Peer-to-peer transaction-based approach for negative external impact
Someday we shall put together all the pieces for peer-to-peer transaction-based approach for quantitative negative external impacts in a comprehensive article or a book and launch the model. Pilot version in fact has been launched already. Everyone interested and supportive is invited to participate and make input into the study or the implementation. Meanwhile, I shall continue to share thoughts on conceptual basis of the model.
Some of the assumptions already discussed in previous papers:[1]
Whether we treat pollution as a resource, a production factor, negative externality or cost the negative impact should be quantified and either be reduced or offset and eliminated entirely, and accumulated impact and harm should be repaired.
The source of negative external impact (pollution),
- from the natural science point of view, is a process (for example, combustion of fuel),
- from legal (regulatory) point of view, it is an installation, physical object in the property of specific entity (for example, internal combustion engine or landfill),
- from the economic point of view, it is a value exchange activity most commonly known as transaction.
There is nothing supernatural about quantification of negative impacts and offsets. It can be done by IoT devices on a peer-to-peer communication basis with open-sourced algorithms applied to verify the existence and correct work of the sensor (meter) and the results it broadcasts.
Although for many self-sustained confidence that there is a precise price is a dominant concept, it is a juxtaposition of subjective exchange values’ metaphors that brings to existence the only real number in economics — the price of the deal for the definite goods or services for the definite moment of time.
For complex issues such as the problem of social costs, negative externalities, the most efficient way to communicate the entirety of information (which none of the stakeholders can comprehend) is market price.
Markets are an artificial creation, not a natural phenomenon. They are institutions, rules established and enforced by their creators. Whoever designs them, private business, government(s), IFI or community, may fail or succeed. Sometime in the future, AI may design markets and robots would be the majority participants. Today environmental markets are dominated by oligopolies of regulators and middlemen, which control and channel the sacred “cashflows”. An individual is entitled to free economic choice but is deprived of it and forced to abide to the institutions and regulators he does not necessarily trust.
Though negative external impact issue can be resolved theoretically if the scope of ownership, private property is ultimately defined, and it is allocated accordingly, private property definitions and scope cannot be carved in stone. There are too many examples showing that the scope of private property must be adjusted along with discovery of new resources or discovery of limits to them. Illustrative case might be such as radio frequencies or anthropogenic GHG emissions.
Until the impact is not quantified, defined and limited or scarce, it generally does not have an exchange value, at least for most people. For example, forests produce oxygen but until it’s scarce it won’t have an exchange value. That’s why “positive externalities” do not have any exchange value unless imposed and enforced. There are interesting implications with regards to intellectual property, to intellectual achievements. Intellectual achievements are scarce and valuable. Grigori Perelman has chosen not to receive the donation for his achievement and not to continue with the science, and this proves again that IP rights and returns are mainly dependent upon the skills, money and craftiness of the holder rather than on actual contribution. It is the case especially with corporations. But this deserves separate discussion.
Getting back the specifics of the transaction-based model. Negotiations over the “negative externalities’” offsetting between the parties involved in the transaction-based model seems over-complicated and might seem to require a middleman. The intended functions of a middleman are to reduce friction (aka “transaction costs”) and substitute trust among the participants of negotiations. Those are important functions if only they were performed efficiently and there was an alternative to select the middleman, including the regulator, or omit middleman entirely. In reality, for instance for carbon markets, market efficiency becomes dependent totally on regulators, middleman, and paternalistic attitudes and models are very hard to overcome. It would happen, but the process would be gradual.
In the transaction-based model, the four parties: 1) the seller (in most cases, the manufacturer), 2) the buyer, 3) the offset provider, and 4) the 3rd party (the injured or the claimant) should negotiate directly and separately with each other on i) quantification and ii) on the price, which brings the number of interactions to 32. In addition, the seller and the buyer should agree on distribution of liability, and negotiations with the 3rd party should include I) the elimination or offsetting of current impact and II) the reimbursement for the harm incurred and accumulated.
It might have been impossible to think of such ends before information technologies have provided us with means to make it possible.
The main negotiating issue would be quantification. Quantification of the impact, as discussed above, is achievable and verifiable, and best to be done by IoT devices on a peer-to-peer communication basis with open-sourced algorithms applied to verify the existence and correct work of the sensor (meter) and the results it broadcasts.
The more complicated quantification issue is whether the impact exists at all, whether it is negative or positive and how much of this impact the buyer and the seller are liable for.
The seller (for instance, the supplier of electricity) may take the stand that there is a positive impact or reduction of negative impact to be accounted for, and the buyer might have a view that his actions and the deal do not have any negative impact at all. The offset provider would most probably state that he is ready to offset the quantified negative impact by quantified removals (offsets) entirely. Let’s mark these positions by -1, 0 and 1 respectively.
The 3rd party would demand the entire offsetting plus reimbursement. Let’s mark it as 2.
In the 90’, working at a very good investment bank I’ve come across a pretty simple solution, which is really practical and widely used. After a profound (and very expensive) presentation of the Bank on the proposed sale price for the facility in question, the calculation, which was based on complicated NPV calculations, the client proposed to sum the seller and the buyer proposed prices and divide the result by two. And the deal was done.
Let’s assume that the stratagem works for our case too, and that 1 unit offset unit price is equal to 1 unit of payment currency, that the seller and the buyer return the currency or offsets, the offset provider receives currency and returns the offsets, the 3rd party receives and returns both. We shall get the results presented in the table below:
To sum it up,
- the seller receives 0,5 in currency from the buyer, returns them to the 3rd party ending up with zero sum;
- the buyer pays to the seller and to the offset provider each 0,5 and receives 0,5 offsets from the offset provider, returns 0,5 of offsets plus 0,25 currency units to the 3rd party and ends up spending 1,25 currency units
- the offset provider receives 0,5 from the buyer and returns 1,5 offsets to the 3rd party, and ends up with selling 2 offsets for 0,5 currency unit
- the 3rd party receives 0,5 currency units from the seller, 0,5 offsets and 0,25 currency units from the buyer and 1,5 offsets from the offset provider and ends up with 0,75 currency units and 2 offsets.
The results would be drastically different if the seller and the buyer take the environmentally responsible stand and come up with the initial proposal equal to 1:
Negotiations may be performed in terms of factors applied to the verified carbon footprint and prices proposed by offset providers.
Existing pledges, commitments, contributions, achievement if quantified and verified must be accounted for.
For the buyer and the seller, the model must be enforced by the requirement to settle negative impact before proceeding with their transaction.
Numerous offset providers may participate, once their offset credits are verified and eligible under specific program (as an example, BloCS). And they do not necessarily should coincide for all the parties as counterparties.
The first three parties to negotiations, the seller, the buyer and offset provider(s) are definite, while the 3rd party should be defined by the rules of specific mitigation program. The 3rd party might be represented by
- Standard factor,
- By self-executing protocol,
- By community,
- By independent decentralized organization,
- By foundation or fund,
- By class action.
All of the technical difficulties and troubles with the development and implementation of the model would be rewarded by the possibility to omit imposed mediation and interventions and sustain one’s natural right for economic choice.