Recently, we have seen a positive shift in the narrative around the interaction of blockchain technologies and the environment. Much of this is driven by Ethereum’s imminent switch to a proof-of-stake mechanism, which will cut network carbon emissions by over 99%, but global organizations such as the World Economic Forum are also recognizing the broader positive impact that web3 can have (see here).
Hearteningly, this shift is being directly acknowledged in the corridors of power too, with the US Government releasing a broadly positive Executive Order on digital assets that places emphasis on the innovative role the space can play in the fight against climate breakdown. Following up on this Order, KlimaDAO recently took the opportunity to respond to a Request for Information on the ‘Energy and Climate Implications of Digital Assets’ released by the US Office of Science and Technology Policy.
We share the text of our response below.
KlimaDAO's Response to the White House Office for Science and Technology Policy's Request for Information: Energy and Climate Implications of Digital Assets
Introduction
KlimaDAO is pleased to submit this comment in response to the Office of Science and Technology Policy (OSTP)’s March 25, 2022 Request for Information (RoI) regarding the ‘Energy and Climate Implications of Digital Assets’.
President Biden’s issuance in March 2022 of an Executive Order entitled ‘Ensuring Responsible Development of Digital Assets’ was a historic moment for blockchain technology, providing recognition from the highest level of the federal government of the potential of cryptocurrency to lead to transformative change across the global financial system. Notably, the Executive Order specifically recognized that “the United States has an interest in ensuring that digital asset technologies and the digital payments ecosystem are developed, designed, and implemented in a responsible manner that […] reduces negative climate impacts and environmental pollution”.
Further, it directed OSTP to prepare a report that incorporates a discussion of “potential uses of blockchain that could support monitoring or mitigating technologies to climate impacts, such as exchanging of liabilities for greenhouse gas emissions, water, and other natural or environmental assets”.
KlimaDAO is a decentralized autonomous organization (DAO) designed to bring the innovations, efficiency, transparency, and global reach of cryptocurrency exchanges to the marketplace for carbon credits, which place a price on carbon emissions and levy costs on net emitters of greenhouse gasses (GHGs) while aiming to reduce and/or remove carbon from the atmosphere.
While much of the public dialogue on cryptocurrency and the environment has focused on the adverse climate impacts of proof-of-work mining, KlimaDAO has pioneered and successfully demonstrated a use case for blockchain technology to serve as a key tool in proactively fighting climate change on a global scale. We strongly urge OSTP and other policymakers and regulatory bodies, when designing new rules for digital assets, to recognize the positive impact that entities such as KlimaDAO have shown in bringing new participants and efficiencies into the fight to mitigate and reduce carbon emissions, and ensure that any new regulatory regime supports, rather than stymies, the ongoing efforts to use innovative blockchain technology and decentralized platforms to combat global warming.
Background
Climate change is the most pressing challenge of our time, described by the United Nations as a “global emergency that goes beyond international borders” with less than ten years left to act to prevent irreversible damage. Current government policy is failing to slow emissions and rising temperatures at a fast enough pace and, as a result, higher sea levels, extreme weather events, wildfires, and other destructive impacts of climate change are disrupting communities and destroying our natural habitats.
Immediate action to reduce carbon emissions on a macro scale is required. Billions of dollars are invested in oil and gas each year, despite the availability of many viable carbon mitigation technologies and solutions to reduce emissions and remove GHGs from the atmosphere. Establishing a global carbon market and carbon economy that internalizes the real market cost of carbon and facilitates efficient, accessible market-based instruments and exchange for carbon credits is critical to incentivize on a global scale the decarbonization that will be required to save our planet.
Voluntary Carbon Markets (VCMs) are designed to “allow carbon emitters to offset their unavoidable emissions by purchasing carbon credits”, the proceeds of which fund “projects targeted at removing or reducing [GHGs] from the atmosphere”. VCMs seek to replicate on a broader scale the mandatory carbon markets created by political entities such as California, which launched a cap and trade program in 2013, and the United Kingdom’s Emissions Trading Scheme (ETS), providing access to carbon markets for a wider range of industries and organizations across the globe seeking to reduce their carbon footprint. According to S&P Global, “oil and gas [companies], hedge funds and banks” were the most active new participants in VCMs in 2021, purchasing carbon offsets as part of sector-wide pledges or individual initiatives designed to help combat climate change. McKinsey estimates that the global VCM market could be worth $50 billion by 2030.
