Toucan’s crypto layer on top of carbon offsets is expanding the market for toxic hot air
Since October 2021, through a company called Toucan, more than 21 million carbon offsets have been retired on the Verra registry and “bridged” onto the blockchain. That’s more than 25% of all Verra offsets sold over the last six months.
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Toucan is a decentralised finance (DeFi) project. Toucan Protocal Association was registered in the tax haven of Switzerland on 30 November 2021. The nonprofit was set up by Julian Sommer, a German living in Zurich, James Farrell, from Ireland and living in Berlin, and Raphaël Haupt, a German living in Berlin.
In February 2022, Wired reported that,
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.
This is revealing. Haupt and Farrell’s starting point (at the hackathon in February 2020) was blockchain and cryptocurrencies to address the climate crisis, rather than starting from looking at ways to leave fossil fuels in the ground and climate justice.
This is an example of what Dan Olson, who made the brilliant critique of NFTs called “The line goes up”, describes as, “The techno-fetishistic egotism of assuming that programmers are uniquely suited to solve society’s problems.”
Toucan allows owners of carbon offsets to put their carbon offsets onto the blockchain. Writing in Bloomberg Green, Akshat Rathi and Natasha White note that,
Blockchain technology underpinning cryptocurrency can be used to keep a public record of accounts involved in transactions for carbon offsets, even while buyers remain anonymous. Prices paid for individual offsets would become publicly available for the first time.
But what happens when a crypto layer is placed on top of a false solution to the climate crisis? Burning fossil fuels caused the climate crisis and in order to address the climate crisis we have to leave fossil fuels in the ground. This involves addressing the impacts of colonialism, extractivism, capitalism, racism, and environmental injustice.
Carbon offsets allow Big Polluters to sweep all these issues under the carpet and to continue business as usual.
With or without crypto, offsets are a false solution to the climate crisis. Toucan is making it easier to trade tokens based on carbon offsets. But no matter how many tokens Toucan trades, offsetting remains a false solution and a dangerous distraction from the need to leave fossil fuels underground.
“Sweeping the floor”
When Toucan transfers carbon offsets from the Verra registry to the blockchain the offsets are retired. Once a carbon offset is retired it cannot be sold again. This is to prevent Big Polluters from buying offsets, claiming to have offset its emissions, then reselling the offsets to another Big Polluter.
In theory, buying the cheapest carbon credits and putting them on the blockchain would remove these low-quality offsets from the market. Once Toucan’s crypto trade had cleared the cheapest (and dodgiest) carbon offsets from the market, Big Polluters would have to pay more for “high quality” carbon offsets.
The crypto community calls this “sweeping the floor”.
“We aren’t convinced that ‘sweeping the floor’ is doing anything but increasing churn in a market that needs fundamental reform, not new software platforms,” Grayson Badgley and Danny Cullenward write in a new Carbon Plan report about Toucan.
But the carbon market doesn’t need “fundamental reform”. It needs scrapping altogether. Adding a crypto layer on top of a dangerous distraction from the need to leave fossil fuels in the ground, is making the climate crisis worse, not better.
Toucan’s crypto layer is accelerating the carbon offsets market for lemons. In his 1970 paper, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism”, economist George Akerlof looks into the way information asymmetry between buyers and sellers can result in lower quality goods being traded in a market. (A lemon is US slang for a car that turns out to have serious defects.)
Toucan’s crypto layer is designed in a way that guarantees information asymmetry between buyers and sellers.
Base Carbon Tokens: Trading toxic hot air
When carbon offsets are transferred to the blockchain from the Verra registry, Toucan issues Base Carbon Tokens. Here’s how Carbon Plan describes the process:
To generate a BCT, a user must have an account with Verra and follow a set of steps to bridge registry-based credits to their new blockchain home. The core process involves retiring VCUs [Verified Carbon Units] on Verra’s registry and marking the retirement “beneficiary” listing with a cryptographic key that identifies the blockchain wallet that seeks BCTs from Toucan. Once the required steps are completed on Toucan’s side, BCTs are issued on the blockchain to represent carbon claims that began as VCUs.
Toucan’s website includes a diagram of how this works:
Base Carbon Tokens are based on offsets, but offsets are taken from many offsetting projects and after being tokenised are poured into the Base Carbon Pool. The only requirements to enter the Base Carbon Pool are that the offsets are certified by Verra as Verified Carbon Units, and they “must have a vintage of 2008 or greater”. All Base Carbon Tokens are in effect identical, despite the fact that they come from a wide range of projects.
Carbon Plan’s report highlights the problem of “zombie” projects – carbon projects that were selling few, if any, carbon offsets until Toucan came along with its offer of buying toxic hot air.
Badgley and Cullenward write that,
Toucan appears to be generating entirely new demand for long-neglected credits that have experienced little or no demand in recent years.
They found that about 28% of Toucan’s offsets come from “zombie” projects. That’s 6 million offsets.
HFC-23 is one of the most dangerous greenhouse gases on the planet. It is 14,800 times more damaging than CO₂. HFC-23 is a by-product created during the manufacture of the refrigerant gas HCFC-22. Factories could destroy the gas (rather than releasing it to the atmosphere) and generate vast numbers of carbon credits.
The cost of destroying HFC-23 is so low that factories manufactured HCFC-22 in order to cash in on the payments for HFC-23 offsets. In 2010, the CDM suspended credits from five HFC-23 projects. The following year, the EU agreed to ban HFC-23 credits, starting in April 2013.
Zombie hydropower offsets
Carbon Plan highlights the Dayingjiang-3 Hydropower Project in China as an example of a “zombie” project. The dam started operations in 2006. It’s part of a cascade of dams on the Daying River in Yunnan Province, close to the border with Myanmar.
Before Toucan started sweeping up offsets from the project not a single offset had been issued according to Verra’s registry. Then, on Christmas Eve 2021, 2,359,060 offsets were retired and transferred to Toucan’s blockchain. That’s more than 10% of all Base Carbon Tokens issued so far.
Badgley and Cullenward note that this dam project had failed to find buyers for its offsets, despite the recent increase in demand. The offsets that were issued in December 2021 were for emissions reductions that the project developers claim took place between 2006 and 2011.
Hydropower dams are not a solution to the climate crisis. Josh Klemm of International Rivers and Eugene Simonov of the Rivers without Boundaries Coalition recently summarised 10 reasons why hydropower dams are a false climate solution.
There is always an additionality problem with any offset project, because creating offsets relies on a counterfactual story about what would have happened if the project did not go ahead. The counterfactual story cannot be verified, because the project did go ahead.
The case of selling offsets from hydropower dams in China provides an excellent illustration of just how ludicrous the concept of additionality is.
China is by far the world’s biggest dam-building nation. At the time of its revolution in 1949, China had eight large dams. Since then, with Chairman Mao’s call for workers to “conquer nature”, China has built more than 22,000 dams over 15 metres tall. About half of all the world’s large dams are in China.
The project developers, Dehong Kairui Dayingjiang Hydropower Development Co., submitted the project description document to Verra (which was then called Voluntary Carbon Standard) in November 2007, a year after the dam started operations. The VCS Board registered the project on 24 November 2009.
Verra: Projects are “no longer additional”
In an interview with Energy Monitor, Verra’s CEO David Antonioli admits that the Dayingjiang-3 hydropower dam, and more than 200 other renewable energy projects in China that were developed under the Clean Development Mechanism but are now registered with Verra, are not actually additional:
“Those projects were developed before we came to the conclusion that they were no longer additional. So they were legitimate at the time they submitted their original requests for registration.”
That, I suspect, is as close as we’re ever going to come to hearing Antonioli admit that Verra is creating carbon offsets out of fairy tales.
Antonioli then explains why, even though the projects are “no longer additional”, Verra is not going to do anything about it:
“I can appreciate why folks may be questioning the legitimacy, i.e. additionality, of those projects, but it is important to consider that additionality is assessed at the beginning, when a project first submits its request for registration. To open up the additionality question after would be unfair to project developers, and would also totally upend the market; nobody would invest because investors would fear that someone might move the goalposts once an investment has been made.”
It’s revealing that Antonioli’s concerns and loyalties are with the corporations selling carbon offsets, rather than the fact that bringing zombie offsets back to life, from the Dayingjiang-3 dam and other similar projects, is a disaster for the climate.
Toucan is attempting to address the problem of “zombie” offsets by moving the vintage-year cut-off date from 2008 to 2012 or 2014. Carbon Plan comments that this is “too little too late”, with tens of millions of offsets already tokenised as Base Carbon Tonnes.
Toucan is also considering a cut-off of, say, five years between vintage start date and issuance date. A note on the Toucan governance forum states that, “This will prevent the tokenization of old credits that were only issued recently.”
But the underlying problem remains. Toucan is working on a crypto layer on top of carbon offsets, and carbon offsets will always be a false solution to the climate crisis.
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