Crypto Against Climate Change
Carbon markets and the case for ClimateCoin
By 2023, expect the partial or full integration of at least one crypto-asset into one of the world’s largest emerging commodity markets. There’s good reason why you’ll want this one to work.
1. Kicking the (crypto-kitty) cat
Energy is central to nearly every major challenge and opportunity the world faces today. Access to energy is essential for jobs, security, mitigating climate change, food production, and increasing wealth and income.
Globally, 85.3 per cent of the world’s population had access to electricity in 2014, an increase of just 0.3 per cent since 2012. That means that 1.06 billion people, mainly in rural areas, still live without electricity.
That’s why any conspicuous consumption of energy draws attention.
It’s why Bitcoin has faced some negative attention because of the profile of its use of energy, stemming from work presented by Digiconomist through its Bitcoin Energy Consumption Index.
The criticism is not just understandable; it’s legitimate.
It’s not just about the dubious morality of yet another economic activity consuming energy in spades while hundreds of millions of people go without. The evidence that connects our consumption of energy to the catastrophic loss of biodiversity, and to violent climate disruption, is damning.
Responses from advocates of Bitcoin have varied from glib to evasive, preferring ‘what-about-ism’ and ‘myth-busting’ over addressing the matter head on.
One response went as far as to suggest that “the Bitcoin revolution could drive [an] explosion of innovation in clean efficient energy.”
That’s cute. It also fails the giggle test.
I addressed criticism of Bitcoin’s energy use and the responses in “Will Bitcoin Destroy the Paris Agreement, The Planet, And Life As We Know It?” As you might gather from the title, the answer is “Of course it won’t,” but not for the reasons given to date.
Criticisms will continue and, from a policy maker’s perspective, it’s easy to understand why.
Faced with a choice between energy guzzled to verify the transactions of an exotic crypto-asset on its blockchain, and energy consumed for publicly-negotiated outcomes, policy makers will tend to choose the latter.
2. How climate policy works (or should)
If you’re familiar with crypto and would like a primer on climate policy, this next section’s for you.
The United Nations Framework Convention on Climate Change enjoys recognition by more than 200 Parties and Observer States.
It’s based on decades of observational science and modeling overseen by the Intergovernmental Panel on Climate Change. The predictive capacity of its work continues to improve.
Those predictions tell us that a world with only a 2-degree rise in average temperatures by the year 2100 will become unlivable. Expect hundreds of millions of people on the move.
The Paris Agreement was adopted by representatives of 195 countries in December 2015 to confront this civilizational threat.
It entered into force in November 2016, thirty days after the date on which at least 55 Parties to the Convention accounting in total for at least an estimated 55 per cent of the total global greenhouse gas emissions ratified, accepted or approved the Agreement.
The Agreement set a target of “1.5 to stay alive” (that’s 1.5 degrees above pre-industrial levels.)
Here’s an important point, especially for our libertarian and voluntarist friends. “Entry into force” does not mean a top-down approach. Paris doesn’t contain a single top-down target.
This isn’t a Trojan Horse for One World Government…
Instead, Paris works — or should — more as a market signal than as a binding statute. All commitments are “nationally-determined.”
For some this is its strength. For others, it’s weakness. Either way, it’s the best we’ve got.
It’s for each country to figure out what it’s to do, on its own terms. This is a cornerstone of the Agreement, and one that protects and promotes national sovereignty in climate diplomacy and action.
The challenge we face is how to create the incentives, pay for and apply the technologies, elicit behaviors and ensure transparent progress that can accelerate the energy transition.
The Paris Agreement also lays out the respective responsibilities of rich, transitioning (emerging) and developing countries.
Why do these distinctions matter?
They matter because rich countries have agreed to take a responsibility for historical and current actions that are destabilizing the climate system for present and future generations everywhere.
It also recognizes “loss and damages” that need dedicated attention, because some climate effects will be so severe that adaptation or mitigation can’t help.
As such, responsibilities extend to cooperating with transitioning and developing countries in: (i) Adaptation; (ii) Capacity-building; (iii) Climate Finance; (iv) Mitigation; and (v) Technology.
Despite this distinction between the burdens of responsibility, we still find government and non-government actors in industrialized countries continuing to criticize transitioning and developing countries.
The criticism usually touches on economic activity that lags behind, or of ‘vested interests’ holding back progress (as though these are not universal phenomena.) For developing countries, moralizing like this without helping can feel like a new form of old patronizing, colonial habits.
Take for instance ongoing disputes over the carbon emissions in the shipping industry (commercial shipping accounts for about 90 percent of world trade.)
These criticisms would be worthy if they were accompanied by follow-through of commitments that rich countries made in Paris. Otherwise they begin to look suspiciously like new barriers to trade.
That said, what exactly are rich and the larger transitioning countries doing?
From 2012 to 2014, three quarters of the world’s 20 largest energy-consuming countries had reduced their energy intensity — the ratio of energy used per unit of gross domestic product. The reduction was driven mainly by greater efficiencies in the industry and transport sectors.
However, that progress is still not enough to meet the target of doubling the global rate of improvement in energy efficiency.
Globally, the share of renewable energy in final energy consumption grew from 2012 to 2014, from 17.9 per cent to 18.3 per cent. Most of the increase was from renewable electricity from water, solar and wind power. Solar and wind power still make up a minor share of energy consumption, despite their rapid growth in recent years.
The challenge is to increase the share of renewable energy in the heat and transport sectors, which together account for 80 per cent of global energy consumption.
Crypto-assets, shipping — and indeed all areas of economic activity — can only use the energy systems that are available to them. There is nothing innate or inevitable about crypto-assets that makes them unsustainable.