Despite the interest and growth in VCMs in recent years, significant shortcomings and challenges exist in the current structure of the market. According to a recent study, the current VCM is “fragmented and complex” and “[l]imited pricing data” make it “challenging for buyers to know whether they are paying a fair price, and for suppliers to manage the risk they take on by financing and working on carbon-reduction projects without knowing how much buyers will ultimately pay for carbon credits.” This opaque and inefficient structure threatens the ability of the VCM to scale, and limits its potential to function as a proven global solution to addressing the climate crisis.
KlimaDAO was launched in 2021 to bring the innovations of crypto markets to the VCM structure, “where smart contracts can securely and transparently govern transactions”. In a short time, KlimaDAO has delivered immediate and measurable climate-positive impact, including (as at May 2022) 17,331,833 tons of carbon absorbed as a result of transactions facilitated by KlimaDAO’s platform.
Responses to specific questions within the RFI
Below, Klima DAO provides responses to questions 1, 5, 6, 8 included in OSTP’s RFI.
Question 1: Information on the climate impacts of the protocols used by digital assets
KlimaDAO is a Decentralized Finance (DeFi) protocol built on the Polygon blockchain that aims to enable climate action through participation within the VCM. Polygon is a Layer 2 scaling solution for Ethereum. Polygon therefore operates a proof-of-stake consensus mechanism to validate transactions on its network using a network of 100 validator nodes (i.e. network nodes run on conventional computer hardware or on cloud servers) spread across North America (30), Europe (35), Asia (15), Latin America (10), and Africa (10). An optimistic estimate that assumes that the computers run by the validator nodes are always on at 75% computing capacity and only use the available computing resource for Polygon network activities would see the electricity consumption of the network at around 690MWh over the course of a year. Assuming an average emissions factor from the countries where Polygon validation activities take place of 359gCO2e/kWh leads to the total emissions of Polygon’s 100 nodes having a carbon impact of 247tCO2e/year. With an annual transaction count on the Polygon network of 567,390,500, the carbon impact of Polygon is estimated to be 0.43gCO2e per transaction.
After the transactions are processed on the Polygon blockchain, they are subsequently written on the Ethereum blockchain. This process is called ‘checkpointing’ and it enables Polygon to leverage the benefits of the Ethereum network’s security and decentralization. Because the transactions are written onto Ethereum, Polygon itself directly exerts a load onto Ethereum’s proof-of-work consensus mechanism. ‘Gas’ is a unit used in Ethereum to indicate the cost necessary to perform a transaction on the network. Miners set the price of gas based on supply and demand of the computational power of the network needed to process transactions. The total gas units used by Polygon checkpointing on Ethereum from February 2021 to February 2022 was 141,922,687. Assuming an emissions factor of 0.343gCO2e/gas, the total emissions from Polygon bridging amount to 11,116.9 tonnes CO2e for this time period.
Given that the primary hardware requirements of the Polygon blockchain are based on the computers that are used for validating activities, the embodied carbon emissions from Polygon are estimated to be around 11 tonnes per year. This assumes that all hardware used for Polygon validators is a newly purchased Hewlett Packard Elite Desktop computer, that the hardware has a lifespan of five years, and that the hardware is used exclusively for Polygon network activities.
Hence, the total emissions from the Polygon network are assumed to be around 11,375tCO2e/year per year (using data from February 2021 to February 2022).
Polygon itself is an Ethereum Virtual Machine (EVM) compatible blockchain, meaning that tokens can flow from Polygon to other EVM compatible blockchains (including Ethereum). The process of moving tokens from one network to another is called ‘bridging’. The emissions from bridging are not considered here given that the principles of crypto carbon accounting are not fully established to define the ‘scope’ of bridging emissions (i.e. are they the responsibility of the user who can accrue economic benefits from bridging activities, or are they the responsibility of the networks from where the tokens come or go?) However, the gas used for bridging transactions between Ethereum and Polygon is estimated to amount to 653,000,000. This equates to roughly 72,340tCO2e (assuming the same emissions factor stated above).
By using the per transaction emissions factor stated above, we can derive that KlimaDAO’s carbon impact (from roughly 656,658 transactions as at May 2022) is 282kgCO2e over the course of the project’s six-month lifespan to date.
