Hi!
It’s well known that certain blockchains have massive carbon footprints, especially those that use the proof of work consensus protocol. Bitcoin alone emits a half a ton of carbon for every one of its yearly 115 million transactions!
The shift to proof of stake is a step in the right direction to make crypto more sustainable. Nevertheless, web3 based projects like Nori and KlimaDAO are addressing climate change head on by creating marketplaces that will ultimately make carbon one of the most valuable assets on the planet. Let’s learn how they’re doing it!
Carbon Background
Before diving into the individual projects, I’ll talk about a few concepts that are key to understanding carbon markets.
First, carbon credits:
A carbon credit is a permit that allows the company that holds it to emit a certain amount of carbon dioxide or other greenhouse gasses. One credit permits the emission of a mass equal to one ton of carbon dioxide.
For certain industries, governments grant companies a certain amount of carbon credits per year in what’s called a cap and trade program. Let’s say that the U.S. government grants all oil drilling companies 10 credits per year, and we’re interested in analyzing DrillingCo’s yearly emissions:
Scenario 1: DrillingCo emits 10 tons of carbon dioxide. Since DrillingCo was granted 10 credits, nothing happens.
Scenario 2: DrillingCo emits 8 tons of carbon dioxide. Since DrillingCo has 2 unused credits, it can sell the excess credits on the open market to other mining companies that emitted over 10 tons.
Scenario 3: DrillingCo emits 11 tons of carbon dioxide. DrillingCo needs to buy one carbon credit from another company or risk government penalization.
As illustrated in the above scenarios, the cap and trade program creates a market where companies can buy and sell carbon credits. The idea is that the government will slowly reduce the amount of credits granted to companies per year, hoping to incentivize investments into clean energy solutions by constricting the supply of credits. One real world example is Tesla, which made $518M in 2021 Q1 just from selling carbon credits!
However, carbon credits are typically reserved for highly regulated industries like drilling. Many companies (and individuals) typically interface with a related concept called a carbon offset:
A carbon offset is generated by an activity that either prevents the release of, reduces, or removes GHG emissions from the atmosphere.
If you’ve seen companies display that they’re carbon neutral (i.e., net 0 carbon emission), they’re most likely voluntarily buying carbon offsets to balance emissions from their business activities. Companies can choose to buy offsets from a variety of projects ranging from carbon sequestration to direct air capture.
Selling carbon offsets is often the primary source of revenue for sustainability projects. Therefore, it’s crucial that open, accessible markets for carbon offsets exist. One such market is Nori, which is leveraging the power of web3.
Nori
Nori is a carbon offset marketplace. Specifically, Nori transacts in carbon removal offsets which refer to projects actively taking carbon out of the atmosphere and storing it in a secure place.
Nori is a 3-way marketplace between farmers (sellers), verifiers, and buyers.
Farmers can often store carbon on their land with minor modifications to their typical farming practices. Nori enables farmers to earn an additional source of income by creating a marketplace for their stored carbon.
Third party verifiers, well, verify the amount of carbon stored in soil. Unfortunately, the carbon offset market is notoriously fraudulent, so independent verification is an important step.
Buyers (including individuals like you or me, or companies) can buy carbon offsets. The current price is $15/ton (all paid to farmers) plus a 15% marketplace fee.
Nori has spent 4 years building the carbon side of their business and is now ready to dive full on into web3 for the following reasons:
1. Create a benchmark. The Nori token ($NORI) can “become a market-driven and universal price for one tonne of carbon dioxide removed from the atmosphere.” Currently, carbon offset markets are fragmented. Nori envisions that the $NORI token will become similar to the Brent Crude reference price for oil by becoming a global benchmark for the price of carbon offsets.
2. Prevent double counting. If every verified ton (called a Nori Removal Ton, or NRT) is minted on the blockchain, farmers can no longer sell a NRT twice and buyers can no longer claim they own more NRTs than they actually do. From the Nori blog:
Yes, it would be possible to do this in a centralized database. But that’s exactly what the current carbon registries use, and yet the double-counting continues. By building this application on a blockchain, everyone involved can completely trust that there is only one owner of the NRT.
3. Provide additional sources of revenue. Web3 native concepts like NFTs enable farmers to earn additional income by monetizing “superfans.” For example, check out the musician Imogen Heap’s tweet about her purchase of a Nori NFT:
To learn more about Nori’s journey into web3, read more here.
One of the reasons that buying carbon offsets isn't as popular as it could (should?) be is the lack of economic incentive to do so. Companies that buy offsets are often motivated by moral obligations to help the environment, which is a difficult strategy for carbon offsets to go mainstream.
Attaching a carbon offset to a token like $NORI is a great first step in addressing this problem, as people can buy in with the potential to turn a profit. Introducing a token also democratizes access to participating in a market that many experts say will grow significantly in the coming years.
However, the world of DeFi is rapidly expanding beyond tokenizing real world assets like carbon. KlimaDAO takes the idea of $NORI one step further – learn how below.
KlimaDAO
KlimaDAO created the $KLIMA token, a carbon-offset-backed cryptocurrency. Therefore, each KLIMA token in circulation is backed by one carbon offset, meaning that the intrinsic value of one $KLIMA equals the value of one offset.
The goal of $KLIMA is to introduce scarcity of carbon offsets by buying up as many as possible and placing them into the KlimaDAO treasury. As a result, the price of carbon offsets will increase, bringing more profit to sustainability projects around the globe that sell these offsets. The second order effect of a rising price of carbon is ideally that companies balk at having to pay large amounts for carbon offsets and instead invest in making their business more eco friendly!
The clip below is an excerpt taken from the KlimaDAO founders’ interview with Bankless:
Everything I’ve talked about so far on KlimaDAO sounds fairly similar to $NORI, and you may be asking how does $KLIMA differentiate itself? In short, KlimaDAO bases its tokenomics on the popular OlympusDAO (Coinsights article coming soon)! I won’t get too deep into the technicalities of the protocol, but people have 3 choices when interacting with KlimaDAO:
Selling: realize profit/loss on owned $KLIMA
Bonding: trade assets (a carbon offset) to the protocol for $KLIMA
Staking: passively earn $KLIMA by offering owned $KLIMA as collateral
To learn more, listen to the rest of the interview I linked above or check out this short video:
Don’t worry if the tokenomics don’t make sense yet, I’ll be covering it in a future article! The main takeaway is that KlimaDAO has created an eco-friendly economic structure that enables people to make money AND support sustainability projects by raising the price of carbon offsets.
From the KlimaDAO website:
To properly value carbon, we need to fully integrate the carbon market with the market, and we need to reward participation for those who participate in the carbon market with value or influence, or both.
Web3 is the perfect place to integrate these markets, it is a place where there is sufficient liquidity to have impact at scale, where smart contracts can securely and transparently govern transactions, and where contributions can be fairly incentivized.
To start participating in the KlimaDAO ecosystem, check out this guide.
Thanks for reading! What are some other ways that can web3 can positively impact our environment? Start a conversation in the Discord or directly on Twitter!
Hi, Paul Gambill from Nori here just to say that we've been crypto-oriented since day 1, not pivoting recently. We basically spent 4 years building the carbon side of our business, and are now finally at the point where we're planning to launch the $NORI token soon to become the method of price discovery for CO2. You can read about this in our white paper, published in early 2018: https://nori.com/documents