Summary

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

Additional Background

See the bold text in the KIP-26a post on the discussion forum (linked below) for full context and details on the HFC-23 credits in question.

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. Toucan has implemented a new “redeemAndBurn” function to facilitate pool cleanup. No fees are 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 14,330 tonnes as of writing, approx. 2% 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 by about 7%, which will reduce staking reward runway by about 140 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.
• Coordinate with Toucan Protocol to:
  1. burn the accumulated BCT fees designated for this purpose,
  2. then utilize the allocated treasury BCT to destroy all remaining HFC-23 tonnes.