Case study: DeFi & climate finance rails — a leading organization's implementation and lessons learned

Global climate finance reached $1.9 trillion in 2023 and crossed the $2 trillion threshold in 2024, yet annual investment needs to scale to $6.3 trillion by 2030 to avoid the worst climate impacts. The voluntary carbon credit market, valued at approximately $4 billion in 2024, is projected to grow to $24–50 billion annually by 2030. Meanwhile, blockchain-based carbon platforms grew from $325 million in 2024 to $354 million in 2025, with projections reaching $567 million by 2031 at an 8.9% CAGR. This case study examines how decentralized finance (DeFi) infrastructure is being deployed to accelerate climate capital flows, drawing lessons from real implementations by organizations including KlimaDAO, Toucan Protocol, and institutional players entering the tokenized carbon space.

The convergence of DeFi and climate finance represents one of the most significant experiments in using programmable money to address systemic environmental challenges. In January 2025, S&P Global and JPMorgan announced a partnership to tokenize carbon credits through JPMorgan's Kinexys digital payments platform, signaling that institutional capital is taking on-chain climate finance seriously. This case study synthesizes implementation patterns, quantifies what's working and what isn't, and provides actionable guidance for organizations considering DeFi climate finance deployments.

Why It Matters

Traditional climate finance suffers from structural inefficiencies that limit capital deployment at the scale and speed required. Transaction costs for carbon credit purchases through conventional brokers can reach 15–25% of credit value. Settlement times extend to weeks or months. Double-counting—where the same emission reduction is claimed by multiple parties—persists despite registry infrastructure. The Climate Policy Initiative estimates that closing the climate finance gap requires not just more capital, but fundamentally faster and more transparent capital movement mechanisms.

DeFi offers three structural advantages for climate finance: programmability, composability, and transparency. Programmability means carbon credits can be embedded with automated retirement logic, ensuring credits are permanently removed from circulation when used for offsetting. Composability allows climate assets to integrate with existing DeFi infrastructure—lending protocols, automated market makers, and yield aggregators—creating liquidity where traditional markets have fragmentation. Transparency through public blockchain ledgers enables real-time verification of credit provenance, retirement status, and ownership history.

The financial logic is compelling. Research from Dr. Rubhesh Jha's December 2024 study "Decentralizing Climate Finance: The Role of DeFi" found that DeFi infrastructure can reduce transaction costs while improving access to climate funds for stakeholders in emerging markets who face banking infrastructure limitations. By eliminating intermediaries and enabling 24/7 global markets, DeFi could theoretically accelerate capital velocity by an order of magnitude—critical when the climate timeline demands rapid deployment.

However, the value proposition extends beyond efficiency. DeFi climate finance creates new incentive structures. KlimaDAO's protocol, for example, accumulated 2% of the entire voluntary carbon market in its first year by offering staking rewards to participants who locked carbon credits rather than trading them. This mechanism—paying users to remove supply from markets—drove carbon credit prices higher, theoretically incentivizing more carbon reduction projects. Whether these incentive designs produce durable climate outcomes remains the central question this case study addresses.

Key Concepts

Tokenized Carbon Credits

Tokenization converts verified carbon credits from traditional registries (Verra, Gold Standard, American Carbon Registry) into blockchain-native assets. The process typically works as follows: a bridging platform like Toucan Protocol takes custody of credits in a traditional registry, marks them as retired or locked, and mints equivalent tokens on a blockchain (usually Polygon or Ethereum for gas efficiency). Each token—such as Toucan's Base Carbon Tonne (BCT) or Nature Carbon Tonne (NCT)—represents one metric ton of CO2 equivalent.

Tokenized credits enable fractional ownership (purchasing 0.1 tonnes rather than minimum lot sizes), instant settlement, and programmable retirement. When a company offsets emissions using on-chain credits, a smart contract permanently burns the tokens and records the retirement on an immutable ledger. This creates verifiable proof that the credit cannot be resold or double-counted.

Regenerative Finance (ReFi)

ReFi extends DeFi principles to explicitly regenerative outcomes—financing that restores rather than extracts. In practice, ReFi protocols direct protocol revenues toward environmental projects, use carbon credits as collateral or reserves backing tokens, and create mechanisms where financial activity automatically funds ecological restoration.

KlimaDAO exemplifies the ReFi model: every KLIMA token is backed by at least one tokenized carbon credit in the protocol's treasury. When users stake KLIMA, they earn rewards generated from treasury yield strategies, but the underlying mechanism requires continuous carbon credit accumulation. This creates a financial flywheel where protocol growth directly correlates with carbon credit demand.

