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  • Writer's pictureKlimaDAO

KlimaDAO’s response to IOSCO’s Discussion Report

Updated: Nov 14, 2023


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In November 2022, the International Organization of Securities Commissions (IOSCO) published a Discussion Report aimed at advancing discussions around sound and efficient voluntary carbon markets. One objective of the paper was to ask market participants about potential approaches to foster a more robust Voluntary Carbon Market and generate discussions on appropriate market infrastructure to scale the VCM successfully. KlimaDAO has submitted its position on several key questions of IOSCO’s paper. The questions answered by KlimaDAO cover topics such as:

  • the current and potential future legal nature of carbon credits;

  • the role of blockchain and DLT in general in the VCM;

  • the benefits of tokenization over traditional market infrastructures;

  • potential blueprints and solutions to advance the market.

The blockchain-based Digital Carbon Market brings unique benefits such as accessibility, transparency, traceability, and liquidity. The intrinsic benefits of the technology address many of the traditional VCM’s shortcomings, such as informational market failures, restricted access, difficult price discovery, and a lack of interoperability and financial integrity. Ultimately, enabling businesses and individuals to be able to consume the environmental benefit of carbon credits in an efficient, transparent, and open manner is key to enable the market to scale-up sufficiently. KlimaDAO advocates for an honest, open, and critical discussion around the role of public blockchains within the VCM. Below you will find the unabbreviated answers KlimaDAO provided to IOSCO.

Question 4: How do you think IOSCO should achieve these objectives? The International Organization of Securities Commissions (IOSCO) has contributed to sustainability disclosure standards for the benefit of issuers and investors and to promote well-functioning carbon markets. To achieve its goals, IOSCO needs to develop a program to support the identification of standards for its members to adopt, but even before that, it needs to help them understand what sustainability disclosures they are expected to make. Materially and especially correctly, IOSCO has defined its expectations that both disclosures and assurance standards should be ready for use by companies for their end-of-2024 financial statements because corporate disclosures are the basis of valuations in financial markets; sustainability disclosures will play the same role. IOSCO will need to align standards and required disclosures worldwide to facilitate trade and reinforce the importance of well-functioning carbon markets. A first step is the useful comparison of CCM and VCM reports, highlighting the vulnerabilities identified in these markets, especially the lack of transparency, standardization and legal certainty as referenced in various reports, including those of the Taskforce on Scaling Voluntary Carbon Markets. A key next step would be to get a handle on these problems starting particularly with the last three (transparency, standardization and legal certainty) – doing so could establish a more level playing field across market participants, and ultimately ensure that the market delivers benefits for carbon project developers and consumers Question 6: What, in your view, is the legal nature of an offset credit? Should IOSCO recommend a specific approach to relevant authorities? A recent and very timely study by the London School of Economic, published in July 2022 (https://www.lse.ac.uk/granthaminstitute/explainers/what-are-carbon-offsets/, but cf. also https://www.weforum.org/agenda/2022/09/carbon-offsets-radio-davos/), specifies what the legal contours of "offset credits" are. Quoting the document: "The act of compensating for emissions remains purely voluntary for most companies – there are no laws governing whether they offset or not – hence the term ‘voluntary carbon market’. However, there are many initiatives drawing up guidelines and rules, as the market is set to grow rapidly as the need to transition to net-zero emissions becomes more widely accepted. The Oxford Principles for Offsetting were released in 2020. The Science-Based Targets Initiative (SBTi), which encourages companies to set near-term and long-term emissions reduction goals that align with the Paris Agreement, leaves space for offsetting in its advice on ‘beyond value chain mitigation’. Both groups highlight that actors seeking to compensate for their emissions should first make every effort to reduce their own emissions – throughout their supply chain, in the case of companies – before turning to offsets. They also recommend a gradual shift from avoidance/reduction credits towards carbon removal credits as we progress towards 2050.

