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  • Writer's pictureKlimaDAO

Introducing KLIMA, an engine for the carbon markets


The KlimaDAO logo on a background of ocean waves shot from below

KLIMA is a unique DeFi product that connects with a real-world asset which is experiencing unprecedented demand pressure across both voluntary markets and compliance markets. Even in the face of the COVID-fueled market crash of 2020, carbon markets pretty much walked away unscathed, have since seen strong demand growth, and are now entering a period of value discovery.


As of May 2021 there were 64 carbon pricing instruments in operation globally, covering an estimated 20% of global greenhouse gas emissions and generating upwards of $53 billion in revenue. According to the World Bank’s annual State and Trends of Carbon Pricing report released in 2021, these advances represent a 17% increase in revenue compared to the previous year.


For analysts covering carbon markets over the past decade, this growth is seen as just the beginning of what is to come over the coming years. McKinsey estimates that demand for carbon credits could increase by a factor of 15 or more by 2030 and up to a factor of 100 by 2050 [1]. Carbon credits, as an instrument for putting a value on carbon, could be a $50 billion market by 2030.


Beyond being a largely uncorrelated asset within the traditional crypto market, carbon’s value is poised for substantial growth and this can be leveraged to maximise positive impact for the planet, and create value for those that participate within the system. Let’s explore why this upside potential is so significant.


Demand pressure is set for an unprecedented increase

A projection of emissions reductions till 2050 authored by McKinsey
Source: McKinsey

It’s no secret that society is at the cusp of the greatest economic transition since the industrial revolution. Our collective efforts to decarbonize the global economy are a necessary task if we are to continue the enterprise of human civilization—key questions relate to the specific ways this transition will affect certain industries and, ultimately, our lives.


Certainly, changes in how we manage waste materials and shuttle ourselves around the world are critical, but the critical lever of change is that which enables technical innovation and adoption. Today, we are seeing technology emerge that enables the transformation and decarbonisation across our heat, power and automotive sectors. But, for KlimaDAO, it is a third wave of solutions designed to help push innovation and guide users towards the carbon economy that are most important. In short, these are the solutions designed to force the market to reckon with the negative externalities of its industrial metabolism.


Carbon offsets—the commodity that KlimaDAO is based on—serve two functions in this regard: they help internalise carbon emissions while concurrently helping fund projects which remove carbon from the atmosphere. The goal of all aforementioned solutions, it should be noted, is to keep our climate within the stable band of temperatures necessary to make Earth hospitable to our modern society.


The commitments of the Paris Climate Accord, developed in line with the best available science, set our goal at ensuring there is no more than 2 degrees Celsius global warming above pre-industrial levels to avoid unmitigated climate catastrophe, with 1.5 degrees of warming preferred to avoid the worst of climate change.




A projection of several global warming scenarios till 2100 authored by Climate Action Tracker
Source: Climate Action Tracker

The volume of negative emissions needed to reduce emissions in line with the more ambitious 1.5-degree warming goal set by the Paris Climate Accord is estimated to be 1.5 to 2 gigatons of carbon dioxide (GtCO2) by 2030. That’s 1.5 to 2 billion tonnes of carbon dioxide. To enable this, McKinsey notes that depending on different price scenarios and their underlying drivers, the carbon offset market in 2030 could be between $5 billion and $30 billion at the low end and more than $50 billion at the high end. In 2019, the voluntary carbon market is valued at less than $300 million.


Even with the most conservative estimates, efforts to decarbonize the global economy are set to see a considerable rise in the demand for carbon offsets. Let’s take a closer look at three major commitments fueling the rapidly growing demand side of this market.


Commitments leading to increased demand

  • Net Zero Asset Managers Initiative 128 signatories representing $43 trillion in assets under management. The Net Zero Asset Managers initiative is an international group of asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner, in line with global efforts to limit warming to 1.5 degrees Celsius; and to supporting investing aligned with net zero emissions by 2050 or sooner.