Proof-of-Reserves for Climate Assets

Traditional carbon markets lack real-time visibility into whether credits claimed as offsets actually exist in registries. Blockchain proof-of-reserves addresses this through cryptographic verification. Any observer can query the blockchain to verify: (1) that tokenized credits correspond to retired credits in traditional registries, (2) the complete transaction history showing all ownership transfers, and (3) the retirement status proving credits haven't been double-spent.

This transparency has regulatory implications. The EU's blockchain climate action initiative has approved pilot programs for blockchain-based MRV (Monitoring, Reporting, Verification) systems. The U.S. CFTC has signaled that certain carbon credits may be classified as commodities, making blockchain audit trails relevant for compliance. For organizations with Scope 3 reporting requirements, on-chain carbon retirements provide documentation that withstands third-party verification.

What's Working and What Isn't

What's Working

Volume and liquidity creation: KlimaDAO retired over 17.3 million tonnes of carbon offsets and generated more than $100 million in revenue within its initial period. The protocol demonstrated that DeFi mechanisms can move meaningful volume—2% of the voluntary carbon market—into new on-chain infrastructure. Toucan Protocol has purchased over 25% of all historically Verra-verified carbon credits, bridging traditional markets to blockchain.

Settlement speed: Traditional carbon credit transactions take days to weeks for settlement. On-chain transactions settle in seconds to minutes. Research from 2025 AI-blockchain frameworks found that blockchain verification achieves 76% faster processing than traditional MRV methods. This speed enables use cases impossible in traditional markets—real-time carbon offsetting at e-commerce checkout, per-transaction offsetting for logistics companies, instant retirement for corporate net-zero pledges.

Transparency and audit trails: Every on-chain carbon credit carries complete provenance—project origin, vintage year, verification standard, and full transaction history. Organizations using on-chain retirements can demonstrate offset integrity to auditors by pointing to public blockchain records. Carbonmark's marketplace provides API access for automated offsetting with blockchain receipts, enabling integration into sustainability dashboards and ESG reporting systems.

Institutional adoption signals: The S&P Global and JPMorgan Kinexys partnership in 2025 represents a turning point. Microsoft and Shopify have used Puro.earth's blockchain-verified carbon removal credits. These institutional moves suggest that on-chain carbon infrastructure is transitioning from crypto-native experimentation to enterprise integration.

What Isn't Working

Credit quality concerns: A critical flaw emerged in early implementations: protocols optimized for acquiring the cheapest credits, not the highest-quality ones. Toucan Protocol's BCT pool accumulated credits from 10+ year old renewable energy projects that no longer require funding support—they would have been built anyway. These low-additionality credits technically represent carbon reductions but don't drive new climate impact. Toucan has acknowledged this problem and is developing filtering mechanisms to exclude low-quality vintage credits, but the reputational damage to ReFi credibility is substantial.

Price volatility: BCT traded at approximately $0.17 in early 2025, down over 85% from 2022 peaks. KLIMA experienced similar volatility, trading between $0.60–$1.17. This volatility undermines the utility of carbon credits as stable instruments for corporate offsetting. Organizations with annual sustainability budgets cannot reliably plan when credit prices swing 50% or more quarter-to-quarter. The protocols generating this volatility often benefited early adopters who sold to later entrants—creating the appearance of a speculative asset rather than climate infrastructure.

Governance participation collapse: KlimaDAO's governance has experienced significant participation decline since early 2024. Critical proposals like KIP-65 passed with only 20–30% voter participation. A June 2025 study on AI-assisted governance frameworks for KlimaDAO found that algorithmic decision support could increase participation by 40%, but this highlights the underlying problem: decentralized governance at scale produces voter fatigue when stakeholders face complex technical decisions every few weeks.

Regulatory uncertainty: While the CFTC's commodity classification signals regulatory engagement, the legal status of tokenized carbon credits remains unclear across jurisdictions. Organizations deploying DeFi climate infrastructure face ambiguous tax treatment, uncertain accounting rules, and potential liability if tokenized credits are later deemed non-compliant with emerging regulations. This uncertainty creates friction for institutional adoption beyond pilot programs.

Liquidity fragmentation: NCT (Toucan's Nature Carbon Tonne) traded only $173 in 24-hour volume in some 2025 periods. Fragmented liquidity across multiple tokens, chains, and protocols means price discovery is inefficient and large purchases move markets significantly. This is the opposite of the deep, stable markets needed for institutional-scale climate finance.

