Toucan Protocol is a non-profit, blockchain project that aims to bring the carbon credit market into the retail world through crypto tokenization.
The Base Carbon Tonne (BCT) crypto token is first created by Toucan bridging retired carbon credits from a legacy carbon registry, such as the Verra Registry, and linking them to newly minted Toucan tokens (TCO2) that can be held, transferred, or deposited into a carbon pool with certain criteria set for the pool. By depositing TCO2 tokens into a specific carbon pool, the depositor receives pool reference tokens. Toucan’s first available pool was the Base Carbon Tonne Pool from which the depositor receives BCT tokens. These BCT tokens can be traded in the secondary market or deposited with another entity, such as the Klima Decentralized Autonomous Organization (KlimaDAO, or Klima), in exchange for their own token. BCT credits are used by Klima as the underlying asset that gives value to their Klima token cryptocurrency that was launched alongside the BCT on October 18th, 2021.
The BCT is a reference token, representing its pool’s requirements of one metric ton of carbon dioxide equivalents (mtCO2e) as retired from Verra’s Verified Carbon Standard (VCS) registry with a vintage year of 2008 or later that has been bridged by the Toucan Protocol required process.
In order to create the BCT, the Toucan bridge builds on Verra's market credibility. Carbon credits to be tokenized are retired in the Verra registry, building on Verra’s role in verifying the integrity of carbon credits. To be clear, the Verra Registry is not an active participant in this crypto creation, it is just being utilized by Toucan for the credibility that it brings. In fact, Verra is reportedly unhappy at being used in this protocol, even though they do profit from every carbon credit retired.
Arbitrage opportunity causes Verra volumes to soar
Once introduced to the market in October 2021, traders began to immediately take advantage of the high price of the BCT token as compared to the price of cheaper carbon credits deliverable into the BCT contract and available in the broader voluntary carbon market.
The process involves purchasing VCS certified carbon credits with at least a 2008 vintage in the broader voluntary carbon market, converting these credits into BCT contracts via Toucan, and then selling the BCTs into Klima’s protocol at the market price of the BCT token. This last step is not required but it provided additional profit as Klima offered incentives for bonding BCTs to their protocol’s tokens and placing them with Klima’s treasury.
BCT is listed on a number of crypto exchanges. However, unlike other main cryptocurrencies, it cannot be directly purchased with fiat money, like the U.S. dollar, but rather through other cryptocurrencies, such as Bitcoin.
In the first month of launch, BCT achieved $2 billion in trading volume — about double the voluntary carbon market’s volume for the entire year of 2021.
This onslaught of Verra retirements that started in October has seen over 20.5 million carbon offset credits being retired and tokenized into BCTs through February 2022. This represented over 25% of all credits retired in the Verra registry over this period. The entire carbon credit pool of nearly 80 projects on the Verra Registry were entirely swept up in single transactions during this process. In comparison, Shell, one the the world's largest carbon offset purchasers, bought a total of 3.1 million carbon offsets in all of 2021.
The spike in demand for these particular Verra credits helped increase the overall value of carbon credits on a broader basis, as displayed by two exchange-traded carbon credit futures, the CME's GEO and the N-GEO:
The strong arbitrage opportunity that triggered a hunt for older and cheaper Verra carbon credits (such as low-quality energy projects in India and China) during the months of October and November came to an abrupt halt at the start of December, along with other cryptocurrencies, as the BCT contract started to shed value, dropping over $3 from over to $8.60/mtCO2e to below $5.60/mtCO2e from its intraday high on November 29th to its intraday low on December 2nd, respectively, leveling out to the $6 to $6.50 range.
Double-dipping dilemma
Users of Toucan’s carbon bridge need to retire carbon credits on the source registry before bringing them on-chain. Furthermore, the bridge is a one-way bridge, meaning carbon credits can be brought on-chain but they cannot come off it in the attempt to prevent double-counting.
Nevertheless, true carbon offsetters are still hesitant to use BCTs as they do represent another form of double-dipping, as not only do you achieve offsetting goals when you retire carbon credits on a registry, but in the case of bridging and tokenization, you also receive the BCT token along with its market value. This leaves trading in BCT up to those trying to take advantage of arbitrage opportunities, if/when they continue to appear, and to speculators who are looking at the market price of the BCT to appreciate, assumingly along with the overall level of carbon credits in the market.
One effect that this introduction of the BCT into the market and the subsequent flood of carbon credit purchases in order to attain arbitrage profits did accomplish was the clearing out of low-valued carbon credits and creating more of a base, or floor, to the prices in the voluntary carbon offset markets.
Toucan’s future carbon-backed tokenization plans
Toucan structured this initial foray into carbon credit-based crypto tokens on a very generalized pool, again any credit that appears on Verra’s VCS registry, as long as it has a 2008 vintage, or newer. Toucan is working on creating other reference pools to tokenize that have more specific criteria.
On February 10th, Toucan launched its new Nature Carbon Tonne (NCT) token at an initial price of $8/mtCO2e. At the time of this new launch, the BCT was trading roughly at $4.75/mtCO2e, reflecting a $3.25 premium for the new nature-based token.
The NCT will bridge all nature-based methodologies off Verra’s registry exclusively, with one particular exception, and will allow for vintages from 2012 onward. A ten-year rolling acceptance will also apply (meaning that next year the eligibility will move to 2013 vintages and later, and so on). This requirement should capture roughly 95% of all the nature-based credits on the Verra VCS Registry.
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