from old renewable energy projects, which constitute the bulk of the BCT pool. But you don’t have to take our word for it.

Here’s the CEO of Verra discussing the controversy over his registry’s handling of old renewable energy projects, including a particularly suspect listing called VCS191 that backs about 10% of the entire BCT credit pool:

Those projects were developed before we came to the conclusion that they were no longer additional,” says Verra’s CEO David Antonioli, referring to one of the key criteria for carbon market offset projects, that the reductions they yield would not have taken place without the revenue from the carbon credits. “So they were legitimate at the time they submitted their original requests for registration.”

So much for relying on registry standards.

Consistent with our recent comments, we think the White House Office of Science and Technology Policy cuts through the noise in its recent report on the climate and energy implications of blockchain technologies:

[W]hile blockchain is often promoted as enhancing trust, it is often the integrity of the underlying carbon reduction or removal project that is questioned, not the counterparty’s likelihood of completing the trade. This issue of trust in [voluntary carbon markets] is not the trust issue that blockchain or distributed ledgers solve.

An unexpected area of agreement

Perhaps the strangest aspect of KlimaDAO’s post is that it purports to represent the findings of a report from AlliedOffsets, a well-known data advisory firm. Here’s how KlimaDAO describes the project:

KlimaDAO has commissioned analysis of Toucan Protocol’s BCT by AlliedOffsets, a data and analytics consultancy active in the [voluntary carbon market]. The BCT pool was designed by Toucan Protocol with input from KlimaDAO and other advisors, to support the launch of KlimaDAO in October 2021. The results of this work are presented in this article.

Because KlimaDAO’s post doesn’t contain a link to any report or outside analysis, we reached out to AlliedOffsets for more information. AlliedOffsets’ Head of Research confirmed that KlimaDAO had commissioned an analysis of market price and credit retirement data for offset projects associated with the BCT pool, but that no report or other public documentation was available. Furthermore, he confirmed that while AlliedOffsets reviewed a draft post to ensure that their data were presented accurately, they “don’t endorse, renounce, or otherwise comment on” KlimaDAO’s findings.

We respect the team at AlliedOffsets and have no reason to question their market price or credit retirement data. But as far as we’re concerned, the KlimaDAO post makes only one salient point: If you’re in the market for low-quality offsets, you can get a good deal on the blockchain.

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CarbonPlan is a registered nonprofit public benefit corporation in California with 501(c)(3) status.
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