Key Players

Established Leaders

KlimaDAO pioneered the carbon-backed treasury model, accumulating over 17 million tonnes of carbon credits and demonstrating that DeFi mechanisms can move substantial volume. Despite governance and volatility challenges, KlimaDAO established the template for ReFi protocols.

Toucan Protocol built the bridging infrastructure that enables traditional carbon credits to move on-chain. Their BCT and NCT tokens became the de facto base layers for DeFi carbon composability on Polygon.

Carbonmark provides the marketplace layer with developer-friendly APIs for automated carbon offsetting. Their infrastructure enables enterprises to integrate blockchain carbon retirements into existing applications without managing wallet infrastructure.

Verra and Gold Standard, while traditional registries, are increasingly relevant as they develop blockchain integration standards. Verra's VCS program remains the largest source of credits being tokenized.

Emerging Startups

Puro.earth focuses on engineered carbon removals (biochar, direct air capture) with blockchain verification, attracting buyers like Microsoft who prioritize permanent storage over nature-based credits.

ClimateTrade enables corporations to offset emissions directly through marketplace infrastructure with blockchain receipts.

Moss.Earth created MCO2 tokens specifically for Amazon rainforest credits, demonstrating regional specialization within the broader ReFi ecosystem.

EcoRegistry built DLT-based registry infrastructure for digitally native credits rather than tokenizing legacy credits.

ICR (Independent Carbon Registry) provides an interoperable, open blockchain registry designed for cross-chain compatibility.

Key Investors & Funders

a]z crypto (Andreessen Horowitz) has backed multiple climate crypto projects including Flowcarbon.

Sequoia Capital invested in climate tech platforms incorporating blockchain elements.

Union Square Ventures participated in ReFi funding rounds.

Placeholder VC has thesis around regenerative economics and backed infrastructure in the space.

The Rockefeller Foundation and World Bank's IFC have supported blockchain climate infrastructure development, particularly the Chia blockchain's carbon registry work for nature-based offsets.

Examples

Example 1: KlimaDAO's Treasury Accumulation (2021–2024)

KlimaDAO launched in October 2021 with a mechanism designed to accumulate carbon credits: users could bond carbon credits to the protocol in exchange for discounted KLIMA tokens, and staking KLIMA earned rewards generated from treasury strategies. Within its first year, the protocol acquired 2% of the entire voluntary carbon market.

Metrics: 17.3+ million tonnes carbon retired, $100M+ revenue, treasury backing of 1+ credit per KLIMA token. However, KLIMA price declined from all-time highs above $3,000 to below $1 by 2025, representing over 99% drawdown. The protocol demonstrated that DeFi incentives can mobilize carbon acquisition at scale but raised questions about sustainability when token price collapses reduce new inflows.

Lesson: Incentive mechanisms that depend on continuous new capital inflows face structural challenges when market sentiment shifts. Protocols should design for sustainability in bear markets, not just growth in bull markets.

Example 2: S&P Global–JPMorgan Kinexys Integration (2025)

In January 2025, S&P Global announced a partnership with JPMorgan's Kinexys platform to tokenize carbon credits for institutional trading. This represents the first major integration of traditional financial infrastructure with on-chain carbon assets at institutional scale.

Significance: The partnership validates on-chain carbon infrastructure for enterprise use. S&P Global's Environmental Registry will provide credit verification, while Kinexys handles settlement and custody. This addresses the custody and compliance concerns that prevented institutions from engaging with earlier ReFi protocols.

Lesson: Institutional adoption requires meeting enterprises where they are—with familiar counterparties, regulated custody solutions, and compliance frameworks. Pure DeFi protocols may need to partner with traditional infrastructure to reach institutional scale.

Example 3: Toucan Protocol's Quality Filtering Evolution (2023–2025)

Toucan Protocol faced criticism that its BCT pool accumulated low-quality credits with questionable additionality. In response, the protocol developed filtering mechanisms to exclude credits from vintage years before certain thresholds and to prioritize project types with demonstrated additional impact.

Metrics: Toucan has bridged over 25% of historical Verra credits. BCT price fell from peaks above $5 to approximately $0.17 by 2025. The protocol's NCT (Nature Carbon Tonne), designed for higher-quality nature-based credits, achieved some price premium but minimal liquidity (under $200 daily volume in some periods).

Lesson: Credit quality matters more than volume for long-term credibility. Protocols that optimize for quantity over quality undermine the climate integrity proposition that justifies blockchain infrastructure. Quality filtering should be implemented at protocol design, not retrofitted after accumulating problematic credits.

