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ClimateCoin by Dennis Peterson

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Pitch

Motivate voluntary carbon offsets with cryptocurrency


Description

Summary

Several organizations sell voluntary carbon offsets, allowing individuals to purchase audited carbon reductions to offset their own emissions. Few people do this, because the purchaser's cost is much higher than his benefit from that small contribution. 

To get more donations, we can compensate the donors.

Bitcoin and its successors have proven that if early adopters get big rewards, it's possible to bootstrap a new currency, even with nothing backing it. The currency is initially adopted by speculators, and as it gains value it is gradually used more for commerce, ultimately being "backed" by all the goods you can buy with it.

Therefore, it should be possible to motivate carbon offsets by creating a new cryptocurrency, and issuing it to people who offset carbon.


Category of the action

Mitigation - Helping U.S. enact carbon price legislation


What actions do you propose?

Create a new cryptocurrency, which here we'll call ClimateCoin. Form partnerships with organizations that sell carbon offsets, which will allow offset purchasers to opt in to the system. Send Climatecoins to the purchasers, in proportion to the amount of carbon they offset.

Each year, issue one Climatecoin per tonne of emitted carbon (approximately ten billion currently). Each week, divide the total weekly emission by the total offsets. If one million tonnes are emitted for every tonne offset, then send offset purchasers one million Climatecoins for each tonne they offset.

Those coins will be worthless at first, just as Bitcoin was. But as with Bitcoin, early adopters who maintain their holdings will have the potential for large rewards. At the same time, they'll be offsetting carbon, which some people do today with no compensation at all.

As time passes and more people participate, Climatecoins will gain value. Fewer coins will be awarded per tonne of offset, but they'll be worth more.

For as long as global carbon emissions remain constant, Climatecoin will have linear inflation, adding the same amount of new currency each year. The percentage growth will decrease each year, but will be quite high for the first several years. However, this was also true of Bitcoin for the first four years, and it nevertheless had a very large gain in value per coin. (Bitcoin has linear growth except it cuts the growth rate in half every four years.)

If the currency is successful, then all large holders will have a direct economic incentive to work towards reducing global carbon emissions, which would reduce inflation of the currency.

Security

Cryptocurrencies are large distributed ledgers of all transactions on the network. Their main challenge is to bring everyone on the network to agreement on what the ledger says, despite network delays and motivated attackers. This agreement prevents people from spending the same money twice.

The first and most popular solution is Bitcoin's. New additions to the ledger are processed with expensive computations, performed by "miners." The version of the ledger with the most accumulated computation is the one everybody accepts. This is called "proof-of-work."

For Climatecoin, proof-of-work has disadvantages. One is that all that computation consumes significant energy. But a more fundamental problem is that miners have to be compensated for doing all that work. The way currencies do that is by allowing the miners to mint a certain number of new coins. This reward has to be fairly large, if the currency is valuable, or it will be too easy to attack.

But we don't want to mostly award new coins to miners. We want to mostly award them to people who offset carbon.

Fortunately a new solution has emerged, called "proof-of-stake." Instead of doing computations on new blocks of transactions, people consume accumulated "coin age." The ledger with the most consumed coin age wins. This allows people to earn a small amount of interest on their holdings. People with large holdings have a built-in incentive to secure the network, and coin age consumption is essentially free, so the interest paid can be low.

A problem for most proof-of-stake currencies is figuring out how to do the initial distribution. That's not a problem for Climatecoin. 

The two most valuable proof-of-stake coins currently have valuations of $66 million and $39 million. However, there is some concern about the security of proof-of-stake, as well as proposed solutions.

Scalability

Cryptocurrencies require every full node to see every transaction. Scaling them to major-currency levels is not entirely a solved problem. Several hundred transactions per second is definitely attainable, but past that we run into trouble.

However, that's only a problem if we insist that all transactions be done "on chain," ie., directly from one cryptocurrency account to another. A simple workaround, if necessary, is to have several thousand service providers who maintain Climatecoin "checking accounts," and use on-chain transactions only to periodically settle balances with other providers. With this approach, Climatecoin could easily scale as large as the U.S. dollar.


