Klima DAO: The Future Of Carbon Offsetting

You have inevitably heard the term carbon footprint and that everybody should offset it in order to save the planet.

How do you calculate your footprint?

  • Individuals: there are literally hundreds of online calculators out there, like this one, which allow you to calculate your footprint in great detail. Further, there are automated apps that attempt to automate the calculation of your footprint, for example via online banking. If you are lazy, you can use the average footprint for your country. Simply check your country’s latest average per capita footprint (Statista or World Bank) and go with it. For example, the average citizen in Germany has a footprint of ca 10 tons per year.
  • Companies: various fintech services offer sophisticated dashboards and analytics to help calculate the footprint.

Ok, you know your footprint. Now what?

You can: 1/ either reduce it or 2/ offset it fully by purchasing carbon credits.

We’ll focus on the second option.

Almost all B2C/B2B services offer a marketplace with single project or bundled carbon credits to choose from. These projects vary from solar cookstoves in Africa to planting new forests in Indonesia, but they all have one thing in common: they allow you to offset your footprint and become carbon neutral or, even better, buy more and become carbon positive.

For example, if you live in Germany, your average footprint is 10 tons, so you’d need to buy 10 carbon credits (1 carbon credit = 1 ton CO2). Again, it doesn’t matter which project you choose as long as it has been validated and registered with a leading standard like Verra or Gold Standard. The additional benefits of the project like job creation, technology know how transfer, social benefits etc. are important, but really secondary to the actual carbon savings.

Important: in regions where mandatory emission trading schemes (cap-and-trade) operate (the European Union, California, RGGI), one might assume that since large industrial/energy companies already pay for carbon, people are covered because there would otherwise be double counting.

This is not the case. Here is why.

These emission trading schemes use carbon allowances, not offsets.

A quick definition guide:

Compliance market

  • Allowances allow companies to pay for polluting with a higher price costing them more and theoretically driving investments to reduce emissions.

Voluntary market

  • Offsets: projects that prevent new emissions, i.e. build solar plant instead of a coal plant or protect a forest from being cut. Emissions don’t increase, but don’t decrease either. The large majority of issued credits to date.
  • Removals: directly reduce emissions via carbon capture, i.e. planting new trees or absorbing CO2 from the air. Trees are the only available “tech” at scale at the moment.

Why is this differentiation relevant?

It is important to understand how cap-and-trade allowances work.

Take the EU ETS. If a coal power plant emits 1,000,000 tons per year, they would receive say 500,000 EUAs from the EU (for free) and would need to buy the rest (from other players that have an excess) in order to comply with their pollution level. They will need to spend EUR 40mn (500,000 EUA * 80 EUR) to buy the 500k deficit and return 1,000,000 EUAs to the EU. This occurs every year.

By doing this, they haven’t actually offset (not emitted or removed) any emissions, they simply paid a “penalty”. When the penalty becomes too costly, the owner would rather replace the coal plant with a gas or nuclear plant with the same production capacity, but a lower CO2 footprint in order to pay less.

That is the goal of all cap-and-trade emission trading schemes.

Back to the double counting question.

For example, if you offset your total 10 tons, part of it would be for electricity (ca. 30% or 3 tons).

By offsetting, you would become carbon neutral (you pollute in one place and save in another). In that sense, you would have covered your share of the coal plant’s pollution. However, the extra costs the coal plant incurs by buying EUAs would force it to reduce its footprint, which would in turn reduce your footprint. If the coal plant is replaced by a gas plant, which has 50% less emissions, your footprint will fall by 1.5 tons (50% of 3 tons) and next year you’d need to only buy 8.5 carbon credits. You get the idea.

In a nutshell: compliance markets act as a “carbon penalty” and only indirectly help emission reductions. This is before ITMOs enter the picture, but we’ll have to see how they would affect the market.

Enter Klima DAO

When you buy KLIMA and stake it in the DAO, you are using the pool token — BCT, which contains many different projects. Using the example above, you would need to buy 10 BCT tokens for ~$60 (at current prices). By locking it in the DAO (staking), the question becomes whether you are offsetting your footprint.

Technically, you can only claim that you are offset if you buy BCT and burn it (this functionality is currently being developed). Also, you’d need to do this every year.

Some argue that if you stake your 10 BCT and never unstake, you would effectively be offsetting your footprint. While there is certain logic behind this, it implies trust that people won’t just sell and not burn, which becomes a vulnerable spot prone to criticism.

When you burn BCT, it would leave the DAO treasury and a corresponding amount of KLIMA would also need to be burned.

However, the way the DAO works potentially offers a new way to approach this problem.

Staking with ongoing offsetting

People who stake are incentivized to never unstake by the APY, i.e. don’t burn.

Let’s run an example (data from 8.12.2021):

Imagine you buy 0.2 KLIMA today and stake it. The inflation you will receive (based on the above assumptions in yellow) allows the position to grow to 19.8 KLIMA in 1 year.

Let’s assume:

  • The price of BCT increases from the current $6 towards the high quality Verra / Gold Standard credits, i.e. $30.
  • The price of KLIMA falls from $600 to the current risk free backing (RFV) of $30, hence also penalizing the treasury by assuming the BCT backing of KLIMA ratio drops from the current ~5x to 1x.

You’d still be able to sell half the position (9.9 KLIMA) for $300 and burn 10 BCT at $30 in order to offset your full footprint for that first year.

At the beginning of year 2, you will have 9.9 staked KLIMA left.

Let’s assume:

  • A reduction in APY to 500%
  • An increase of BCT to $60 (note that it doesn’t have to necessarily be BCT, it could be any other high priced pool in KLIMA’s treasury)
  • We keep the BCT backing ratio at 1:1 (because below 1x, the DAO will automatically buy KLIMA and burn it)
  • That means a price of $60 for KLIMA.

You can now burn just 1/4 of your position = 10 BCT at $60 and offset your footprint. You will have 3 years worth of footprint left.

Just as a fun projection, if APY fell to 200% and you kept the remaining position for 4 years unchanged with BCT going up to $100, you’d have enough BCT in year 4 to offset your footprint for ~44 years.

You get the idea.

It all depends how the DAO and APY develop, as well as the price of BCT.

The example shows that the DAO can play the role of a permanent capture mechanism, which incentivizes stakers to keep their KLIMA in the DAO (the famous (3,3) for the game theory nerds).

The growth in the DAO’s reserve would also allow BCT (or more correctly, the future aggregate carbon pool in the treasury) to increase in price per ton to levels which would enable the funding of new technologies which are currently out of reach due to lack of funding.

For example, current prototype large scale carbon capture installations estimate an average price per ton of $1,000 which would not have many buyers out there. Their goal is to reach a price of < $50/ton at gigaton scale. If the DAO grew large enough, it would allow regular burning without sacrificing stability.

The burning process includes unstaking and selling part of the KLIMA for BCT, which will be destroyed. The sellers of BCT would ideally be project developers who can convert the KLIMA they got for USD and fund the carbon removals / reductions.

Conclusion

All this looks like something feasible for people and companies who want to offset and fight climate change in the long term. This is the best use case.

The same idea can be applied to project developers as a way for them to regularly fund different stages of the projects by unstaking and selling BCT instead of burning. This also makes sense.

Obviously, financial investors (retail and institutions) will also be part of the game, they won’t really be in for the offsetting, but to make money and sell the BCT to others. Let’s recognize that while not aligned with the actual long terms goal of Klima, the early cash inflows from speculators / investors are crucial to support the growth of the DAO and build up the treasury. When these players sell to the large actual offset customers later on, it would show protocol maturity and the DAO should stabilize.

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