  • Race to Zero Campaign It mobilizes a coalition of leading net zero initiatives, representing 733 cities, 31 regions, 3,067 businesses, 173 of the biggest investors, and 622 Higher Education Institutions. These ‘real economy’ actors join 120 countries in the largest ever alliance committed to achieving net zero carbon emissions by 2050 at the latest. Collectively these actors now cover nearly 25% global CO2 emissions and over 50% GDP.

  • The Climate Pledge 103 signatories comprised of some of the world’s largest corporations dedicated to reducing their emissions and supporting carbon removal and compensation technologies.

Importantly, while the principal aim of Net Zero is to lower produced emissions as close to zero as possible by 2050, participants are encouraged to compensate for emissions along the way and utilize carbon removal offsets to remove any additional carbon which cannot be abated otherwise.


Of course, it’s not just that demand is increasing in this market. There are considerable supply constraints emerging that will drive the price of carbon higher.


Supply constraints in the Voluntary Carbon Market

Undoubtedly, the increase in carbon price will make projects on the development of carbon mitigation and removal around the world more attractive. Demand in 2030 could potentially be matched by supply: 8 to 12 GtCO2 per year. These projects will likely include technologies which are used today, such as methane capture, forest protection, and nature-based carbon removals via biochar, for example. They may also include technical carbon removals utilizing carbon capture and storage, though these technologies are immature and will require much more capital to scale.


However, a variety of factors may make it challenging to mobilize the entire potential offsetting supply and hinder it being brought to market. The development of carbon projects would need to ramp up at an unprecedented rate, and the majority of nature-based solutions would likely occur in just a handful of countries (e.g. Indonesia, Brazil and Peru), where existing biomass is still somewhat plentiful.


Compounding this issue is a general lack of suitable land to plant more trees. Waring et al. estimate that “Large-scale afforestation and reforestation efforts could remove between 40 and 100 GtCO2 from the atmosphere once forests reach maturity.” This is an impressive quantity but unfortunately represents only a decade’s worth of anthropogenic emissions at current rates. [2]


Additionally, many projects could face difficulties in acquiring the financing necessary to start their development, given the often long lag times between initial investments and the issuance of offsets for the market. Most recently, McKinsey estimated the actual supply of carbon credits reaching market by 2030 to be just 1 to 5 GtCO2 per year — nearly 2 to 10 times less than what will be demanded.


KlimaDAO as a Negotiability Absorption Flywheel

KlimaDAO’s purpose is to accelerate the appreciation of carbon assets in order to force quicker adaption to the realities of climate change and drive additional finance toward low-carbon technologies. As further voluntary commitments and compliance regimes come online the world’s companies will be forced to compensate, i.e. offset, their carbon emissions. The costlier the negative externality of their damage becomes, the more economic the decision to reduce emissions and invest in green alternatives.


As described on our website, we are building a community that’s resolute on solving climate change by creating a black hole for carbon to accelerate pressure past the event horizon of traditional markets while creating synergies between DeFi and the carbon markets.



Resources:

2) RaboResearch: Can voluntary carbon markets change the game for climate change? https://economics.rabobank.com/publications/2021/march/can-voluntary-carbon-markets-change-the-game-for-climate-change/

4) Forests and Decarbonization — Roles of Natural and Planted Forests. Front. For. Glob. Change, 08 May 2020 | https://doi.org/10.3389/ffgc.2020.00058




Disclaimer:

The information provided in this blog post pertaining to KlimaDAO (“KlimaDAO”), its crypto-assets, business assets, strategy, and operations, is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any securities, options, futures, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws. Information contained in this blog post should not be relied upon as advice to buy or sell or hold such securities or as an offer to sell such securities. This blog post does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. KlimaDAO and its agents, advisors, directors, officers, employees and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and KlimaDAO expressly disclaims any and all liability that may be based on such information or errors or omissions thereof. KlimaDAO reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof. The information contained in this blog post supersedes any prior blog post or conversation concerning the same, similar or related information. Any information, representations or statements not contained herein shall not be relied upon for any purpose. Neither KlimaDAO nor any of its representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to you or any person resulting from the use of the information in this blog post by you or any of your representatives or for omissions from the information in this blog post. Additionally, KlimaDAO undertakes no obligation to comment on the expectations of, or statements made by, third parties in respect of the matters discussed in this blog post.

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