Climatecoin 2017 by Dennis Peterson
Pitch
A cryptocurrency that funds climate action directly, while also working with carbon fee programs.
Description
Summary
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 voluntarily. Usually we pay for public goods with taxes. But we can also use inflation.
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 pays them by minting new coins.
We can solve our CO2 problem the same way.
We can create our own currency, which pays for climate mitigation with its own inflation, instead of waiting for government action.
And when governments do enact carbon pricing, we can help them. Governments can plug themselves into our ready-made global economic framework, completely with fraud-proof, immutable record-keeping, and in the process, multiply the climate effect of their own carbon pricing.
Is this proposal for a practice or a project?
Project
What actions do you propose?
Economic Structure
Bitcoin mints new currency at a fixed rate, and divides it among "miners" who apply the computational power that secures the network, proportionally with the amount of computation they do. If Bitcoin gains value, it becomes more profitable to mine, which attracts more miners so the total amount of mining increases.
Climatecoin works the same way, except our "miners" contribute to climate mitigation.
Climatecoin will run on the Ethereum blockchain. Each week, people donate Ethereum's built-in currency "ether" to their choice of approved recipients engaged in mitigation efforts. A fixed number of coins are minted, and divided among donors in proportion to their donations.
In effect, the inflation of the coin supply pays for the climate mitigation, so the cost is split among all holders of the coin, just as Bitcoin's mining cost is split among all holders of bitcoins.
Government Partnerships
While inflation alone can pay fund substantial contributions, it's probably not enough on its own. So we add a second mechanism: anyone can destroy their own coins. The inflation rate limits the total supply of coins, so when coins are destroyed, more coins can be minted. Therefore, destroying coins has the same effect as making a direct donation to climate mitigation.
Now, suppose you're a government with a carbon fee. Your carbon price encourages residents to emit less carbon, but you would also like to incentivize positive efforts like carbon absorption. You could do this by giving people carbon credits for donations to climate mitigation. These credits could be used instead of cash, for paying carbon fees.
Climatecoin gives you another way. Just allow people to submit proofs that they destroyed climatecoins, and reduce their carbon fees by an amount equal to the market price of the coins, at the time they were destroyed.
We let governments designate particular climate actions they are willing to credit. Anyone destroying coins indicates the government from whom they want credit. New coins minted to replace destroyed those coins have to come from donations to recipients approved by that government.
Using Climatecoin, instead of just crediting direct donations to climate mitigation efforts, has two advantages for governments:
1) It's easy to audit, since the evidence of coin destruction is recorded indelibly on the blockchain, with no possibility of forgery.
2) Integrating Climatecoin with official carbon fee programs would give Climatecoin more legitimacy, and likely increase its value. This means the total carbon mitigation funded by Climatecoin's inflation will increase. This multiplies the total effect of the carbon credit system.
We don't have to wait for an international agreement, or even for national governments. Any government, even at the state or local level, can enact a carbon fee that integrates with Climatecoin.
The prospect of future participation by governments will help support Climatecoin's value from the beginning.
Insurance Partnerships
The Climate Restoration Foundation proposes that insurance companies apply a climate surcharge to fossil fuel clients, as a way of funding climate action. This seems like an interesting idea, especially if the same insurance companies both insure fossil companies, and are vulnerable to large payouts due to climate disasters.
There's no reason a system like this couldn't integrate with Climatecoin as well. Insurance companies would play the same role in the system that governments do. Destroyed coins could be used to offset the insurance surcharge, instead of government climate fees.
There might be a coordination problem, since an insurance company could defect from the group and offer cheaper insurance. In any case, for the rest of this proposal we'll simply refer to "governments" with the understanding that potentially, insurance companies could play a similar role.
Choosing Valid Projects
Somehow we have to choose which projects are valid recipients of Ether donations, worthy of getting rewards of newly minted coins.
Involvement by governments makes this easy. When you destroy coins for carbon fee credits, the replacement coins have to be minted from a project accepted by that government. The same projects can be our approved recipients of ether donations.
Recognizing Valid Governments
If we're going to rely on governments to tell us which recipients are valid for minting, we have another problem: how do we recognize which governments are real? Governments are identified in the system only by Ethereum address; which ones are actually used by real governments?
Luckily there's a very simple solution. Only governments (and our insurance "governments") have the ability to charge carbon fees, so only they can motivate people to destroy climatecoins to any significant degree. If a large number of climatecoins are destroyed with a particular address designated as the associated government, we can assume that's a real government. (The more coins burned for that government, the more we should trust that government's views on valid recipients of minting.)
