Arbitrage opportunities on renewable carbon credits fade as BCT contract sheds $1.50/mtCO2e

The strong arbitrage opportunities that triggered a hunt for older and competitive renewable carbon credits during the month of October and November came to a halt at the start of December as the Base Carbon Tonne contract was seen losing more than $1.50/mtCO2e in just over two trading days.

The BCT contract was seen trading at $6.27/mtCO2e minutes before the 1200 GMT market close, lower than the $6.35/mtCO2e seen Dec 2 at around the same time, and well below the $8.03/mtCO2e seen on Nov. 30 minutes before the close, data from coinmarketcap.com showed.

The BCT carbon contract – a standardized contract created by the tech solution provider Toucan Protocol and reflecting VCS credits with a 2008+ vintage – started to shed value during the Nov. 30 afternoon and continued to drop over the next two days.

Less arbitrage opportunities meant that the price rise in the renewable segment of the voluntary carbon market came also to a halt, with the S&P Global Platts Renewable Energy Current Year price seen shedding value for a second consecutive day on Dec. 3 to close at 1200 GMT at $7.35/mtCO2e, down 5 cent/mtCO2e on day and off from its highest ever assessment on Nov. 30, when it was at $7.55/mtCO2e.

Prices of renewable energy credits started to raise fast at the end of October, after the launch on Oct 18 of the Klima cryptocurrency.

The Klima token -- created by the cryptocurrency organization Klima DAO – derives its value from a Treasury made of BCT.

Klima DAO incentivizes traders and brokers to sell credits into the Klima protocol instead of in the broader voluntary carbon market through a practice known as bonding.

Players who sell credits into the Klima protocol receive discounted Klima tokens in exchange for their credits. The bond contract requires participants to deposit BCTs in return for the discounted Klima over a fixed vesting period.

Arbitrage game

Traders have been taking advantage of the high price of the BCT contract if compared to the price of carbon credits deliverable into the BCT contract and available in the broader voluntary carbon market.

They have so far purchased VCS certified carbon credits with a 2008+ vintage in the broader voluntary carbon market (typically renewable carbon credits, the most competitive in the market), converted these credits into BCT contracts via Toucan and then sold the BCTs into the Klima Protocol at the market price of the BCT token.

The profit opportunity was derived from the price difference between the price at which they bought carbon credits in the market and the price of the BCT token, plus the bond discount offered by the Klima protocol for traders depositing BCTs in their Treasury.

The value of the Klima token was seen dropping further Dec. 3 at $671 during the late morning trading hours, down from market close of $745 on Dec. 2, on the Klima DAO website. It was seen above $1,600 until Nov. 30 1200 GMT.

BCT credits can be used for different purposes. They can be delivered into the Klima Treasury, but they are also available on the market for offsetting needs. They are usually purchased by the cryptominers to offset the higher footprint of their activity.

"As soon as BCTs are created, you can do whatever you want with them in the world of DeFi. Trade, deposit and use as collateral, retire, use for bonding with Klima, etc," a source in the DeFi Carbon Market Industry who wished to remain anonymous said.

Once transformed into a BCT contract, a VCS certified carbon credits is moved to the Verra's retirement registry.

From then onwards, it continues to live as a BCT contract. Once a BCT contract is used to offset emissions, it's 'burnt' by its user and no longer tradable.

However, BCT that enter the Klima Treasury are not burnt and they could in theory be returned to the market as BCT credits.

According to the same source, the BCTs in the Klima treasury will only sold back to the market and therefore be available for buying and burning only if the price of the Klima token goes below the price of BCT credits.