A Crypto Company Thinks It Can Help Fight Climate Change

It started at a hackathon a few years ago near Trafalgar Square, in London. Raphaël Haupt and James Farrell got to talking about how to use the growing popularity of blockchain and cryptocurrencies to help combat climate change. The result was Toucan, a project founded by the duo, which aims to revolutionize carbon offsetting.

To understand what that means you have to start with the voluntary carbon offsetting market. The logic behind it is quite simple. While companies and individuals need to reduce how many carbon emissions they produce, in the short-term at least there will always be a certain amount they won’t be able to get rid of straight away. Carbon credits exist as a way to balance out for that and still reach net zero – “retiring” a credit allows you to emit a tonne of carbon and still technically be carbon neutral. What that credit is created by can range from just cutting down your own emissions to planting a forest or funding the construction of a hydroelectric dam.

But currently the system is a mess, governed by a close-knit collection of private standards bodies, each running their own carbon credits registries. “This is an unregulated market and it’s a global market,” says John Hoopes, also known as John X in the crypto community, who is in charge of Toucan’s strategy. “Each of these standards bodies have these different registries, differing formats, different methodologies and definitions for a credit and also use different data models. They’re not harmonized, they’re not interoperable; it’s very hard to work with them.”

Simply put, Toucan is a market infrastructure. It bridges physical carbon credits, found on countless different physical registries, and converts and standardizes them into carbon tokens on one blockchain super-registry. Those tokens are aggregated into “pools”, from which users are then given a tradable crypto token. Toucan’s first carbon pool is called BCT, or Base Carbon Tonne, and it represents a basket of credits of various types – such as those coming from tree-planting or pollution-reduction — to offset one tonne of carbon emissions.

By having the system on one single registry, Toucan aims to stop projects or companies double-reporting credits. The company can also break down the different carbon credit projects by their age and quality, and can even tailor the type of tokens available to a buyer’s needs.

“Corporates are looking to align offsetting activities with their brand. Maybe they want to only do nature-based solutions, they only want to do technology-based ones, they don’t want to do stuff in Brazil or Indonesia or wherever they’re based,” says Hoopes. “Our system allows us to create those categories of carbon tokens.”

As just one example, the group is set to launch a new Nature Carbon Tonne pool – where all credits have to come from nature-based projects such as tree-planting rather than more dubious sources of emissions reductions. The hope is that the system will bring more and more people just interested in crypto into a carbon market traditionally dominated by corporate players trying to balance their emissions for PR reasons.

Since officially launching last year, Toucan has exploded in popularity. It has bridged some 18.3m tonnes of carbon credits onto the blockchain, and reports previously reaching a market cap, calculated by timesing a cryptocurrency or tokens’ supply by its price, of $100m (though it currently looks to be worth closer to $30m after a crash in the crypto markets). By comparison, the entire traditional voluntary carbon market is tracking $1b for 2021.

To many, the very premise of a blockchain climate solution would sound nonsensical, especially as cryptocurrency’s impact on climate has begun to dominate headlines. According to the Bitcoin Energy Consumption Index, created by Vrije Universiteit Amsterdam PhD researcher Alex De Vries, at current rates the bitcoin market alone has a carbon footprint of 97.14 megatonnes of CO2, similar to the entire annual carbon footprint of Kuwait. Most major blockchains are underpinned by cryptocurrency “mining”, a process where thousands of powerful and power-hungry computers need to solve complex mathematical problems. De Vries compares the system to “the world’s largest random number generator”.

“You have a guessing machine that is just putting out 200 quintillion guesses every second of the day non stop, trying to guess the winning number which will allow that lucky person who gets it right to create the next block for the blockchain and get the reward associated with that,” says De Vries. De Vries thinks that the carbon footprint of most cryptocurrencies would drop by 99.99 per cent if they were to swap to a different system —called “proof of stake” — that does not require mining. Toucan itself runs on Polygon, a proof of stake network.

Currently, there’s a never-ending stream of “green” cryptocurrency projects, many of which just use climate change awareness as a sales tool. One such project, Save Planet Earth, sold hundreds of carbon credits as NFTs for as much as $70,000 each, in order to raise money to plant 1.1bn trees in Pakistan, Sri Lanka and the Maldives. An investigation by Climate Home, however, found that while the company said it had started planting its one billion trees in Pakistan, the country’s climate minister had never even heard of the project. By centralizing the blockchain carbon market on one infrastructure and working with credits already on physical registries, another proposed benefit for Toucan then is that it’s bringing a little order to this infamously unregulated and potentially even scam-filled world.

“A lot of this comes down to incentives and disincentives,” explains Hoopes. “We can tweak and tailor and modify the system so that it dampens the more extractive exploitative impulses that some market players have.”