To stress the point: the issue is not crypto’s use of energy per se. The issue is a 150-year old energy system that has past its sell-by date.
Paris is an enormous achievement. It’s a rallying point, and not just for governments. The business community was quick to recognize its importance and the opportunities it presents. It welcomed the policy certainty.
We have ample evidence that momentum for a low-carbon future extends across a wide range of actors.
Innovators in business, capital markets, city governments, consumer groups and human rights organizations are showing leadership even as some national governments falter.
This is promising but will it be enough?
3. Carbon markets post-2020
The ultimate aim is to decarbonize all economic activity by 2060. That transition requires — at the very least — frameworks, pricing-as-incentive, appropriate technologies, broad-based participation, and lots and lots of change in behavior.
Up until 2020, carbon markets will continue to operate under terms framed by the Kyoto Protocol.
A good chunk of activity in those markets was projectized, and faced criticism of narrow opportunism and cherry-picking (country x selecting country y for a carbon offset project for reasons not limited carbon offsetting; country y getting ahead of a more compelling project in country z because it happened to have the tools to develop proposals first.)
These markets delivered mixed results at best, and have been in need of resuscitation for several years.
From 2020 onwards, a more ambitious ‘sustainable development mechanism’ will operate to take into account the fact that every country, every market, every community and every individual in the world can play an active and empowered part in mitigating climate change.
Each actor can do so voluntarily, out of a sense of noblese oblige. Eventually as carbon pricing evolves, the market value of individual ‘investments’ are expected to take shape.
The World Carbon Market Database provides an analytical overview of 13 carbon trading markets in three continents.
We can expect the size and sophistication of this market to grow substantially over the next decade, and measurable in the trillions of dollars. Here’s one interpretation of how the market mechanism could play out.
The ramping up is already under way.
In December 2017, China announced a domestic carbon market to curb climate change emissions. The initiative has been described as “the Mount Everest of climate policy” by the Environmental Defense Fund.
This commitment followed an announcement earlier in the year that it would invest more than US$300 billion in renewable technologies.
Efforts are under way to evolve carbon pricing, reporting, monitoring and verification in Latin America and the Caribbean.
Impact investment reflects a burgeoning interest among investors for their money to not just grow, but to do good.
The market for sovereign, municipal and corporate green fixed-income bonds has exploded from a standing start to half a trillion dollars in value in seven years.
For all of these reasons, there’s mounting evidence for — and momentum behind — the idea that a low-carbon business strategy is in the direct self-interest of brands that wish to prosper in the future. Yes, even for oil companies.
All said and done, it won’t be easy to get carbon pricing right, as this critique of the European Union’s approach shows.
Nevertheless, the elements for the new carbon markets are already in place.
The nationally-determined contribution converts the right to pollute the global atmosphere with a tonne of CO2 into a sovereign asset.
As a result, governments/markets will can begin to value emission rights more accurately. Why? Because voters/investors will want to be sure that governments/markets won’t pass on sovereign assets below their tradable value.
(I use the ‘/’ above deliberately. It does not indicate either/or. Rather, it reflects a recognition that both states and markets can act, and preferably act in complementary ways.)
Eventually we can expect domestic and regional carbon markets to spread and link up internationally. As soon as any kind of carbon asset becomes transferable between countries and their markets, it’ll need to be accounted for as an emission in the nationally-determined contribution.
4. Enter ClimateCoin
Given the above, it’s quite clear that carbon markets and crypto-assets are about to meet through tokenization.
Mobile-enabled 24/7/365 trading of a multi-trillion dollar carbon market via crypto?
Transparent accounting of carbon emissions on a public blockchain to offset political and commercial risk?
A solution to double counting?
ClimateCoin is designed specifically to cater to this emerging global carbon market. It is based on an Ethereum ERC20 smart contract. It operates out of ‘Crypto Valley’ in Zug, Switzerland. Its token, aptly named the ‘CO2,’ is ‘stapled’ to a carbon credit pool.
In its own words,
Our … tokenized system will make [it] possible for any citizen in the world, and also corporations, to buy carbon credits peer-to-peer by using our coin.
You can read more in latest version of their white paper.
The convergence of nationally-determined contributions to climate mitigation, a functioning carbon market, and a crypto-token offer a very precise answer to a set of enduring challenges. How to:
- Account accurately for carbon emissions
- Open carbon trading up to everyone
- Limit or remove friction from the market
Every five years, the international community intends to meet to take stock of how everyone is doing in accordance with the Paris Agreement. The next such stocktaking event will likely be in 2023.
The transparency that ClimateCoin can bring to carbon trading could become a crucial tool in tracking progress under the Paris Agreement.
It’s conceivable that ClimateCoin could help to create an inclusive peer-to-peer carbon market from the individual level up. That’s its aim.
It could become an essential component of the emerging system of international transfer of mitigation outcomes.
It could also help provide a granular and accurate basis to account for actual progress on containing greenhouse gas emissions.
There are of course the familiar reservations worth trotting out.
Is this a speculative project? Perhaps. Is it untested? Largely (it’s still only a few months old.)
At the same time, does it confront head-on criticisms about the energy usage of other crypto-assets. It does (by offsetting its own carbon footprint.)
Does it contribute to a known societal challenge by embracing science-based public policy and market opportunity? It does.
Quick gains from crypto are fine as far as they go. If that’s your motivation: fine.
At the same time, it’s encouraging to find projects like ClimateCoin adding to a larger purpose, one that makes it worthy of our curiosity at least, and perhaps more.