High-level coalitions have been formed to define consensus-based standards that ensure the ‘integrity’ of the carbon credit market, in terms of ensuring positive impacts on the environment and on people. The Integrity Council for the Voluntary Carbon Market (ICVCM) is designing a benchmark for the integrity of credits themselves, via guidelines for projects and programs – in other words, to address the supply side of the market. On the demand side, the Voluntary Carbon Market Integrity Initiative (VCMI) is developing guidance for non-state actors seeking to make claims based on their use of offsets (for example, “we are a carbon-neutral business”). In summer 2022, both groups are soliciting feedback on their draft outputs via a public consultation (see ICVCM; VCMI). Despite the absence of legal requirements, the resulting standards for credits and claims could become widely adopted, given increasing public, consumer and investor interest in institutions’ efforts to compensate for their emissions." In a sense concurring with this paper, we believe that, following the SBTi or Oxford guidelines, offsets are in addition to, not in place of, their action. VCMI aims to consolidate this practice by making science-based goals a prerequisite for compensation-based claims. There are alternatives to compensation (wrapped up in the looseness of "mitigation beyond the value chain," according to SBTi terminology). Institutions could articulate their "contribution" to global decarbonization or their "impact" on global emissions, rather than claiming to have "offset" their emissions or to be "carbon neutral." Question 7: What is the role of blockchain and distributed ledger technology in voluntary carbon markets? It is important to distinguish between the role of public and private blockchains. Private blockchains (i.e. centralized ledgers) can help achieve operational efficiencies in some areas of the Voluntary Carbon Market, particularly in the case of carbon registries. It can enable them to manage the issuance, transfer and retirement of tokens efficiently and securely by logging all transactions onto a secure blockchain. This can also enhance the scalability of the market as blockchain-based registry systems can flexibly integrate with other VCM solutions (e.g. marketplaces, order books etc, via APIs). The increased interoperability between registries and market participants can reduce administrative burdens and integration costs as the market grows. The EcoRegistry is a good example of a registry leveraging private blockchain technology. The efficiencies of private blockchains are replicable by well-designed database management systems, or similar. Public blockchains on the other hand, present a different set of benefits, which require exploration for the VCM. Trusted: they provide a shared, immutable ledger for recording transactions and tracking assets. The ‘neutrality’ of the infrastructure stems from the fact that there is not one centralized party controlling the network’s operation. Rather, in the case of Ethereum for example, you have a decentralized group of tens of thousands of computers running the network.

Security and traceability: Consensus on data accuracy is required from all network members, and all validated transactions are immutable because they are recorded permanently. No one, not even a system administrator, can delete a transaction. This means that all transactions can be traced and understood by market participants.


Transparent: public blockchains are readable, writable and auditable; this means that any activity that takes place on the networks can be read and audited by any third party. Information relating to public blockchains can be fully understood by market stakeholders.

Automated: applications can be governed by smart contracts - these are essentially conditions for transferring assets or sending information. Smart contracts are utilized throughout the public blockchain space, including for example KlimaDAO’s “retirement aggregator”, which is a tool for retiring digital carbon assets on the blockchain; this tool can be leveraged by any third-party wishing offset carbon emissions using any of the tokenized carbon credits held on the public Polygon blockchain.

Efficient: An asset can be tangible or intangible. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. Blockchain technology is currently being used across a range of industries, including by payment network providers and commodity traders. Therefore, in contrast, private blockchains are less decentralized, often intransparent, and generally gatekept by centralized actors which limits the innovation potential from the participation of a diverse stakeholder group. By leveraging public blockchains specifically, some intrinsic benefits of ‘digital’ carbon (i.e. carbon hosted on the blockchain) are as follows: Programmatic offsetting: provides unique possibilities for automating carbon neutral claims for business processes, wherein carbon accounting triggers can automatically source and retire offsets matching specific characteristics, such as vintage year or technology type.

Decentralization: Another key benefit of Digital Carbon is the decentralized governance mechanisms that can lead to additional funding and liquidity provisioning. Here we illustrate an example of financing from KlimaDAO bringing online high quality energy efficiency and social impact (EEIMP) credits for use as digital carbon.

Liquidity: the ability to provide deep liquidity around a host of types of digital carbon credits is a unique benefit for public blockchains that leverage technologies initially developed in the ‘Decentralized Finance’ space; the KlimaDAO protocol leverages a number of these technologies which are explored here.

