Carbon Classes

Which carbon class prices and allocations should we use at launch?

Context

The table below lists carbon classes potentially included at launch. The checkbox at the left of each row determines whether the corresponding carbon class is included.

The carbon classes selected above represent a total supply of  tCO2eq and a net asset value of  USD. They are represented in the figure below, where both axes are logarithmic: the vertical axis represents the price of a carbon class and the horizontal axis represents how many tCO2eq are in the protocol’s portfolio.

In the above figure, the dashed line represents the price at which a user can sell carbon to the protocol as a function of the number of tonnes of the respective cabon class in the portfolio, with the kVCM allocation and market cap kept constant.^[1]

In other words, for a given kVCM market cap, the correct kVCM allocation for a carbon class is reached when the dot representing the carbon class falls on the dashed line.

Decreasing the kVCM market cap above shows that if the market cap is too small, the protocol can become unable to price a carbon class accurately, even if 100% of the kVCM tokens are allocated to this carbon class.

The next section describes how to set the kVCM market cap.

kVCM Market Cap

Relationship Between kVCM Market Cap and Net Asset Value

In the figure above, the kVCM market cap is set to:

This equation is equivalent to:

In order to price carbon classes accurately with this market cap, kVCM allocations would have to be set as follows:

Two observations can be made from the above table:

1. The kVCM allocated to a carbon class is is roughly proportional to its proportion of the asset value.

2. The total kVCM allocation (here ) is always roughly equal to the ratio between the net asset value and the kVCM market cap (here ).

The next section shows how to use the total kVCM allocation to set to set the kVCM market cap.

Setting the kVCM Market Cap in Practice

In practice, only up to roughly 20% of the kVCM can be allocated to carbon classes by the Klima Foundation. In order to reach the desired carbon prices and supply, the kVCM market cap must therefore be set to (at least):

This corresponds to a kVCM market cap of  USD and the following kVCM allocations:

If the kVCM market cap is considered too high, reducing carbon supply can make it smaller.

Reducing Supply

Reducing the supply of the carbon class with the highest asset value not only makes the market cap smaller, but it also reduces the difference between kVCM allocations.

Here is an example where the supply of the carbon class “” is reduced by .

This corresponds to a kVCM market cap of  USD and the following kVCM allocations:

This approach has the advantage of leaving carbon prices untouched.

Conclusion

My recommendation for carbon prices and kVCM allocations at launch is to assume that 20% of the total kVCM tokens will be allocated to carbon classes, and to reduce the supply of the carbon class “Bulk Hydro” until the kVCM market cap reaches roughly 3,000,000 USD:

This corresponds to a market cap of  USD, or: