Summary

Allocate a limited amount of treasury BCT to remove the problematic HFC-23 credits from the BCT pool and properly dispose of them.

Motivation

Per the KlimaDAO Tokenized Carbon Dashboard’s BCT page, there are approximately 672 thousand tonnes of TCO2 in the BCT pool bridged from Verra’s deprecated HFC-23 methodology, AM0001:

While many have rightly pointed out that these credits should never have been retirable within Verra’s registry - which would have prevented them from being bridged - they met BCT’s initial vintage and methodology criteria and were de-facto allowed into the pool. Once the problem was identified, Toucan promptly excluded the methodology from the BCT pool requirements.

The ReFi community has taken efforts to prevent the use of HFC-23 credits by excluding them from the no-fee automatic redemption function on Toucan’s TCO2 contracts, so anyone trying to consume the HFC-23 credits would have to pay the steep selective redemption fee. They have also been disabled in the KlimaDAO retirement aggregator. However, the presence of these credits is still a limiting factor for the integrity, demand and adoption of BCT as a ReFi building block.

Methodology

While we had hoped to partner with Toucan to equally split the burden of this cleanup initiative, as indicated by Toucan’s official response to our RFC on their governance forum, they have decided not to allocate the capital required to acquire the necessary amount of BCT for their half.

However, they have agreed to collaborate in a more limited manner:

  1. They will implement a new “redeemAndBurn” function to facilitate pool cleanup. No fees will be charged for redemptions made using this function, which saves KlimaDAO roughly 33% in tonne terms (about 335k BCT) on the operation.
  2. They will utilize the accumulated fees in the regenerative BCT selective redemption fee wallet for destroying HFC-23 tonnes (about 3000 tonnes as of writing, approx. 0.5% of the HFC-23 total)

If this proposal is approved, the DAO multisig would be used to withdraw at most 672,249 tonnes of BCT from the treasury to be used for permanently destroying the HFC-23 TCO2 tokens.

This amount is quoted as a maximum limit rather than an exact value, because Toucan will be burning the small amount of BCT accumulated in their fee wallet. The exact amount of BCT withdrawn from the treasury and burned will be determined by subtracting the amount burned via the Toucan redemption fee multisig.

NOTE: For community members who would like to participate in the cleanup effort:

  • any selective redemption of tonnage from the BCT pool will contribute to Toucan’s regenerative fee wallet,
  • or, you can simply send BCT directly to that fee wallet’s address and it will be burned by Toucan: 0x222aAdfAF8FfA6CC7D89F7E99cf94963b121ADbf

Implications

Destroying treasury BCT to clean up the HFC-23 tonnage is expected to have two primary impacts:

  1. Reduce the amount of excess reserves held in the treasury for backing KLIMA tokens, which will reduce staking reward runway by about 25 days at the current reward rate, and reduce CC/KLIMA by about 4%.
  2. Reduce BCT supply by about 3.5% and increase integrity of the BCT pool (currently the treasury’s largest holding).

Proposal

  • Allocate at most 672,249 tonnes of treasury BCT for the HFC-23 cleanup operation.
  • Once Toucan releases the “redeemAndBurn” function, coordinate with them to:
    • burn the accumulated BCT fees designated for this purpose,
    • then utilize the allocated treasury BCT to destroy all remaining HFC-23 tonnes.

Links

Polling Period

The informal forum poll begins now and will end in approximately 5 days on July 12th at 17:00 UTC. Assuming in favor, this vote will go to Snapshot.

Vote

This poll has ended.

Considering the FUD around HFC-23 will never end if we do not allocate and clean up the pool, I don't see an alternative. Clean it up!

Down the road, the integrity signal created by using considerable amounts of money on cleaning up the pool instead of buying a new set of Lambos for the devs will probably be worth it.

Why I have the feeling Klima is trying to clean up mess of others accumulated over years and on multiple fronts ? Happy to see this effort and I vote yes for greenish tomorrow.

I'm definitely in favor, but it's a shame that Toucan isn't holding up their end of the bargain.

it ain't easy being a leader in the space. Great way to back the talk with action.
I vote for 🙂

This is where we live our values as stewards of the environment. Let’s show the world how integrity is down!

Great News! Thats how leaders take charge! Also shows the strength of Klima. I Vote for 😁

There's a big opportunity here for positive press coverage around the crypto community taking the initiative to clean up the HFC credits - something the traditional market failed to do!

It is a shame that this situation was allowed to occur (unintentionally) by others, but with no one else stepping up to lead in this space it is right for Klima to largely resolve this itself. Beyond the "it is the right thing to do" reasoning there are several big benefits:

Klima again proves it's leadership in the Refi space
Klima shows it will address problems, even when there is a significant cost, and not hide from them
Improving perceptions of the quality of BCT, which could lead to price increases down the line
Positive news stories

With the increased analytical capabilities Klima has been developing in recent months (and the democratisation of analysis capability via Playgrounds) allowing fine-grained analysis of on-chain carbon credits, as well as improved bridger quality gates (we have seen Toucan react quickly to events and C3 has whitelisted specific allowed methodologies from day one) this will also be a one-off activity, and a one-off cost.

In support for this proposal! Voting FOR ✨

Strongly in favor. KlimaDAO should always be committed to doing the right thing, even when partners refuse to put their money where their mouth is. The fact is, these credits are non-legitimate and should never have been left lying around and able to be bridged - no fault of KlimaDAO's but in the end it is left to KlimaDAO to deal with them. The world will be a better place for it. However, as others have noted: doing the right thing does of course have strong signalling benefits, which are particularly important in spaces like crypto and climate, where FUD and holier-than-thou attitudes come easier to bystanders than positive action. Through this, KlimaDAO will build its credibility in the eyes of those who understand the carbon markets - and this will in turn lead to greater achievements down the line.

Thank you for the engagement everyone! So glad our community is rallying behind this important initiative.

There is some additional nuance around this issue that has come to light recently. We need some time to investigate so we can present all relevant information to the community before we move this proposal to Snapshot for a final vote.

Since we're going to hold off moving to Snapshot, I'll leave this discussion thread open even though the poll has ended. We'll provide an update here once we have clear and confirmed information.

8 days later

Klima have to solve all toucans problems, in favor

2 months later
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