ClimateCoin 2015 by Dennis Peterson
To change attitudes, change incentives. Let's make a digital currency that awards new coins to people who voluntarily offset carbon.
Why can't global warming be solved by voluntary action?
Imagine a space colony of 1000 people, suffering a buildup of smelly frobgas. All the frobgas can be eliminated for $10,000. Each person would be happy to pay as much as $15 to get rid of the smell. A $10 tax would make most people happy, but the king has no sense of smell and thinks it's a hoax.
Someone offers to take donations and remove as much frobgas as people pay to remove. If everyone donates $10 then the problem is solved.
But many people think: my little $10 donation would only remove 0.1% of the frobgas. If removing all the frobgas is worth $15 to me, then that 0.1% is only worth $0.015. I hope lots of people donate, but my own contribution won't change much either way. I'm much better off if I keep my $10 to myself.
Economists call this the "public goods problem," and say that rational people won't contribute anything at all. Real humans are a little more altruistic than that, but not by much.
Or can it? How Bitcoin solved the public goods problem
Bitcoin is a digital currency without central control. It's a public good, available to anyone. Bitcoin requires extreme amounts of computation, which must be contributed voluntarily by people on the network. Standard economics would say that bitcoin must fail.
In fact, people contribute very large amounts of computation to Bitcoin, at great expense. They do this because when they contribute to Bitcoin, the network mints them some brand-new coins. The coins aren't backed by anything, but they have enough value anyway for the contributors to make a profit.
Bitcoin solved a large public goods problem, in a completely voluntary way.
We can solve our CO2 problem the same way.
Usually people rely on government for public goods problems. But governments aren't doing a very good job with the climate. Let's quit depending on them to save the planet.
Let's make a digital currency that awards new coins to people who voluntarily offset carbon.
What actions do you propose?
Civilization emits about 30 billion tons of CO2 every year. We have ways to reduce that: reforestation, building renewables instead of coal plants, etc. We have organizations that take voluntary donations, and use them to pay for carbon reductions, called "offsets." For about $12 you can pay to offset one ton of CO2 emissions, effectively reducing global emissions by one ton. We have certifications that ensure that your donation is effective.
But in the absence of a price on carbon, imposed by governments, all this is voluntary. It's a public goods problem, which many people propose fixing with the stick of taxes or regulations. Climatecoin offers a carrot: offset carbon, get coins.
What is cryptocurrency?
Currencies like Bitcoin are just shared public ledgers. They tell how much currency every user has, and record all the transactions between users. They use cryptography and expensive computations to make sure everybody agrees on everything in the ledger. Nobody can break the rules of the currency. The rules control how fast new "coins" are minted, and who gets the new coins.
Anyone can launch a currency, without the approval of any authority. It's just software, running on people's home computers and talking to other computers running the software.
How we'll build Climatecoin
If we had to start from scratch, Climatecoin would be a major software project. Fortunately, there's a much easier way.
There's a new cryptocurrency platform, called Ethereum, which lets people write their own apps that run on the platform. The client software will have an "app store." These apps can do crowdfunding, voting, gambling, practically anything involving money. They can also be entirely new currencies.
Ethereum handles all the hard stuff, so our app only has to do the parts specific to Climatecoin. By using Ethereum, we don't have to pay new coins to the people running the currency, since Ethereum takes care of that. We can focus on paying for carbon offsets.
The Ethereum project launched in 2014 with a $15 million crowdfund, and is currently in public beta testing. There's no need to specifically partner with the Ethereum team itself; Ethereum is designed so users can build applications like this on their own. The online community of Ethereum application developers is likely to provide helpful advice.
This proposal's author has already built a rough-draft implementation of Climatecoin using Ethereum script.
How we issue currency
Many nonprofits already accept donations in Bitcoin. To accomplish this, all they have to do is publish their Bitcoin address. Anyone who knows the address can use their Bitcoin client software to pay funds to that address. The nonprofits can keep the bitcoins or exchange them for dollars.
