Get Rich Offsetting Carbon
Klima DAO is a new Decentralised Autonomous Organisation designed to manifest change in carbon emissions and hand you a healthy profit along the way.
If after reading the three lines below this makes sense then I take my hat off to you. If like me you need a clearer explanation then this article is for you.
Klima DAO is a Decentralised Autonomous Organisation for change.
Klima DAO develops infrastructure incentives that fulfil our manifesto, through primitives such as the KLIMA token.
As a matter of course, Klima DAO will solve the critical problems of the carbon markets: illiquidity, opacity and inefficiency.
Yeah, I am not sure at all what that means but it sounds good. What caught my attention first on this project is the 37,000% APY (at the time of writing). This project runs deeper than profit and money to effect positive change for our planet globally. There are numerous videos on YouTube about the interest but a lack of anyone discussing the fundamentals of this project. To understand this project you have to understand how carbon is becoming an emerging asset class.
💰 Carbon as an asset class.
Carbon emissions being released into the atmosphere is what economists call a ‘negative externality’: it is a by-product of economic or other activity that creates damage now and in the future. Companies and consumers do not pay enough for these negative externalities and are emitting too much carbon. This is a market failure. The market does not internalise the costs of these emissions. It is then left to other groups and charities to try and cover this cost. In order to internalise the costs within the market, you can introduce a tax on carbon or introduce a marketplace for allowances to emit carbon.
Carbon pricing is a policy that aims to reduce carbon emissions by requiring emitters to internalise the societal costs of emissions. What this means is if you are creating a product with a high carbon footprint you will have to charge a higher price for this product. Put another way you and your consumers will have to bear this cost and negative impact upon the environment. The goal is to reduce carbon output by ensuring the production of goods with a high carbon footprint is expensive.
In order to incentivise companies to reduce their carbon footprint, you need a bigger stick. Putting a price on externalities, such as carbon emissions, is the most widely accepted way to encourage companies to reduce their emissions. Pricing emissions provides a direct economic incentive to reduce your carbon emissions or seek low-carbon alternatives.1 2
📈 Trading Carbon.
How do emissions become an asset that can be traded? This is done using two instruments.
🌿 Carbon Taxes - place a fee on the carbon emissions content of fossil fuels. The more you burn the more you pay in fees. If you are behaving and reducing this then the market determines the resulting quantity of emissions reductions.
🌿 Emissions Trading System (ETS) - places a cap on the total quantity of emissions allowed. The market then determines the price of tradable emissions allowances. Let’s say Company A has gone over their emissions allowance but Company B is still under. They would then have the option to sell the emissions allowance they haven’t used to Company A.
Trading enables companies that can reduce emissions at a lower cost to be paid to do so by higher-cost emitters, thus lowering the economic cost of reducing emissions. What’s happening is those who are being smart and efficient about reducing their carbon output are being rewarded for that margin generated.
🌊 Are these markets liquid?
The ETS carbon market where participation is mandatory is liquid and in 2018 more than $200 billion was traded. The international carbon market and voluntary carbon markets are more illiquid. The chart below summarises this nicely and makes it clear where the issues are. 3
🤷♂️ Carbon Offsetting Good or Bad?
Won’t companies just buy more offsets so they can keep using carbon to their heart’s content? Researchers from Germany decided to find out. They found the opposite to be true. People who offset their emissions also take more positive climate actions elsewhere.
Furthermore, if you are personally invested in a cause you want it to succeed. In order to offset your emissions, you need to monitor your emissions in the first place. It takes considerable effort to set up the monitoring so once you have invested in the set up you are more likely to then use the data to improve your impact.
Offsets represent the real removal of carbon dioxide from the atmosphere. Reports have also found that some companies are generating offsets by reducing emissions beyond regulatory requirements.
L’Oreal, for example, distributes efficient, cleaner-burning stoves to women in Burkina Faso who boil the shea nuts used in its cosmetics products. These stoves reduce emissions by reducing the need to chop down trees, thereby saving forests, and they also reduce the health hazards of indoor smoke. 4
💰 How does this all make money?
When Company A has removed a measurable and verifiable amount of greenhouse gas emissions (GHG) they can list this on the voluntary carbon market. One carbon offset is equivalent to 1 tonne of CO2 abatement or removal. Company A will need to go through the Verra or Gold Standard verification process to prove action has been taken and the GHG genuinely removed.