Accessible, transparent and traceable: Fundamentally Digital Carbon is directly accessible and allows for near instantaneous transactions allowing for speedy redemption of a project or direct retirement of credits with readily accessible pricing information. In addition to being open and quick, KlimaDAO’s carbon pools can be explored on a number of demographics from project type, to geography. Retirements can be made public down to the level of the project underpinning the action. The Klima Data Carbon Dashboard provides near real time information on the status of various digital carbon pools and their prices – offering a stepchange from paywalled, retrospective market data typically available within the VCM. Question 8: What are the benefits and vulnerabilities of using tokenization over relying on more traditional market infrastructure? Do these benefits outweigh how energy-intensive the use of blockchain is? Vulnerabilities of traditional market infrastructure that digital carbon helps overcome:

Centralization: truly decentralized activities on the blockchain can only be implemented with the consensus of network participants. Conversely, in the legacy system, actors can take unilateral decisions with no prior engagement with market stakeholders. A more decentralized approach to governance within the VCM can help build trust, and fairer outcomes.

Opacity: all data within the legacy system is retrospective and paywalled; the manifestation of this condition is a classic example of informational market failure, with distorted market conditions that arguably favour certain participants. Public blockchains give full transparency over market conditions which can “level the playing field” and support informed decision making across the value chain.

