How do we ensure the benefits of Carbon Markets reach local communities?
For those of us who live in the global south, hearing about how technological advances will make our lives better can be stomach-turning.
Without understanding the context, US-based technologists can overestimate how easily their technology is going to be adopted, and underestimate how resilient structural problems, like corruption and weak governing institutions, or lack of infrastructure, can undermine well-meaning projects in places like Ecuador.
If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up for my substack here.
Carbon markets are not exempt from these systemic/structural issues.
Satellite technology may get us closer to measuring carbon sequestration capacity without the need for much human intervention.
Tokenized carbon credits may make it easy to connect supply and demand.
Smart contracts may enable seamless payments, at least for the demand side of the equation.
Without wanting to be a pessimist, crypto-based solutions may not be enough to make carbon markets work in the global south.
A recent article from ProPublica has got me thinking about the dangers of naive assumptions regarding carbon markets.
Titled, “An Even More Inconvenient Truth: Why Carbon Credits for Forest Preservation May be Worse than Nothing,” the article documents how a carbon offset conservation effort undertaken in Acre, Brazil, has more or less failed.
Based on the United Nation’s REDD model (Reducing Emissions from Deforestation and Forest Degradation), the project is portrayed as failing on all fronts: farmers were left without a means to survive and began cutting down trees outside the protected areas (known as carbon leakage).
Others, resentful of how funds generated from the sale of offsets were managed, took their revenge out on the protected forest by colluding with loggers.
Hapless Campesinos struggled to make ends meet with the suggested replacement crops.
The project’s verifiers haven’t produced a report in five years, despite the fact that the credits have already been sold.
While the article is somewhat sensationalist, it points to a lot of deep, structural problems that need to be solved in order for carbon markets to do their job of removing Co2 from the atmosphere.
In what follows, I’ll try my best to express some admittedly half-baked thoughts about how we might set up carbon markets such that the benefits are distributed in a model that takes the shape of an hourglass, with value distributed primarily at the head and the tail, rather than a bell curve, where value is primarily accrued to the middle of a market, meaning intermediaries.
The primary question we need to address is how do we ensure that the monies collected from the sale of carbon offsets get into the hands of the farmers conserving and restoring forests or creating new sources of carbon sequestration?
As mentioned in previous posts, carbon markets only work if the economic incentive on the ground is strong enough for the individuals at the forefront of environmental destruction to change behaviors.
In the United States where rule of law, property rights, and telecom infrastructure is omnipresent, solving the problem of connecting supply and demand may be relatively straightforward.
Working with savvy property owners in an imagined future, we can envision using a combination of technologies and some sort of decentralized MRV (Monitoring, Reporting, and Verification) model to allow for offset buyers to have near-perfect information and assurance that their money is actually being used to move the world towards some sort of carbon sequestration net benefit.
Working in the global south everything becomes murkier.
First of all, in a country like Ecuador, property rights are neither guaranteed nor documented.
Someone can live on a piece of land for years without ever having title to that land. Without title, how can we enter into a contract with that person in which he or she commits to long-term land management?
Land “invasions” are common, in which individuals or groups will appropriate property that doesn’t belong to them.
Through corruption, invaders may even pay off bureaucrats working in property registries to create a confusing paperwork trail that can condemn the dispute to years of legal squabbling.
In other cases, land may be held collectively with varying degrees of legality.
A local government might recognize an indigenous nation’s claim to an area, while the federal government does not.
As soon as resources are discovered in the area, the community and the government will go to battle in the weak judicial system. Even before there is a judgment the oil, gas, or mining company may already move in and begin operations.
Even when property rights are straightforward, you may still have illegal activities, such as tree harvesting on collectively owned or private property.
I recently saw a case where a company made a major investment to build tourism infrastructure in a remote part of Colombia, only for the area to be overtaken by drug traffickers. Such risks are real in much of the Andean region, Central America and Mexico.
Lastly, just because lands are entered into a carbon offset scheme does not protect them from impeding environmental threats.
A landholder may be satisfied receiving funds from Carbon offsets until a palm oil farmer approaches him with an offer of immediate cash in exchange for his land. As the agricultural frontier pushes up against the forest frontier, landholders will struggle to hold off the forces of destruction.
So assuming we’re able to organize a series of landholders, be they collective or individuals, into a carbon offsetting scheme where we are both conserving and restoring the forest, thus preserving existing carbon sequestration capacity and adding more, how do we payout?
Currently, carbon offsets are usually paid for “ex-post” or “ex-ante”.
When an offset project is financed ex-ante, the buyer will pay out immediately for future sequestration. With ex-ante, the buyer is assuming the risk because they are putting up monies before any sequestration has taken place.
With ex-post, sellers assume the initial cost and the risk, because they’ll do a lot of work and not get paid until that work has proven to effectively remove carbon from the atmosphere.
When we talk about the global south, ex-post is often going to be off the table. Small-scale farmers have immediate needs and cannot afford to let a forest grow only to receive the benefits well into the future.
Those who work in the forestry industry in places like Ecuador have seen how poverty will sometimes drive farmers to cut down certain types of trees in their infancy, even though those trees fetch a much higher margin after reaching a certain level of maturity.
In addition, true ex-post would mean payment would come after 100 years since Carbon exists in the atmosphere for about 100 years, and trees, therefore, need to exist that long in order to provide a net benefit to the planet.
In the article mentioned above about Acre, Brazil, we are told of a perfect shit-storm made possible due to ex-ante financing, and we can imagine that enough of those types of stories spreading throughout media outlets could do long-term damage to the carbon industry.