Who will take these actions?

Creating a new cryptocurrency which is not a near-exact copy of an existing opensource currency is a nontrivial project requiring specialized skills. It's cryptographic software which, if successful, protects substantial real-world value.

However, within a year or two it may be possible to do it much more easily, by using Ethereum. 

Ethereum is a platform for cryptocurrency applications, currently available in an early experimental version. It uses a powerful scripting language to allow users to create their own currencies and other financial applications. Creating a simple new currency in Ethereum requires only 14 lines of script.

The current version of Ethereum uses proof-of-work, but the final version may primarily use proof-of-stake, with only 1% as much proof-of-work as Bitcoin. Either way, implementing a currency within Ethereum leverages the security of Ethereum itself, without requiring the currency itself to implement its own security at all.

Without Ethereum, Climatecoin would require centralized distribution, and ideally should be run as a nonprofit, with the cooperation of carbon offset organizations. No participation by governments or other large entities is required.

With Ethereum, governance functions can be crowdsourced via scripts. Stakeholders could vote on which organizations (and associated cryptographic keys) are authorized to issue currency. The amount of carbon emissions can be input from authorized accounts or via the Schelling method: stakeholders vote on the correct amount, and are rewarded if their votes are near the median vote. Using these methods, Climatecoin could be run in a completely decentralized manner.


Where will these actions be taken?

Climatecoin would be a global currency, just like Bitcoin. 


How much will emissions be reduced or sequestered vs. business as usual levels?

Assume somewhat optimistically that Climatecoin attains success comparable to Bitcoin, having an $8 billion market value in its fifth year. Since it adds a constant number of coins that year (assuming constant CO2 emissions), it will have 25% nominal inflation in the fifth year, awarding new coins with a value of $2 billion. Assuming economic equilibrium, the fifth year of Climatecoin would motivate $2 billion in carbon offsets, or 20 million tonnes of carbon at $100/tonne.

If in the 21st year Climatecoin has a market cap of $1 trillion, nominal inflation that year would be 5%, giving us $50 billion in offsets or 500 megatonnes.

Clearly, Climatecoin offsets can't solve the problem alone. However, the number of new coins produced each year depends on the carbon emitted. If Climatecoins were such a large part of the world economy, everyone holding them would have an economic interest in reducing inflation. This could enhance support for other measures that reduce emissions.


What are other key benefits?

Cryptocurrencies are useful in their own right, allowing things like convenient, low-cost international payments. Ethereum goes further with cryptographic contracts, programmable by anyone. Being part of the Ethereum ecosystem could bring side benefits difficult to predict in advance.


What are the proposal’s costs?

Costs are trivial. Many cryptocurrencies have been created by individuals, and Ethereum would make it much easier. Additional development would be required to accept data from carbon offsetters, send new currency to their customers, and build a web interface for the general public.


Time line

Ethereum is expected to launch in Q4 2014, but test development on Ethereum's alpha platform could begin sooner. Development of an independent currency would likely take a little longer, and it may be wise to wait for more discussion of proof-of-stake security issues. Deployment can begin as soon as the currency and other software is ready, and at least one carbon offsetter agrees to participate.


Related proposals

The 2012 proposal Carbon Rights advocated awarding credits for absorbing carbon. The credits would have value because they would be usable for paying carbon fees to the government. Since then, Bitcoin has shown more convincingly that you can support substantial currency value even if you don't have to use the currency for taxes.

Several other proposals this year involve cryptocurrencies,  including Global 4C and The People's Cap and Trade, both in the U.S. Carbon Price contest.


References

More information on Ethereum:

https://www.ethereum.org

http://www.reddit.com/r/ethereum

For an introduction to technical workings of cryptocurrencies, a good place to start is the original Bitcoin paper:

https://bitcoin.org/bitcoin.pdf

For more on cryptocurrency scalability, see the GHOST protocol paper: https://eprint.iacr.org/2013/881.pdf