What that means in practice right now is something the project is a little less certain on. A main example they cite is gamifying the carbon market – giving NFTs for retiring carbon tokens and metaverse projects where virtual trees correspond to real-life trees – but it’s uncertain how this would stop those only interested in trading carbon tokens to make money.

And as with any growing project, Toucan are not without their critics. For one, the traditional carbon credit registries themselves. One of the largest, Veera, recently issued several statements criticizing the movement and even suggesting that the anonymity provided by blockchain could lead to projects being used to launder money.

Claudia Herbert, a PhD candidate at UC Berkeley and a specialist on the crossover between blockchain and carbon offsetting, cites the issue of offsets of HFC-23. A type of “super greenhouse gas”, it is often deliberately overproduced by emitters to make money from the ensuing slew of carbon credits they receive for reducing their output to the level they would have had in the first place. She says several hundred thousand tonnes of the HFC-23 offset credits made it onto the blockchain through Toucan’s bridging system before the company was able to block the corresponding wallet addresses. “I think user-driven, permissionless applications can have amazing scale and speed, but for a convoluted, technical asset like carbon offset tonnes on registries, it can also lead to unintentional purchasing of offsets that deliver less climate benefit than others,” says Herbert.

Despite that, Hoopes says the system now contains 85 per cent of all blockchain carbon credit transactions, and Toucan reports having facilitated over $2bn transactions using its BCT tokens.

The downside to their approach is that the group aren’t creating any new carbon credits themselves – they only convert existing credits on traditional registries into blockchain entries. What that means is that if you aren’t building any new forests or hydroelectric dams, just trading tokens representing current projects, the number of projects and thus the net amount of carbon being offset is the same as it would be if the same tokens were credits on physical registers.

For Toucan the argument is that even just harnessing blockchain and decentralized finance to get more investment in the space will increase the value of climate tokens and in turn increase the supply at the other end, as the supply on the market adjusts to meet that chance for profit. But whether that will play out in reality, is far from certain — especially as the value of a Toucan BCT is far below its peak in November. And as Toucan is reliant on the carbon credits already created by the voluntary carbon market, it is also subject to its flaws. And that list is long.

“Most offset credits don’t actually represent real emissions reductions, in part because offset programmes chronically pay project developers to build projects they would have built anyway,” explains Barbara Haya, who directs the Berkeley Carbon Trading Project at UC Berkeley. The issue, known in the field as “additionality”, is that large numbers of projects, from hydroelectric dams to reforestation, are done for a variety of reasons beyond just trying to officially offset carbon emissions. The reality is that many projects claimed as carbon credits would have been built anyway, and the net impact on stopping climate change would be the same.

One 2016 study from the German Öko-Institut found that as much as 85 per cent of just UN-sponsored carbon offset projects were unlikely to be something that wouldn’t have been done anyway. Only 2 per cent of the actual projects analyzed were judged to have a “high likelihood” of delivering new emission reductions. While the voluntary carbon markets Toucan works with have improved on the back of those early UN projects, most projects remain at risk of additionality.

“The methods for estimating emissions reductions are also exaggerated. California’s offset program has four project types for generating credits and 82 per cent of credits are coming from forest projects,” explains Haya. “What I found in my research is that for the majority of these forest projects the methods for estimating emissions reductions are overestimating their impact by between 50 and over 80 per cent… the vast majority of the credits don’t represent real emissions reductions. They’re exaggerated.”

One investigation of oil company Shell’s promise to let customers carbon-offset their fuel purchases, found that three of the projects used to drive that offsetting were either at risk of deforestation or that their actual impact was hard to prove. The company had also claimed for the carbon reducing impact of a forest that was simultaneously being claimed as a carbon offset by the Scottish government. While that can look good on a company’s annual report, especially one trying to claim to be achieving net zero, the persisting dubious quality of many carbon projects means their impact is minimal, and in fact could make those burning fossil fuels focus less on reducing the amount they’re emitting. Hoopes admits that without its own expensive worldwide infrastructure of inspectors, Toucan have to “outsource verification” by relying on the dubious quality of the carbon registries themselves.

But, for Toucan, the logic is simple – while the voluntary carbon market is flawed, it already exists, so if the company has a chance to try and shape it for the better, then it should.

For those studying carbon markets though, the worry is that projects like Toucan might bring technological versatility and efficiency, without solving the system’s fundamental problems. “You can’t scale a broken market,” says Haya. “If most carbon credits don’t represent real emissions reductions, and you scale that, you’re scaling false climate solutions at a time when we’ve a brief window of time to really rein in our greenhouse gas emissions.”

Reaching net zero emissions by 2050 will require innovative solutions at a global scale. In this series, in partnership with the Rolex Perpetual Planet initiative, WIRED highlights individuals and communities working to solve some of our most pressing environmental challenges. It’s produced in partnership with Rolex but all content is editorially independent. Find out more.