A company buys offsets and then brags about achieving carbon neutrality.
A quick look at the offset project shows deforestation continuing or simply moving to a nearby forest not covered in the scheme.
The money paid by the buyer disappears into the bureaucratic entrails of a local government, never to be seen again. Instead of a win-win, the world is witness to a lose-lose-lose.
So what alternatives exist?
The first step to ensuring that the digital world is compatible with the analog world will definitely require working with communities since local communities can either act as the decentralized enforcement that ensures the integrity of a forest, or the force that cuts it down.
Second, one option to design a payment scheme would be to pro-rate payment.
Let’s imagine that instead of paying out ex-ante, a buyer advances the value of the first year of sequestration to the seller.
At the end of year one, we look at the lands to determine progress. If no progress has been made, the buyer is out of pocket but only for a fraction of the value they would have overwise invested.
If progress has been made, the second-year funds can be advanced, either at a fixed rate determined at the beginning of the project, or at a floating rate based on the market value of a ton of carbon.
The next question is, how do you distribute the funds?
Many people might default to the idea of working with local governments to fund needed infrastructure. The problem with working with governments is that corruption in places like Latin America can often be the rule rather than the exception.
If corruption didn’t exist, resource-rich countries like Venezuela and Ecuador would provide their citizens with the quality of life their vast oil reserves merit.
And yet, Venezuela is broke and Ecuador is always one step away from an IMF adjustment program. Relying on governments is not always a solid plan A.
The next idea might be crypto wallets: let’s imagine we undertake a census of every member of a community.
Then, each day satellite images verify the progress made by the reforestation effort and a smart contract pays out a daily value to each member of the community. If deforestation continues, the payments stop until the community is able to collectively address the source of the deforestation.
While such an idea makes sense in a crypto future, two immediate problems emerge: the first is that you have to take primarily unbanked people and on-ramp them into the complicated world of crypto wallets and exchanges.
Then, these communities may not even have cell phone service, let alone any means to convert their cryptocurrencies or stable coins into the local currencies.
What happens when new people move to a community? Are they left out of the scheme, or are the existing community members forced to accept a smaller piece of the pie in order to accommodate the newcomers?
Also, what currency are the community members receiving?
If they’re receiving a stable coin, is it easy to convert that stable coin into local currency? If the currency is a cryptocurrency, is the entire project at risk if the bottom falls out of the currency and it devalues?
Another option would be to set up the equivalent of a trust fund through a smart contract in which the community could borrow up to half the accumulated capital at a nominal interest rate.
As the Peruvian economist, Hernando de Soto has shown, many people in the global south fail to prosper from capitalism because they have no access to the tools that lift people out of poverty, including credit.
Banks in the global south tend to only lend money to people who already have it, thus further concentrating ownership of the means of production.
While lots of cooperatives exist in Latin America, they tend to demand higher interest rates than even the banks. Seeing cooperatives charging 15–20% for a loan is not uncommon. 3%-5% loans anywhere in Latin America would be highly disruptive.
In a community where everyone knows each other and is willing to vouch for one another, a model not dissimilar to the community-based lending perfected by Graamen Bank could help solve numerous problems born of a lack of access to capital.
Then, after a set period, capital could be released to the community members for them to do with it as they please. Monies left in the treasury could be used for staking (in this article we talk a bit about what staking is), earning a modest 5%-7% return compounding annually.
While paying monies out to individuals may seem to empower, we also have to be aware of the problems of creating a semi-universal basic income.
People who live in agriculturally productive or forestry-rich areas are not likely going to find purpose in simply collecting funds in exchange for giving up work.
Moreover, if the forest isn’t given an economic purpose that serves the community, that forest is vulnerable to outside invaders.
Building sustainable forestry and agriculture into carbon offset schemes is likely the best way to ensure that the offset scheme is a motor rather than an impediment to local economic development.
Sustainable tourism is another option, but there is a fair degree of naivety in thinking that you can gift a community a business model and that business model can exist outside the economic pressures created by competition.
For example, sustainable tourism requires a lot of knowledge to execute properly.
In the North and the South of the planet, tourism is only viable for half the year.
Also, if people are boosting the airline industry by taking planes to far-off countries to partake in sustainable tourism, we’re probably doing more damage than good.
Here we require partnerships in order to foster the type of knowledge sharing and skills building required to develop competitive industries in places that lack them.
One model I like is that of Rainforest Expeditions in Perú.
The local indigenous community signed an agreement with a tourism operator for 20 years.
During those 20 years, the tourism operator trains the local community in all aspects of managing the business. Then, at the end of the contract, the local community can either re-negotiate the terms, keep them as they are, or take over management completely.
To figure out what works to connect supply and demand in carbon markets, we’re going to have to run a lot of experiments, and those experiments are going to have to be well planned and executed.
Otherwise, we run serious risks by involving vulnerable communities in “fail fast” projects in which they have much more to lose than anyone else.
The first step in solving these problems is talking to communities.
Just like any good UX/UI designer needs to be an anthropologist in order to understand the culture and behavior of her target audience, we need to work with communities to understand existing infrastructure, practices, etc., in order to find solutions that work for communities.
Lastly, my larger point is that a crypto solution to making carbon markets work may only be about 30% of the entire solution. A lot of work needs to be done in order to make carbon markets work in the global south. The opportunity is massive, and so too is the challenge.
If you’d like to receive my weekly newsletter about crypto, climate, and carbon, please sign up for my substack here.