Ethereum has its own built-in currency, called "ether." All we need to do is ask approved carbon offsetters to publish an Ethereum address, so they can accept donations in ether.
People using Ethereum will have some funds in ether, and the Ethereum client software and app store. One of the apps will be Climatecoin. To offset carbon and receive climatecoins, simply open the app and buy some climatecoins.
When you make that purchase, you'll pay with ether. The Climatecoin app forwards the ether to offsetters, and issues the appropriate number of coins to the donor. The app also allows users to check their balance, and pay climatecoins to other Ethereum users.
Cryptocurrencies bootstrap their value with massive deflation. Early adopters get outsize rewards, compensating them for the risk of using an unproven currency. We need the same dynamic for Climatecoin.
Therefore, we award a number of climatecoins per year equal to total carbon emissions. We prorate that total among all the donors. For example, with 30 gigatons CO2 emittted in a year, we will issue 30 billion climatecoins. If in the first year you contribute 1/1000 of the total Ether donated through our app, then you will receive 30 million climatecoins.
As Climatecoin itself gains in value, speculation begins. People want climatecoins because their value is increasing. The same happened with Bitcoin. In that case, more people bought specialized computers and ran up their electricity bills to get the newly-minted coins. For us, more people will offset carbon.
This means a given amount of ether will buy fewer climatecoins, since more total ether is being contributed. This is also the same dynamic as Bitcoin, which awards fewer coins for a given amount of computation, as more computation is contributed.
In short, Climatecoin economics are modeled closely on the proven success of Bitcoin.
The first users will be Ethereum enthusiasts. Climatecoin will be developed in public, with help from the Ethereum forums, so the project should have visibility within the community without any particular effort. As Ethereum rolls out to a broader base of users, we'll expand the marketing to other people interested in climate change.
With more traction, carbon offsetters may be willing to feature Climatecoin on their websites. Startup companies hoping to profit from carbon offsets could even help with marketing.
What can you buy with climatecoins?
As Climatecoin gains popularity, interest will grow in obtaining coins by exchanging real goods for them. These goods could be anything, but anyone selling "green," sustainable, organic, or renewable products will find especially receptive customers among Climatecoin users. Merchants need only publish a Climatecoin address, and customers can use our app to pay them. Small merchants especially can benefit, using Climatecoin to market to a small but enthusiastic customer base. They can exchange their coins for dollars or ether, or keep them for other purchases.
As our Climatecoin economy expands, other merchants will join in. Any company hoping to improve its environmental image can take Climatecoin payments, supporting the currency's value and thus helping to motivate more offsets.
Upton Sinclair once wrote, "It is difficult to get a man to understand something, when his salary depends on his not understanding it." Perhaps the converse is true as well; if it is possible to profit by offsetting carbon, maybe more people will feel that climate change is an important problem to solve.
Many "skeptics" feel that climate action will wreck the economy, or that cap-and-trade will be abused by the privileged to reap profits, or that government will use climate as an excuse to increase revenue collection.
In place of those seemingly grim scenarios, we offer a purely voluntary solution that brings an opportunity for profit to average citizens. There's nothing to fight against; anyone who's not interested can simply ignore it. But perhaps some skeptics will participate, purely as speculators, and find they like the feeling of contributing to a solution.
Meanwhile, money will flow to reforestation projects, renewables plants, and if we're lucky, innovative new solutions for drawing down CO2. We'll start making a better world, without hurting the economy at all. The more we do, the more people will see the benefits, feel good about positive accomplishment, and want to be part of it.
Unless Climatecoin is absurdly successful, it won't suffice to solve climate change by itself. But Climatecoin can encourage people to cooperate on constructive solutions, and people who get used to that sort of cooperation can accomplish amazing things.