Incompatibility: an ecosystem of transparent and innovation solutions is developing within the public blockchain space; further acceptance by off-chain counterparts can lead to the development of an efficient and trusted system that can become increasingly interconnected and modularized – these conditions are generally not present today, with significant transaction costs required to move carbon credits across and within the value chain. Regarding energy intensity (and the related carbon intensity) of blockchains, it is important to remember that not all blockchains use the same consensus mechanisms and therefore cannot or should not be grouped together as one homogeneous group of technologies. Public blockchain networks represent a diverse set of technical, social and economic systems. Proof of Work (e.g. Bitcoin), and Proof of Space (e.g. Chia) blockchains are highly energy and resource intensive technologies. The carbon emissions of these technologies have been analyzed, with some consensus achieved around their carbon footprints and resource intensity. The emissions are significant (although hard to define), and the fundamental lack of scalability of these technologies inhibit their ability to provide meaningful solutions for the VCM (or other applications) at scale. Proof of Stake blockchains on the other hand have carbon emissions comparable to that of running a set of laptops proportional to the number of validators of the network, which can range from a few (e.g. Gnosis Chain), to a few hundred (e.g. Polygon), to a few thousand (e.g. Polkadot). These blockchains can facilitate transactional throughput in the tens or hundreds of thousands per second. In other words, on a per transaction basis they are highly energy efficient. Their overall energy and carbon intensity is low; with the annual carbon emissions of a Proof of Stake network unlikely to exceed amounts in the order of hundreds of tonnes of CO2 per year, for the largest networks. Note that the Polygon blockchain has offset its legacy carbon emissions associated with its dependency on Ethereum’s pre-merge Proof of Work consensus mechanism. Polygon today has an estimated carbon footprint in the order of 1,000s of kWhs per year (i.e. less than a standard home in an industrialized nation). The KlimaDAO protocol itself is proportionally responsible for a small amount of the Polygon network’s total energy consumption and represents one such project which leverages public blockchains for the VCM – its own carbon footprint from its proportional utilization of the Polygon network is likely to be in the order of 10s of kgs of CO2 per year. Note that in 2022, the Ethereum network transitioned to Proof of Stake, from Proof of Work. Although Ethereum has a large historical footprint from when it was previously utilizing a Proof of Work consensus mechanism, its operational footprint today is very low (estimated to be 0.0026TWh per year). In reality, carbon market solutions that are developed on Proof of Stake blockchains have a small impact on the energy system at large (and associated carbon budgets); individuals and companies involved within the VCM who have offices and that travel to international events using aircraft will far outweigh the emissions of any such Proof of Stake blockchain solutions. It is therefore assumed that the benefits (e.g. transparency, efficiency, interoperability, and general scope for innovation) do indeed outweigh the costs of using PoS networks. Question 10: Are these the key considerations appropriate for the sound functioning of voluntary carbon markets? Yes, KlimaDAO primarily functions within the demand-side of the market; it holds carbon credits in its treasury, it aims to create a system that increases transparency, interoperability and liquidity within the markets, and it offers customers the ability to offset their carbon emissions efficiently and transparently without the need for intermediaries. Hence, we have the following comments regarding the key considerations based on our market experience. Open Access Clarity around whether trading within a market should be permissible for different participants would be welcomed. Limited and fragmented liquidity is cited in literature as a major hinderance for the efficient functioning of the VCM – hence increasing liquidity in markets using decentralized tools and participation can support the development of the market as a whole. Given the flexibility of decentralized technologies, there are a range of restrictions and mechanisms that can be placed on market infrastructure to exclude certain participation with the trading of carbon credits (e.g. must have passed KYC/KYB checks; must be accredited investor etc). The technical implementation of any such mechanisms do not represent a barrier – insufficient legal clarity, and no clear policies around the requirements of carbon registries do. A key consideration here is that the purpose of a carbon credit is for its environmental benefit to be consumed via retirement. Enabling businesses and individuals to be able to consume the environmental benefit of carbon credits in an efficient, transparent and open manner is considered key to enable the market to scale-up sufficiently. Today, most consumers must use an intermediary to ‘offset’ their carbon emissions, which increases the supply chain lead time. Making the act of ‘offsetting’ emissions as open as possible should be considered as an important condition to drive demand to the market. In conclusion, an open market can increase the liquidity and overall efficiency of a market. Decentralized markets can be flexible and as ‘open’ as is required by legal constraints or carbon registry requirements. Indeed, the increased ‘openness’ that has been experienced in the past two years by those who use public blockchain-based systems have ostensibly brought increased awareness to many of the market failures within the VCM, and importantly they have demonstrated how open (or decentralized) solutions can offer a viable alternative to the status quo. Continuing to strive for openness within the markets could lead to beneficial environmental outcomes for the market, and improve the experience of consumers of carbon credits. Market Integrity As discussed in question 7, one of the key benefits of public blockchains is the transparency of market activity. Public blockchains are ‘append only’; which means that any and all market activity can be traced and understood by third parties. Public blockchains can bring unparalleled transparency to the VCM that has previously been hard to attain – this core benefit should be considered on merit by market stakeholders as a tool to enhance market integrity. With the emergence of blockchain tracking tools and software, such as those developed by Chainalysis and Nansen, and KYC/KYB requirements from ‘off ramp’ services, it is becoming increasingly challenging for wallets to remain pseudonymous. As the decentralized markets mature, the VCM should consider how they can be leveraged in this regard. Publicly Available Data to Promote Transparency The lack of transparency within the VCM, particularly around pricing and liquidity has severely inhibited its growth. Poor data transparency has compromised the benefits that can be realized by project developers and consumers of carbon credits. It is KlimaDAO’s belief that public data should be a ‘public good’, accessible to all market participants. To this end, KlimaDAO has developed its