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As Verra halts tokenization of carbon credits, Toucan vows to 'keep Web3 ethos alive'


Verra to initiate consultation period before next steps

KlimaDAO criticizes 'closed door' approach

  • Author
  • Brandon Mulder
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  • Aastha Agnihotri
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Six months after advising carbon traders to engage with crypto markets at their own risk, Verra announced May 25 that it will be taking a firmer stance against traders that issue crypto tokens backed by retired carbon credits.

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"Verra will, effective immediately, prohibit the practice of creating instruments or tokens based on retired credits on the basis that the act of retirement is widely understood to refer to the consumption of the credit's environmental benefit," Verra's statement said.

The decision is particularly aimed at Toucan Protocol, a Web3 organization launched October 2021 that "bridges" carbon credits issued by Verra onto the blockchain by retiring the credit in exchange for a tradeable token, known as a Base Carbon Token, or BCT. Since last year, around 22 million Verra-issued credits have been bridged on-chain, representing around 4% of all issued credits.

The decision, which was made by Verra's board of directors in April, is an attempt to eliminate confusion in the voluntary carbon marketplace. Verra wants to ensure that the retirement of a carbon credit has a singular meaning: that a credit's environmental benefit has been exhausted after being used to offset a company's emissions. The emergence of Toucan, however, distorts that meaning by giving life to a digital ghost of that credit in the form of a BCT that is then traded as a digital commodity.

"It's mind frying," said Robin Rix, Verra's chief legal, policy and markets officer. "Carbon credits themselves are abstract intangible things based on counterfactuals of things that you can't actually see – emissions. And then crypto is another layer of abstraction on top of that."

According to Rix, Verra will enforce the prohibition by scrutinizing each credit's retirement request for evidence that a user is attempting to tokenize the credit via Toucan. If Verra finds that the retirement is associated with tokenization, they can block the request.

But that doesn't mean Verra is allergic to the idea of incorporating tokenized carbon credits into the voluntary carbon marketplace. The company said it is exploring ways it could "immobilize" credits within its registry so that they can be tokenized with transparency and traceability. It will also consider implementing fees for credit tokenization.

"We're not luddites that are putting our heads in the sand," Rix said. "We're not the hotel industry in the face of Airbnb, or taxis in the face of Uber. But we do think that it has to proceed carefully."

Verra said it will be launching a public consultation period during which it will collect input from market participants and potential partners on how Web3 can be properly brought into the fold. The launch date of that consultation period has not yet been revealed.

"The initial thinking is that the best way of doing this is if these tokens somehow tie back to live, unretired credits so that the environmental benefit hasn't yet been used," Rix said. "In other words, if you're acquiring tokens or coins, you always know that the underlying [offset] is there."

Keeping 'Web3 ethos alive'

Although leaders of Toucan Protocol said that the May 25 announcement was the first they learned of Verra's plans after months of dialogue, they reacted with hopeful optimism.

In a statement sent hours after Verra's announcement, Toucan said that it has always viewed its method for bridging retired carbon credits onto the blockchain as "not optimal," yet it had been the only way to build "a transparent, deterministic, blockchain-based carbon registry" that avoided double counting.

Creating a system that could safely connect "on-chain and off-chain registries would allow credit prices on each market to maintain parity," thereby giving traditional carbon traders the benefits of the on-chain market, like new applications for carbon credits and access to a fast-growing sector of the carbon market.

While Toucan welcomes the idea of credits in an "immobilized" state, its founder Raphael Haupt said in a public forum that they will be doing everything they can to "keep the Web3 ethos alive."

While there are concerns about how new methods will be implemented, "I think the overall marching direction is the right one and we'll do everything we can to hold the Web3 flag high in the sky," he said.

But not all are pleased with Verra's handling of the situation. KlimaDAO – a Web3 group that issues KLIMA tokens backed by BCT – said that while Verra's decision is "a broadly positive move forward for the Web3 carbon space," Verra has "done little to engage with the emerging on-chain carbon market, as evident by the frustration of many working in this space."

"This 'closed doors' approach to development is quite anathema to the Web3 ethos of transparency, and is clearly a thorn between both sides of this market," KlimaDAO wrote in a statement posted to its website.

The value of KlimaDAO's KLIMA token plummeted in the hours after Verra's announcement, from about $5.68 to a low of $4.74, according to CoinMarketCap data. The tokens reached a peak value of $3,681 in October 2021, the month Toucan was launched.

Transparency is key

The Web3 ethos that Toucan and KlimaDAO will work to keep alive may come into conflict with the voluntary carbon market's traditional principals around transparency, some market observers have said. While traditional registries like Verra uphold a know-your-customer ethos, where buyers and sellers are known in every transaction along a credit's chain of custody, the BCT transactions across the blockchain don't provide the same level of detail.

Stephen Donofrio, director of the carbon market intelligence group Ecosystems Marketplace, explained that market integrity depends on the ability to track the life of a carbon credit from issuance to retirement with great granularity.

"Some credits might get passed around between intermediaries before retirement, others might go directly from producer to buyer," Donofrio said. "If we don't know the inter-market dynamics, then it's really hard to understand the market trends and market interests in certain attributes. Because these are all very different types of credits."

A credit traded amongst brokers, for instance, sends different market signals than those that are directly purchased by emitters, and it's crucial for this data to be tied to each credit and trackable through every transaction to gain market intelligence, he said.

"Clearly there is a role for Web3 to play," said Donofrio. "The market just needs to develop the right sort of infrastructure and rules to make sure it's done with transparency and integrity."