Initially Ethereum, like Bitcoin, will rely on large amounts of computation ensure that everyone agrees on everything in the ledger. Since this uses energy, from a climate perspective it isn't ideal. However, the Ethereum project hopes to transition to a consensus mechanism called "proof-of-stake," which would have insignificant energy consumption. If they succeed, no change to Climatecoin will be required.
Two proof-of-stake currencies are already operating; see the references section for details.
Few carbon offsetters are likely to be interested in ether donations before Ethereum gets significant traction. If we wish to get started sooner, we can create with one approved "offsetter," which simply accepts payments in ether, converts them to dollars, and uses the money to buy carbon offsets from other organizations. This offsetter would have no special status, and there could be more than one organization doing this.
We can skip this if we're willing to wait until Ethereum is reasonably well-known, so that offsetters are willing to accept payment in ether. Offsetters don't have to be aware of Climatecoin. We can keep their offset pricing up-to-date until they're ready to do it themselves.
Technical details and administration
The Climatecoin app maintains a list of addresses for approved offsetters and a total of global emissions since the currency launched (extrapolating between updates). It keeps track of total tons CO2 offset since launch.
When a user sends ether to the app, the app forwards the ether to the offsetters, multiplies the user's contribution by (total emissions) / (total offsets), and adds that number of climatecoins to the user's balance. Users can also check their balance, and send coins to each other.
The simplest implementation would have an administrator set the approved offsetter list and global carbon emission total. This may be fine initially, but opens a possibility for abuse.
Instead, we can use "collective intelligence," also known as the "wisdom of crowds." Just as ClimateColab crowdsources climate solutions, we can crowdsource the administration of our currency. It's nothing fancy, just bets and votes.
Global Carbon Emissions: the app needs to know the global carbon emission total, so it knows how many coins to issue. To manage this, allow people to bet on what they think is the correct value. The people close to the median bet win their bets and profit. Since there are many false values and only one true value, you maximize your chance at a win by making the most accurate bet you can. With everyone doing this, the median bet is likely to be near the actual value.
This is called a "Schelling point." The Ethereum community has proposed this mechanism for bringing all sorts of real-world values into scripts.
Approved Offsetters: Allow offsetters to submit their Ethereum addresses to the Climatecoin app. They can publish these addresses on their websites. People can then vote on whether the offsetter should be an approved recipient.
People's votes can be weighted by how many actual tons carbon they've offset in the system. By weighting votes this way, voting will be controlled by people who've demonstrated a strong interest in maximizing carbon offsets. (Note this is not the same as weighting by the number of climatecoins.)
Price Updates: Offsetter prices may change over time. Offsetters can update their prices by submitting the new price to the app. The app verifies that the update comes from the offsetter's Ethereum account.
Dollar Pricing: Since cryptocurrencies tend to be volatile, we can allow offsetters to submit their prices in dollars, so they don't have to make as many updates. Ethereum apps can talk to each other; it's likely that another app will provide up-to-date dollar/ether exchange rates, which our Climatecoin app can use.
Distribution: With multiple offsetters, how do we decide who gets the money? Each offsetter has posted a price, and also posts a maximum tonnage it can handle. By default, the Climatecoin app distributes funds to the cheapest offsetter first, until it reaches the maximum, then goes to the next-cheapest. Users also have the option of choosing which offsetter will get their funds (as long as the tonnage limit hasn't been met).
So far, the sample code includes voting for offsetters and price updates by offsetters. It allows upgrades of other admin functions to decentralized mechanisms after the currency launches.
Who will take these actions?
This proposal's author is a software developer building Climatecoin. The project is open source so other programmers familiar with Ethereum can join in if they wish, or take the code and create their own version.
The optional bootstrap company could be founded by anyone who's familiar with Ethereum as an end user, who's willing to invest the money and effort. As long as there's an ether/dollar exchange available, forwarding to offsetters would simply be a matter of periodically opening the Ethereum client and sending all collected ether to the exchange, which responds by depositing dollars in the company bank account. After that, just write a check to the offsetter, and record transaction details in the company ledger. The only other requirement would be to use the Climatecoin app to keep the offset price updated.
