Repricing Carbon: Klima 2.0 and the Market Infrastructure for Semi-Fungible Assets
- Alex Taylor
- 5 days ago
- 4 min read
Carbon markets are often celebrated for their potential, but rarely for their efficiency. Unlike traditional commodity markets where assets are fungible and liquidity is deep, carbon credits exist in a semi-fungible space: partially substitutable, highly contextual, and largely traded over-the-counter (OTC). That makes price discovery, liquidity formation, and trust notoriously difficult to scale.
Klima Foundation aims to support and incubate transparent, decentralised solutions that can solve challenges that hinder market growth. Supported by Klima Foundation, Klima Protocol will deploy Klima 2.0 in early Autumn, 2025, to address these market challenges. At its core lies a new kind of market infrastructure to price carbon: the Autonomous Asset Manager (AAM). Rather than relying on Automated Market Makers (AMMs), which faltered under the weight of carbon’s complexity, the AAM is a user-governed pricing and execution layer that can interpret and react to the unique characteristics of semi-fungible assets like carbon credits.
Informed by its own learnings from Klima 1.0 and deep interviews with market actors, Klima 2.0 introduces a more reflexive approach to carbon pricing: one that prioritizes governance, modularity, and the reality that not all carbon credits are created equal.
The Limits of Fungibility in Climate Finance
Traditional commodity markets like oil or gold thrive on fungibility: one barrel or ounce is as good as another. In contrast, carbon credits differ by vintage, geography, project type, methodology, additionality, and co-benefits. This creates what researchers term a partial ordering: some credits are preferred over others, while many are simply incomparable.
This complexity has real-world consequences. In carbon markets, spreads can exceed $10/tCO₂e, sometimes as high as 100% of credit value, whereas in mature markets like oil or wheat, spreads may be a penny or less. These inefficiencies raise transaction costs, reduce climate finance for project developers, and dilute buyer trust.
Semi-Fungibility Requires New Market Approaches
The failure of early onchain carbon markets to price these credits accurately (notably Klima 1.0’s indiscriminate AMM-based approach) highlighted the need for a mechanism that accounts for subjectivity and dynamic preferences.
Klima 2.0’s Autonomous Asset Manager is built to handle this complexity. Drawing from direct market experience and insights from research, Klima’s AAM is built to reflect the complexity of real-world carbon preferences. It doesn’t assume a single price for all credits. Instead, it recognizes that buyers often rank credits based on subjective factors, like co-benefits, technology type, or region, rather than treating them as directly comparable.
To reflect this, Klima uses a system of “partial orders”: a way of encoding which assets are preferable to others without requiring strict rankings. This preference structure allows the AAM to process multiple user signals and compose portfolios that reflect both market sentiment and project quality. A step beyond static or pool-based systems.
Governance-Driven Liquidity and Portfolio Curation
Unlike a static AMM, the AAM is participatory by design. Users express their preferences using $kVCM tokens, signalling which types of carbon the Protocol should acquire: nature-based removals, biochar, blue carbon, or otherwise.
A second governance token, $K2, functions as a risk-weighted modulator, letting users express price sensitivity across carbon classes. For example, if engineered removals become overpriced relative to comparable market benchmarks, $K2 holders can push for de-risking and reallocation.
This governance-driven approach is similar to innovations seen in other parts of DeFi, such as restaking protocols, where validators allocate capital based on perceived risk and expected return. In Klima 2.0, holders of $kVCM and $K2 guide how capital flows across various dynamic Carbon Classes. These are flexible groupings of carbon credits that adapt over time, based on supply, user sentiment, and shifting definitions of quality.
As more users participate and more credits flow through the system, these inputs shape how the protocol assembles its portfolio, balancing trust, quality, and market relevance.
Responding to Market Fragmentation with Structured Flexibility
One of the key insights from both Klima’s experience and the research literature is this: fragmentation is not a bug, it’s a feature of semi-fungible markets. But fragmentation doesn’t have to imply opacity.
The AAM does not try to eliminate fragmentation but structures it. It provides access to programmable liquidity, where project developers can sell credits directly to the Protocol if price thresholds are met, and corporate buyers can retire credits transparently if the portfolio composition aligns with their claims.
This kind of reflexive market-making allows Klima 2.0 to navigate both short-term preferences and long-term supply-demand cycles, without overexposing itself to vintage risk or liquidity mispricing.
Beyond Carbon: A Blueprint for Semi-Fungible Markets
Klima 2.0’s architecture aligns with what emerging research describes as the future of digital markets. Semi-fungible assets, like bonds, compute resources, or restaking tokens, are rapidly growing within DeFi, institutional finance, and environmental markets alike.
As digital environmental assets proliferate (e.g., battery passports, biodiversity credits, dMRV-backed credits), the need for structured partial ordering and programmable allocation becomes increasingly important.
Klima Protocol offers one of the first blueprints for a market-clearing system for semi-fungible environmental assets, backed by real governance, real token mechanics, and real economic incentives.
What Comes Next
The carbon market won’t be “solved” with a single innovation. But it can evolve toward greater transparency, efficiency, and impact if the tools are built to reflect its inherent complexity.
Klima 2.0 represents a step toward that evolution: a model of a user-governed climate finance protocol that embraces fragmentation as an input, not an obstacle, to intelligent pricing and capital allocation.
As other carbon market actors, from Northern Trust to EcoRegistry, ICR, DevvStream and JPMorgan, begin exploring blockchain-based registry systems and tokenized carbon assets, we believe Klima’s role as an experimental infrastructure layer is more important than ever.
Whether we set the standard or inspire the one that does, we remain committed to building the market infrastructure that climate finance needs, and that the planet demands.