BCT carbon credits issued, sold into Klima DAO in Dec despite no arbitrage

Tech solution provider Toucan Protocol continued to issue Base Carbon Tonne (BCT) contracts during the Dec 1-13 period despite a sudden depreciation of the BCT credit from Nov 30 onwards, which would leave no economic incentive to do so, data from Dune Analytics and the Verra registry showed.

The data indicates that the BCT credits issued at the start of December are being backed by carbon credits bought and accumulated by traders over the past weeks or months, when the price of credits in the market was lower than the current price of the BCT contract.

According to Dune Analytics, a tool for research on blockchain projects, the total level of BCT supply currently in the market rose from about 14 million at 0000GMT Dec. 1 to 15.5 million at 0000GMT Dec. 13, in line with the rate of issuance seen since Oct. 18, the launching day of the Klima DAO project. These numbers include the BCT credits that are 'trapped' into the Klima protocol.

Data from the Verra registry confirmed that Toucan continued to retire credits from its registry during the same period of time.

The BCT contract is a standardized and tokenized contract created by tech solution provider Toucan Protocol. It reflects carbon credits with a VCS certification and a 2008+ vintage.

Anytime a carbon credit is delivered into the BCT standardized contract – or pool – and tokenized, that credit is retired from the Verra registry, meaning that it's no longer available for trading in the broader voluntary market. From this moment onwards, the credits only exist n the shape of a BCT.

BCT credits are used by the Klima DAO Decentralized Autonomous Organization as the underlying asset that gives value to their Klima token cryptocurrency, which was launched Oct. 18.

Klima DAO has so far accumulated 12,950,000 of BCT contracts in its treasury. As of Dec 13, each circulating Klima token was backed by 14.35 BCT, Dune Analytics data showed, suggesting a total of about 902,000 Klima tokens circulating in the market.

BCT credits can also be traded in the secondary market. When a BCT buyer wants to use a BCT credit to offset its emissions, the BCT credit is 'burnt' by Toucan protocol.

Over the past two months and a half, traders have been incentivized to buy carbon credits in the broad voluntary carbon markets, to exchange them for BCT tokenized contracts and to sell them into the Klima DAO protocol thanks to two main economic incentives: the premium of the BCT contract towards the market price of credits deliverable into the BCT contract, and the bond discount offered by Klima DAO.

Under the bonding practice, Klima DAO would offer discounted Klima tokens to traders that were releasing BCT tokens into its protocol.

BCT fall

The BCT contract is seen reaching an all-time high of $8.68/mtCO2e at 2100 GMT Dec. 29, according to data from marketcoincap.com. and at the time, the price floor for VCS credits with a 2008+ vintage available in the market was heard between $6.00 and $7.00/mtCO2e.

However, with the price drop registered by the BCT token Nov 30, these arbitrage opportunities slowly shrank at the start of December and almost disappeared in the second week of December.

The BCT contract was seen falling to $5.04/mtCO2e Dec 10 at 0800 GMT – below a floor price for VCS certified 2008+ credits in the market at above $6.00/mtCO2e.

On Dec 13, the BCT credits was seen recovering and trading at $6.00 minutes before 1200 GMT, but a trader talking to S&P Global Platts during the morning trading hours said it would have been hard to find VCS credits 2008+ offered below that price.

The data suggests that the current BCT being issued by Toucan Protocol are being backed by carbon credits that were bought on the market by traders over the past months or weeks, and that are now being converted into BCT after having been held by them.

While Klima DAO treasury continued to absorb BCT credits at the start of December, data from Dune Analytics show that the percentage of BCT held by Klima out of the total BCT supply available dropped from 90.6% on Nov. 25, the highest level ever, to 83.3% Dec. 13, leaving more BCT credits available for trading in the secondary market.

On Nov. 25, the carbon projects certifier Verra released a market note reminding account holders in the Verra registry that financial instruments linked to Verra certified credits cannot be created, marketed, or transacted without Verra's express written consent, which is to be granted in Verra's sole and absolute discretion. No further announcements followed.

The Klima DAO treasury grew from 11,900,000 BCT Dec. 1 to 12,950,000 BCT Dec. 13.

The treasury appeared to have increased at a faster rate during the Dec. 10-13 period, moving from 12,400,000 Dec. 10 to 12,950,000 Dec. 13. Over the same period, the BCT contract rose from the Dec. 10 low of $5.04/mtCO2e to $6.00/mtCO2e at 1200 GMT Dec. 13.

Nov 30 price drop

The price of the BCT contract and of the Klima DAO token were both seen shedding value consistently after Nov. 30, which is the day when Klima DAO announced a proposal to reduce its APY gradually from 45% to 22%.

The APY is the interest rate paid on the Klima token held by their owners. This practice is known as staking.

With lower interest rates, many holders of Klima tokens may have preferred to sell their tokens and monetize the gains made over the previous weeks. At the same time, with lower interest rates, demand for Klima tokens in the market may have also decreased, triggering a drop in the price and lower demand for BCT credits to be released into the Klima DAO protocol.