Auditing and legal advice would be the only initial barriers. Marketing and public relations would probably be helpful, of course.
Where will these actions be taken?
Climatecoin would be a global currency and could fund carbon offsets anywhere in the world.
How will these actions have a high impact in addressing climate change?
Carbon offsets are currently being sold at about $12/ton CO2.
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 167 million tons of CO2 at $12/ton.
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 4 gigatons.
This is approximately 1/9 of present-day global emissions, at a money supply 1/10 that of the U.S. dollar. It's not a complete solution, but for a purely voluntary system it makes a pretty good dent.
What are other key benefits?
New currency is issued at a rate corresponding to the amount of CO2 emitted. Every holder of climatecoins has an economic incentive to push for reduced emissions, to limit inflation of the currency.
In the near term, offsets will be done using the same methods we use now, such as reforestation. But with all this money available, there's a large economic incentive for people to better clean energy sources and new ways of removing CO2 from the atmosphere (such as this). In the long term, this R&D could reduce the cost of offsets, increasing the total impact.
If Climatecoin became popular it would also help popularize Ethereum, which has many benefits of its own.
What are the proposal’s costs?
A bare-bones implementation of Climatecoin is practically free; the author's draft of the core code is only a couple pages long. This is a volunteer effort but if billed at consulting rates, testing and UI development would likely total under $20,000. This implementation has room for improvement but is upgradeable after launch. If Climatecoin succeeds in gaining coin value, further development can be self-funding.
If the community advises a more complex initial implementation, cost may increase, and a very sophisticated implementation could require more advanced expertise. So far, this doesn't appear to be necessary.
If we need help getting press coverage, we could try $10,000 for professional public relations.
This is all we need, if we're willing to wait until offsetters accept ether. To start sooner, we'll need a company accepting Ether, exchanging for dollars, and buying offsets. This would require minimal labor to operate. Initial legal and accounting consultation should total under $10,000. As far as the author is aware, no complex regulatory requirements will apply, but if it turns out they do then compliance costs could be much higher.
Development of the Climatecoin app has already begun. Actual deployment will have to wait until Ethereum itself launches. Ethereum plans a phased launch, probably beginning in mid-2015. Transition to proof-of-stake is likely to happen within the first year.
To actually offset carbon we'll need to wait until ether have sufficient value to buy significant offsets. Unlike many cryptocurrencies, Ethereum is not starting from zero. Ethereum was funded by a presale of Ether coins. It seems reasonable to expect that their initial value will be at the same order of magnitude as the presale valuation totaling $15 million.
If we skip the bootstrap organization, we won't be able to actually offset carbon until at least one offsetter agrees to publish an ether address for donations. Ethereum is a high-profile project, and companies that exchange ether for dollars should be available soon after launch, so this may be achievable fairly quickly.
If offsetters aren't interested in ether, we'll need to set up a company, with public auditing. Once funded, this could happen in a matter of months.
An earlier version of Climatecoin appeared in 2014 contests.
The 2014 winner Sno-Caps uses cryptocurrency as part of a voluntary cap-and-trade program, relying on public reputation to incentivize payments for emissions. Climatecoin differs from these by rewarding good behavior, rather than taking the more difficult path of applying penalties in a purely voluntary system.
Several other proposals have used cryptocurrencies in partnership with government action; for example, the 2015 entry BitTrade uses cryptocurrency to administer a legislated cap-and-trade.
Bitcoin paper (pdf) - it all started here.
Ethereum main website
Tutorial: How to make your own currency in Ethereum
Climatecoin initial implementation
Data feed using Schelling bets
Stabilizing currency with Schelling mechanisms
Sample script for Schelling bets
Proof of Stake
Two proof-of-stake implementations are already live in working cryptocurrencies, Peercoin and NXT.
Peercoin whitepaper (pdf)
The Ethereum team is working on its own proof-of-stake design, described in the following blog posts.