Climate Meets Crypto: Regenerative Finance

The climate technology landscape has evolved to the point where governments could deploy multiple, market-ready clean technologies at scale to reduce emissions (high-efficiency solar and wind, for example). That said, they are ultimately sidelined because individual actors are not incentivized to change their current behaviors in a way that fits the current economic system. What does this look like in practice? It can be as simple as the cost between two basic products. For example, water bottled in plastic is far cheaper than water bottled in biodegradable materials or glass. The clear incentive for a resource-constrained actor is to buy the cheaper, more environmentally harmful option. Governments today “enact” climate policies primarily for optics and political reasons. These policies typically have nothing to do with what is actually pragmatic and effective. The global failure to implement real climate change action is more than just a lack of technology; it’s a lack of social coordination.

New Costs, New Models

Implementing effective climate action will result in a wide range of new economic actors, costs, and interactions. The transition to a net-negative carbon society will require that these new climate costs be accurately priced and paid for by consumers of resources. Individuals and organizations (taxpayers) will need to bear the climate transition cost collectively.

Climate cost pricing, coordination, and value transfer need a foundation that can scale to address the global climate issue. Decentralized systems technologies are uniquely positioned to help address the climate issue. Certain financialized products, including carbon credits and CCS (carbon capture & storage) payments, are already being traded and moved on-chain. As multiple chains continue to develop in terms of scalability, cost, and throughput, their value as social coordination layers for climate-related issues will only increase.

New Order & Regenerative Finance (ReFi)

Regenerative Finance (ReFi) is the embodiment of applying decentralized systems to the climate crisis. The goal of ReFi is to use new forms of decentralized money to incentivize human coordination around scaling new climate technologies and policies.

At New Order, we believe that standardization and tokenized asset uniformity are critical components of the global carbon repricing effort. Developing and implementing common standards and metrics for measuring climate change and regenerative finance practices provides the framework for which “impact” can be recorded and verified. Once uniformity is achieved, ReFi-focused teams can build new financial products and tools that are oriented towards long-term climate progress. Tokenized ReFi assets will become novel and powerful forms of money in the global carbon economy.

Example Concepts

We expect that the most impactful re-pricing of climate risk, standardization, and carbon asset trading will take place within entirely decentralized systems. Potential platforms and carbon-related innovations include:

Climate Risk Pricing Market

The effective re-pricing of all risk will need to occur for markets to better understand the true costs of climate impact. A full re-pricing will take decades and the full coordination of global capital markets. In the interim, decentralized technologies can quickly deploy climate-specific risk markets for immediate use. For example, a perpetual contract market tied to a custom real-estate pricing Oracle could be used to speculate on the value of coastal, flood-prone properties. Effective pricing of the accelerating sea rise risk is an immediate way to begin re-pricing climate risk. This model could be expanded or replicated to focus on any number of regions at risk of especially intense climate change (coastal regions, sensitive agricultural areas, drought-prone areas).

Climate Oracles

Current oracle solutions do not offer the breadth of information needed for climate risk repricing markets. Chainlink, Pyth, and newer entrants like API3 primarily cater to price-feed customers with only a small number of alternative datasets available. An all-in-one climate oracle with access to sea level patterns, storm data, and coastal real estate would be extremely valuable to teams looking to build in ReFi. Unique custom oracles for asset classes that will be impacted by climate change are already out in the wild. For example, Parcl brings real estate pricing on-chain in a granular way. Combining this data with climate data could provide a more clear path to climate risk repricing across markets Rapidly bootstrapping the pool of trust necessary to operate an Oracle is only becoming more viable via re-staking tools like EigenLayer. We expect specialized climate data applications to emerge as the demand for climate risk pricing increases.

Tokenized Coal Retirements

Coal-fired power generation is one of the largest emitters of carbon in the world. We acknowledge that in some regions it is by far the most economically feasible solution to extremely cold winters. That being said, getting as much coal as possible off-line over the coming years is critical in terms of meeting climate targets. Tokenized coal retirements can serve as highly valuable carbon collateral given that they remove an especially intensive source of carbon from the atmosphere. Retirements of this type would represent a premier grade of tokenized carbon credit that could be seamlessly integrated into emerging carbon financial infrastructure. Every single long-term climate plan includes the dramatic reduction or elimination of coal powered energy. According to the IEA, the most aggressive climate plans include the elimination of coal energy by 2040 (5% per year average reductions).

Real-Time Sequestration Infrastructure & Liquidity

Improving liquidity conditions for carbon-based assets will ultimately encourage the financing and development of improved carbon removal and sequestration infrastructure at scale. Real-time sequestration data could drive the creation of on-demand carbon financing markets. Stakeholders in these markets could trade and speculate on carbon emission and sequestration values while simultaneously financing the construction of new carbon-negative infrastructure. Creating deep, multichain liquidity for tokenized carbon assets (ex. Toucan’s TCO2) is a critical step in ensuring that these future carbon markets function effectively for all stakeholders. Applications like Toucan have seen accelerated adoption despite the nascency of their ecosystems.

The scope of carbon markets and the decentralized systems that will support them will be enormous. The intersection of environment, carbon, and decentralized systems is a powerful combination of clear technological change, capital, human incentives, and existential risk. New Order is actively exploring innovation in ReFi and is looking to support even more teams that are scaling climate-positive technologies.