The problem is the voluntary market is underdeveloped and illiquid. What can I do with the offset I have created? How do I get value from this? Remember the value created is what encourages companies to continue taking positive action and receive a monetary benefit for not continuing to pollute.
Enter Kilma DAO and Company B. Company B has been unable to reduce their emissions, has generated no offset and in fact has increased emissions. They will need to purchase some offsets in order to reduce fees or extend their cap. Kilma will provide the liquidity needed for this market. Kilma DAO will buy and hold these offsets and then sell them to Company B.
🌿 How are the offsets generated?
Common Technology Types
These are the most common ways offsets are produced, developed and purchased. Once bought by Kilma DAO they will be locked up in the Kilma DAO treasury. Remember each carbon offset is equivalent to 1 tonne of CO2 abatement or removal. it just means that they are the most common to be developed and purchased.
Carbon sequestration via reforestation: Biological sequestration absorbs CO2 emissions through the growth of vegetation and the continued storage of some of the carbon in plant tissues and organic materials derived from plant tissues (e.g. stored in the soil).
Carbon mitigation via forest protection: An area of forest that would have likely been cut down due to agriculture or timber activities is protected instead to maintain the carbon sinks already present in the existing biomass.
Renewable energy. Renewable Energy projects. It is worth noting that although these projects are common, Verra and the Gold Standard will no longer support the development of offsetting projects from renewables after 2022, citing a lack of additionality for these technology types (i.e. the finance brought forward by carbon offsets is no longer required to make these projects competitive against new fossil fuel power plants).
Methane capture. Methane’s global warming potential is about 21 times greater than that of CO2. This GHG is produced and emitted by landfills, during wastewater treatment, in natural gas and petroleum systems, and from farming and agricultural activities. Methane is basically ‘natural gas’ (that’s the gas that is piped in the gas grid into homes for cooking and heating) and therefore if its captured at a facility (e.g. landfill, wastewater treatment centre, etc) it can then be used as a source of energy to displace newly extracted gas. The West Star North Dairy project in California, USA is an example project that captures methane from a dairy farm and uses it for energy.
Less Common Technology Types
Industrial Processing: These projects include interventions such as industrial fuel switching to decarbonise operations, greenhouse gas capture at a facility to reduce emissions going directly into the atmosphere, and the recovery and destruction of ozone-depleting substances.
Carbon removal via soil sequestration: This includes various ways of managing land, especially farmland so that soils absorb and hold more carbon than it otherwise would.
CCUS: Out of all of the technology types listed in this article, CCUS is the least mature. However, it holds great promise in providing a technological way to scale up carbon removals and deposit carbon into long term storage mediums, e.g., basalt rock.
🌿 Back to Klima DAO
Klima DAO is attempting to provide liquidity to this market. Focusing on international carbon markets and voluntary carbon markets. Staking provides liquidity to the market and as such is how you are rewarded for staking Klima.
In addition, the price of the tokens is based on a quantifiable real-world asset which is 1 tonne of carbon offset.
📈Good news for investors.
As of May 2021, there were 64 carbon pricing instruments in operation globally, covering an estimated 20% of global greenhouse gas emissions and generating upwards of $53 billion in revenue. According to the World Bank’s annual “State and Trends of Carbon Pricing” report released in 2021, these advances represent a 17% increase in revenue compared to the previous year.
For analysts covering carbon markets over the past decade, this growth is seen as just the beginning of what is to come over the coming years. McKinsey estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and up to a factor of 100 by 2050 . Carbon credits, as an instrument for putting a price on carbon, could be a $50 billion market by 2030.
Beyond being a largely uncorrelated asset within the traditional crypto market, carbon’s price is poised for substantial growth and this can be leveraged to maximise positive impact for the planet and create value for those that participate within the system.
A Final Note
For the regular readers, you are probably wondering why carbon offsetting instead of marketing. My writing has focused on marketing until now but I wanted to diversify a little. I will still be producing a marketing email per month but I’m switching to a deep dive format on that rather than the higher-level overview. The thesis is that it will provide more value. I also have a few other ideas I wish to explore and this platform will be a great place to share my learning along the way.