transparency dashboard that provides granular information about carbon credits within its ecosystem. Visit the page at carbon.klimadao.finance. Price Discovery KlimaDAO leverages Automated Market Makers, also known as “Liquidity Pools” to facilitate the process of price discovery. Liquidity Pools are often ‘decentralized’ in that any user can add liquidity or acquire assets from them. However, they can be ‘permissioned’ (i.e. only white listed addresses may interact with them). Liquidity pools enable the market activity between two tokens to occur. They often pair tokens with lower supply with other tokens such as a stablecoin, or a more established token such as USDC, ETH, etc. Because these tokens have significant supply they can be used to establish liquidity pairs across a variety of tokens. Liquidity Pools on decentralized marketplaces have transparent pricing and all market activity can be analyzed by market participants. Liquidity Pools are acknowledged as an important technology that can enable price discovery and immediate settlement of transactions. Financial Institutions such as EY are experimenting with Liquidity Pools and Decentralized Finance technologies due to the benefits it can bring. Technologies within the public blockchain space offer novel means to establish pricing within the market that can provide a signal across the value chain. Interoperability Interoperability is a key requirement for the efficient functioning of the VCM; a fully integrated market can significantly reduce fragmentation and transaction costs. The interoperable nature of blockchain technologies means that different ecosystems can connect efficiently with one another, and the risk of double spending can be eradicated (e.g. a carbon credit can only be bridged from one ecosystem to another if appropriate mechanisms are built in to “lock” or “burn” it from the issuing ecosystem). There are a number of pilot projects underway with cross-chain (including from private to public blockchains) functionality between market participants within the blockchain-enabled carbon markets. Anecdotally the lack of interoperability within the existing market infrastructure has been a hindrance to growth. For example carbon credit retailers are known to manually batch carbon credit retirements on an intermittent basis (e.g. monthly) onto the registries after payments are received. This process carries an administrative burden, and in theory could reduce market integrity; if the beneficiary of a given ‘offset’ has their transaction batched with a number of other organizations (or individuals) there is no way to tell if double counting has occurred (i.e. if any batching of multiple customer offsets happens, it will be difficult to validate that the amount of carbon on a given retirement certificate directly corresponds to the amount of funding received by a given retailer to compensate for emissions). It is unclear whether certain market stakeholders have access to APIs to certain VCM infrastructure that would put them in a stronger operational position than other market participants. Financial Integrity As soon as carbon credits are involved in public blockchains, they are fully traceable, from source to retirement. In addition, the pricing of these carbon credits are achieved in real-time and can be viewed retroactively. Public blockchain technologies can be used to support the financial integrity of the credits contained within their ecosystems. Governance KlimaDAO aims to develop public, transparent and neutral infrastructure that can be used by all market participants without prejudice, and in a manner that is flexible towards legal requirements and policies developed by market stakeholders. KlimaDAO is a “decentralized autonomous organization”. This means that the governance of the protocol itself is achieved via stakeholders voting with their tokens to ratify decisions; stakeholders can also propose improvements or changes to the project. The carbon markets should prioritize pro-climate impact; as such it is deemed appropriate that the market infrastructure that facilitates the flows of climate finance should be transparent, and designed in line with the needs of the market and society at large. Decentralized governance models offer a novel and innovative way to develop market infrastructure; guiding principles for the VCM as a whole could be integrated into KlimaDAO’s own governance framework. Review KlimaDAO’s governance framework here. View KlimaDAO’s public discussion forum here. View the history of KlimaDAO’s token votes here. Conflicts of Interest Establishing clear guidance around conflicts of interest for the market would be of the utmost benefit to the integrity of the market. In addition, establishing transparent guidelines around how new market participants may enter into the market would be beneficial. In March 2022, a number of registries prohibited the ‘tokenization’ of carbon credits until public consultations had concluded; naturally this has inhibited the growth of the on-chain ecosystem. Within the context of tokenization of carbon credits, some market participants have been asked to disengage from unilateral conversations around the merit and suitability of their solutions and communicate with decision makers only via public consultations; meanwhile other blockchain applications have been granted permission to integrate with registry systems. This fragmented and opaque approach distorts the progress of innovative solutions in favour of those who are deemed suitable to engage with the registries. A more transparent, fair and open mechanism for key market decisions to be made by those who are in a position of power can ensure a level playing field is achieved. The European Union’s Payment Services Directive 2, has been referenced as a blueprint for enabling private sector participation within the VCM, in a way that creates a level playing field and that ultimately prioritizes consumers and innovation – with the regulation designed to consider for state of technology that is available within the market. Considering how such mechanisms can be developed within the VCM may create for a fairer, more innovative and more transparent environment for all stakeholders. Enterprise Risk Management KlimaDAO is built on the Polygon blockchain, which is a layer 2 scaling solution for Ethereum. Given that KlimaDAO leverages the Ethereum ecosystem, it is considered highly resilient to attacks, incorruptible, and immutable. KlimaDAO’s smart contracts, and the smart contracts of other infrastructure providers that it uses, have been audited. The resilience of audited technologies, built on top of public blockchains could be one way to securely manage risks to systems within the VCM.

Question 11: What other key considerations may be necessary in order to scale up carbon markets? KlimaDAO advocates for an honest, open and critical discussion around the role of public blockchains within the VCM. With appropriate guidance and legal certainty, these technologies could be incredibly powerful in scaling the VCM; their intrinsic benefits are particularly well-positioned to develop a market that prioritizes the needs of consumers and project developers above all. To this end, KlimaDAO is devoting resources to increase general education around the role of public blockchains within the VCM through content, webinars, market engagement, and consultation responses.

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