Economic Governance and Carbon Pricing in Klima 2.0

One of the core offerings of the Klima Protocol is to facilitate real-time execution of carbon supply and retirement requests, whilst ensuring there is sufficient liquidity to do this.

Achieving this consistently and at scale could fundamentally change the nature of carbon markets by allowing participants to access the market with less friction, rather than defaulting to OTC trading models.

A New Design

Klima achieves its ambitions through its resdesigned model. The protocol computes reference prices according to pre-defined rules (e.g. supply-and-demand). But it goes further: it allows users to overlay an additional layer of information through a codified token-voting mechanism.

At the same time, the Protocol aggregates protocol-internal signals and activity. Earlier on-chain experiments in carbon markets—such as Base Carbon Tonne (BCT), Nature Carbon Tonne (NCT), Universal Basic Offset (UBO), Moss Carbon Credit (MCO2), and Natural Based Offset (NBO)—tended to disperse information across multiple venues with their own market dynamics. Furthermore, they often forced the commodification (or assumed fungibility) of broad groups of different types of carbon in an attempt to build sufficient trading liquidity, but in a way that was criticised because it reduced pricing accuracy.

Klima 2.0 takes the opposite approach: standardises and interprets protocol inputs. It uses “carbon classes” to create smaller groups of fungible carbon credits, but remains flexible in adjusting these classes. As more credits are internalised and carbon classes are created, its ability to price different groups of credits against each other becomes increasingly granular.

This approach gives the Protocol the ability to draw on both the wisdom of the crowd—by internalising users’ perspectives—while benefitting from the strength of a unified dataset that grows more powerful as it scales.

The outputs of this pricing mechanism inform the Protocol’s carbon inventory and guide its operations within the carbon market. Klima allows both supply- and demand-side participants to engage. On the supply side, Klima engages with project developers and traders seeking to exit positions, acquiring carbon credits from them at prices quoted by the AAM. In parallel, demand-side users can acquire carbon retirement certificates from the Protocol at the same AAM-defined rate. The Protocol’s intake and retirement conditions are unobfuscated, and transactions are permissionless, allowing the market to respond to Klima with the same information as any other user, at any given moment.

Opinions Matter

Carbon markets have repeatedly revealed themselves as complex and dynamic. New research, news stories, policy shifts, or regulatory updates can quickly reshape perceptions of value within certain segments of the market.

At the same time, it remains unlikely that the market will ever agree that “a tonne is a tonne.” Hundreds of millions of carbon credits are in circulation, and their prices diverge based on parameters such as vintage, methodology, registry, and geography.

This creates volatility and semi-fungibility: credits share some attributes but are not perfectly interchangeable. For a nascent commodity market, this is a serious challenge. It fragments liquidity. While exchanges exist, volumes remain small, and most trading still occurs via OTC transactions, where relationship-based margins and inconsistent pricing dominate.

Web3 as a Solution

Web3 has already demonstrated its ability to build highly liquid markets for fungible tokens (i.e. assets that are perfectly interchangeable) worth billions of dollars. It has also enabled markets for non-fungible tokens (NFTs), where uniqueness drives value; though NFT markets have likely been underpinned by liquidity and speculation.

Somewhere in between lies the category of semi-fungible assets: not entirely identical, but sharing enough properties to be priced systematically. Real estate is one example: no two properties are identical, yet markets can establish relatively consistent benchmarks for rents. [1] Web3 platforms are already exploring ways to create liquidity in real estate by recognising and pricing this semi-fungibility.

Carbon credits fall squarely into this category. Klima’s AAM model acknowledges this reality and attempts to innovate in a space that resists simple categorisation, or where existing technologies cannot be applied wholesale.

Pricing Carbon in Practice

The Klima Protocol is expected to launch in December 2025. The system is inherently experimental, but its aspiration is to create meaningful change in carbon market dynamics, producing more equitable outcomes for project developers, corporate buyers, and others who invest time and resources in the space.

Once launched, the Protocol will begin defining carbon prices for the assets it holds, accepting carbon supply from project developers and traders, and demand-side users to procure them. Its activities are defined by smart contracts and algorithms outlined in the whitepaper—there will not be any single entity directing exactly what happens. “The market” will effectively decide the outcomes for Klima 2.0.

References

[1] Shorish, J. et al. (2021). A Practical Theory of Fungibility. Working Paper Series / Institute for Cryptoeconomics / Interdisciplinary Research. doi:10.57938/aa8858fc-8c01-4f2a-a858-96fd0abfc1b1

[2] Saguillo, O. et al. (2025). Unravelling the Probabilistic Forest: Arbitrage in Prediction Markets. In 7th Conference on Advances in Financial Technologies (AFT 2025). Leibniz International Proceedings in Informatics (LIPIcs), Volume 354, pp. 27:1-27:24, Schloss Dagstuhl – Leibniz-Zentrum für Informatik. doi:10.4230/LIPIcs.AFT.2025.27