Prior to launching on Polygon, KlimaDAO also conducted some activity directly on the Ethereum network. This activity was responsible for roughly 105tCO2e (derived from 610,000,000 units of gas being consumed). This number includes bridging activities associated with KlimaDAO itself, moving tokens from Ethereum to Polygon.
KlimaDAO and Polygon have both offset their full carbon accounts. A more detailed description of this analysis can be viewed on KlimaDAO’s website.
After Ethereum’s planned upgrade – known as ‘the merge’ and expected to be completed this year – emissions associated with Polygon’s checkpointing (and bridging) will reduce by an estimated 99.5%. Polygon’s operational carbon emissions will likely be in the order of tonnes per year after the merge. Therefore, compared with resource-intensive blockchains such as those based on proof of work and proof of (time and) space, proof-of-stake solutions offer an efficient scaling solution for the blockchain, with the (Scope 2) carbon emissions being proportional to the number of validator nodes (typically energy-efficient consumer-grade computers rather than the energy-intensive specialized hardware utilized for proof of work) required to secure the network.
Question 5: Past or ongoing mitigation attempts
Critics of digital assets may hold the misconception that products and services built on blockchain technology must be a net negative for the environment due to the disproportionate attention given to the energy consumption of proof-of-work mining activities. This focus on mining has outshadowed the extraordinary innovations and projects across the crypto ecosystem to both mitigate the negative climate impacts of cryptocurrency mining as well as proactively pioneer solutions that help combat climate change.
Beyond the sector-wide transition from energy-intensive proof-of-work protocols to proof-of-stake designs, there are ongoing initiatives attracting talent, investment, and global interest to leverage the innovations and benefits of blockchain technology and DeFi market efficiency to fight global warming. The VCM can play a key role in offsetting ongoing and historical emissions of GHGs by directing capital to high-impact carbon projects across the globe, and blockchain and DeFi protocols will help the VCM reach the global scale required to have the size of impact needed to confront the climate crisis.
While KlimaDAO is the center of the rapidly growing ‘Regenerative Finance’ (ReFi) sector, offering a marketplace to align incentives between those who want to have a positive impact, other protocols are actively working to offset any energy consumed by blockchain technology. For example, Offsetra works with numerous projects, including many within the blockchain ecosystem, to help reduce environmental impact. Art Blocks, an NFT platform, has offset 20,230 tons of CO2 with Offsetra. Cryptovoxels, a “virtual world powered by the Ethereum blockchain”, works with Offsetra to calculate and offset their share of Ethereum network emissions. Elrond, a high-speed proof-of-stake blockchain network, has offset 7,407,000 kilograms of CO2 – some 25% more CO2 than its network accounts for – and the Gnosis Chain has committed to offsetting ten times their network emissions.
KlimaDAO builds on these efforts to mitigate emissions by providing a global solution that is scalable and inclusive, enabling the market to scale more quickly while lowering transaction costs and increasing transparency for offset consumers. Since the launch of its Klima Infinity program in April 2022, KlimaDAO has enabled the offsetting of over 250,000 tonnes of carbon. This is a volume of carbon credits removed from the market that eclipses the efforts of start-up carbon credit retailers who have been operational for a number of years.
KlimaDAO’s impact is achievable because of the benefits it offers to users, which fall under two key categories:
Transparency: Any user can access all pool data, including carbon credit price, transaction history, volume, and liquidity. KlimaDAO does not take opaque mark-ups on carbon credit trades, which can create doubt within the market for purchasers.
Openness: Any individual or organization can access KlimaDAO’s infrastructure on the platform’s website and immediately execute a carbon offset transaction without the need to rely on a third-party broker to source or retire carbon credits. This unlocks significant efficiency in what is currently a broker-dominated market that relies on over-the-counter deals.
The challenges of the VCMs are not unique. They are symptomatic of markets that trade in environmental commodities that represent public goods. Historically, these markets have not arisen naturally and do not function efficiently without assigned property rights, rules governing transactions, and institutional oversight. By bringing liquidity, transparency, and openness to the market, KlimaDAO has unlocked a new wave of adoption and demand for carbon credits, with the ultimate beneficiary of this activity being the project developers who develop high-impact sustainability projects.
Question 6. Potential energy or climate benefits
President Biden’s Executive Order rightly recognizes the potential for blockchain technologies to “support […] mitigating technologies to climate impacts, such as exchanging of liabilities for greenhouse gas emissions, water, and other natural or environmental assets”. The technological advances of the past decades have enabled new approaches to reducing carbon emissions and helping reverse the damage caused by global warming. These include projects “aimed to destroy or manage the direct emissions resulting from industrial processes such as fugitive emissions management, ozone-capture or destruction of ozone-depleting substances, or wastewater treatment” as well as “[n]ature-based projects includ[ing] REDD+ (avoided deforestation), soil sequestration or afforestation”. Other types include “tech carbon capture such as direct air capture while new categories are being added constantly”.
The VCM entered the mainstream as a potential vehicle to bring together entities seeking to allocate capital to lower their net carbon impact, with the aforementioned projects seeking funding for removing carbon from the atmosphere or reducing GHG emissions. The ideal vision of carbon markets sought to place a market price on carbon emissions, imposing a real commercial cost on entities that continually emit carbon dioxide because the internal cost of modernizing to an emissions-free operating model is higher than the cost of social pressures or government regulation requiring lower emissions. Carbon markets in a perfect world would, over a period of time, make GHG emissions prohibitively expensive for a commercial enterprise while directing massive investments in new green technologies and infrastructure (e.g. renewable energy installations) and emissions-mitigation activities (e.g. forest conservation and restoration).
The current state of carbon markets falls far short of this ideal. Only a handful of political entities have instituted mandatory carbon markets and even those only cover a few of the highest GHG emitting sectors, ignoring dozens of other industries that produce in aggregate enormous amounts of GHG emissions each year. However, due to pressure from regulators, customers, and other stakeholders, entities with large carbon footprints have looked for voluntary ways to lower their net emissions, through implementing new green technologies.
VCMs as designed represent a potentially transformative market-based solution to global warming. Yet in their current iteration and structure they lack the characteristics of true global markets: transparent, efficient, liquid, and accessible. This is the problem that KlimaDAO is designed to address, recognizing the power of blockchain-based protocols on DeFi marketplace exchanges that have liquidity, transparent market data, and smart-contract governance, as well as convenient access and innovative incentive structures to attract participants from all corners of the globe.
KlimaDAO is an online, accessible marketplace where users can participate in the carbon market through the KLIMA token, a crypto asset that is backed by at least 1 ton of tokenized, verified carbon offsets held in the KlimaDAO treasury. KlimaDAO is built on transparent and open-source smart contract governance where token holders can vote on KlimaDAO policy. KlimaDAO enables users – anyone from individuals interested in helping combat global warming to large institutions or political entities seeking to compensate for their emissions – to participate in the carbon marketplace and thereby fund climate action. KlimaDAO has delivered immediate and measurable climate-positive impact, including 17,331,833 tons of carbon absorbed by the protocol.
Question 8: Implications for US policy
KlimaDAO stands to bridge the gap between DeFi and the real world by leveraging the carbon markets. Through its bridging partner C3, KlimaDAO will soon enable DeFi to fund high-impact carbon projects from the American Carbon Registry. This will spur climate-positive economic growth. The impact of KlimaDAO has already increased access to the carbon markets, contributing to carbon projects worldwide (thus boosting the social, environmental and economic viability of these projects), impacts that will soon be delivered to the US economy and its climate-mitigation efforts.
KlimaDAO now provides a seamless, transparently priced, and efficient way for all US companies and individuals to source and retire carbon credits via its native carbon offset sourcing and retirement tool. This reduces barriers for organizations looking to deliver against net zero carbon targets as part of their wider ESG and decarbonization goals. For the US to achieve its net zero target, it is imperative that corporations are able to affordably and transparently offset residual carbon emissions. KlimaDAO delivers this.
Conclusion
We urge OSTP and other government policymakers to be cognizant of the important and impactful work being done by KlimaDAO and other entities across the blockchain ecosystem to proactively combat climate change. Regulatory policy should support, not hinder, participation by entities and individuals in KlimaDAO’s protocol as they seek efficient and transparent methods to reduce carbon impact. As OSTP considers approaches to help reduce the overall environmental impact of blockchain technology, solutions such as those pioneered by KlimaDAO provide a proven platform where entities seeking to reduce their carbon footprint can collaborate and ensure the crypto ecosystem is playing an active and positive role in the global fight against climate change.
KlimaDAO appreciates the opportunity to provide our perspective on the climate implications of digital assets and looks forward to our continued engagement and dialogue.
Sources
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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.