Action Checklist

• Evaluate credit quality before volume—prioritize integration with platforms that filter for additionality, recent vintages (<5 years), and project types with demonstrated permanence (engineered removals, verified reforestation)
• Implement proof-of-reserves transparency—ensure any on-chain carbon positions can be audited against traditional registry records and blockchain explorers
• Design for volatility resilience—use dollar-cost averaging for carbon acquisitions, maintain fiat reserves for offset commitments, and avoid speculative token positions in sustainability budgets
• Start with established infrastructure—use Carbonmark's API for automated retirements rather than building custom smart contract integrations; leverage existing liquidity pools rather than fragmenting markets further
• Document for compliance—maintain records linking on-chain retirements to Scope 1/2/3 reporting categories, including transaction hashes, registry retirement confirmations, and vintage data
• Monitor governance participation—for protocols with DAO governance, establish internal processes for voting on critical proposals rather than defaulting to abstention
• Plan for regulatory evolution—structure carbon positions to accommodate potential requirements for commodity classification, tax reporting, and accounting standards as jurisdictions clarify rules
• Build internal education—ensure sustainability, finance, and legal teams understand blockchain carbon infrastructure before deployment to avoid governance disconnects

FAQ

Q: Are tokenized carbon credits legally equivalent to traditional registry credits for compliance purposes? A: Currently, regulatory frameworks vary by jurisdiction. The EU is piloting blockchain-based MRV systems that may recognize on-chain retirements. The U.S. CFTC's commodity classification signals could provide legal clarity but rules are still emerging. For voluntary offset claims (not compliance markets like EU ETS), on-chain retirements provide auditable documentation. Organizations should consult legal counsel on jurisdiction-specific requirements and maintain traditional registry documentation alongside blockchain records.

Q: How do we ensure the carbon credits we tokenize are high quality and not greenwashing? A: Prioritize credits from platforms with explicit quality filtering (NCT over BCT, for example). Look for recent vintages (<5 years), project types with demonstrated additionality (direct air capture, biochar, verified reforestation with long-term monitoring), and verification from standards like Gold Standard or Verra's VCS with additional certifications. Avoid credits from renewable energy projects in regions where renewables are already cost-competitive without subsidies. Use platforms like Puro.earth for engineered removals with permanent storage.

Q: What happens if a DeFi protocol we're using for carbon credits fails or loses liquidity? A: On-chain carbon retirements are permanent—once tokens are burned with a retirement transaction, the offset claim is recorded immutably even if the protocol shuts down. However, unretired holdings in protocol treasuries or liquidity pools face smart contract risk. Mitigate by retiring credits promptly rather than holding speculative positions, using audited smart contracts from established protocols, and diversifying across multiple platforms.

Q: What's the energy consumption of blockchain-based carbon credits? A: Most climate DeFi operates on Polygon, a proof-of-stake network with minimal energy footprint—estimated at less than 0.01% of Bitcoin's consumption. Ethereum transitioned to proof-of-stake in 2022, reducing energy use by approximately 99.95%. The blockchain energy consumption for carbon credit transactions is negligible compared to the emissions represented by the credits themselves. Proof-of-work chains like Bitcoin are not used for carbon credit tokenization.

Q: How should we account for tokenized carbon credits in financial statements? A: Accounting treatment remains jurisdiction-dependent and evolving. Many organizations treat carbon credits as intangible assets; tokenization doesn't inherently change this classification, though the speculative nature of some token positions may require mark-to-market accounting. Consult with auditors familiar with both sustainability reporting (GHG Protocol, ISSB standards) and digital asset accounting. Document the distinction between credits held for retirement versus trading.

Sources

• Climate Policy Initiative, "Global Landscape of Climate Finance 2024-2025," 2024–2025
• Dr. Rubhesh Jha, "Decentralizing Climate Finance: The Role of DeFi," SSRN, December 2024
• MSCI, "Carbon Credits Come of Age in 2025," January 2025
• S&P Global, "S&P Global and JPMorgan Partner to Tokenize Carbon Credits," January 2025
• Carbonmark, "The Rise of Tokenized Carbon Credits: Why Blockchain Is Transforming Carbon Markets," 2024
• GM Insights, "Carbon Credit Market Size, Growth Forecasts 2025-2034," 2024
• Intel Market Research, "Blockchain-based Carbon Credit Platform Development Market Outlook 2025-2032," 2024
• MDPI Electronics, "Intelligent Decentralized Governance: A Case Study of KlimaDAO Decision-Making," June 2025