The Bootstrapping Problem
Initially of course we'll be on our own. We want to start Climatecoin ourselves, funding climate action directly from coin minting. We can't expect large entities to get involved before we've proven ourselves.
How do we choose valid recipients before we have government involvement?
A simple way would be to trust an administrator. But we can do better.
Coin-lock Voting
It seems likely that (1) climatecoins will be more valuable long-term if they gain more acceptance with governments, and (2) the more reputable the projects funded by Climatecoin, the more governments will accept it.
Therefore, our ideal decision-makers are people with a long-term stake in the project.
We can take advantage of this with coin-lock voting. People lock their coins for some period of time, chosen by themselves, and cast their vote. Votes are weighted by number of coins locked, and by length of time until their coins unlock.
Betting on Mitigators
Another approach is to bet on whether specific mitigators will be accepted by governments for carbon credits. Supporters of a mitigator lock climatecoins into a bet: "Mitigator M will attract burn funds by date X." Skeptics can bet against the proposition. If the funds are burned, supporters take the skeptics' money. If the funds are not burned, skeptics take the supporters' money. To prevent profitable manipulation, the amount burned must exceed the supporter money committed to the bet.
By making results specific to a particular mitigator, this method may attract bettors with more specialized knowledge. A disadvantage is the need to choose a specific deadline.
These options can be combined; e.g. coin-lock voting can determine general parameters, and betting can approve specific mitigators. Or, coin-lock voting can be used for everything, but voters could be informed by the odds generated by aggregate bets.
Making Things Easy For Recipients
Ideally, recipients would simply publish Ethereum addresses, and handle the conversion to national currencies themselves. If they're unwilling to deal with this, we can make our own "mitigators" which simply accept ether donations, convert them to national currency, and forward that to the actual mitigators, minus a small service fee to fund operations. These organizations could be nonprofits or private companies. They would need regular public audits.
Once sufficient funds are being forwarded this way, the actual mitigators may prefer to avoid the fees by accepting ether directly.
Public Recognition
Another approach to tackling public goods is public recognition for donors. With Climatecoin we can do this in two ways:
1) When people destroy coins, we can give them the option of posting their names, website addresses, or whatever other information they like.
2) We can maintain a public directory of merchants who accept climatecoins for payment. If we want Climatecoin to be a significant part of the economy, we need people using it in commerce.
Scalability
At the moment, all cryptocurrencies including Ethereum have very low transaction rates, on the order of ten transactions per second globally. Ethereum has a very aggressive scaling plan, and on-chain transaction throughput could be up to thousands per second within the next two years.
An emerging solution, called Plasma, could scale to billions of transactions per second. To use Plasma, an Ethereum application has to do its computations in a particular pattern, but Climatecoin is a very good fit.
Mitigation Projects
It's probably a good idea to "seed" Climatecoin with a few initial projects. Here are some possibilities which are cost-effective and have potentially high impact. We have not yet contacted these projects, so this is mainly for illustrative purposes (though as mentioned above, we don't necessarily need cooperation from the projects to donate to them.)
UN REDD
UN REDD pays people in developing countries who promise not to cut down their local forests.
For a while it was questionable whether this was effective; perhaps for example it only moves deforestation to other areas, or participants would not have cut down their trees anyway. However, a recent study found that in fact this method works and is very economical; effectively it offsets carbon at an average cost of only $1.10 per tonne, far lower than most methods. There's also the happy side effect of preserving biodiversity.
This method obviously tackles only the emissions due to deforestation, but that's a good start.
Deep Water Kelp Farming
Seaweeds can grow very quickly, absorbing carbon 30 times faster than land-based plants. They also de-acidify seawater. While near-shore seaweed farms would have limited scalability, new methods appear to make seaweed farming practical in deep water.
In principle, this system could scale to incredible levels. If 9 percent of the ocean were to be covered in seaweed farms, they could absorb more CO2 each year than civilization emits.
Large-scale seaweed farms would produce copious amounts of seafood, primarily shellfish. They would be placed in open ocean regions with very little native sea life; essentially the surface of the deep ocean is desert, except where natural upwellings fertilize the surface. The farms would produce copious amounts of seafood, primarily shellfish. The oysters would even remove excess nitrogen from the oceans.
Carbon could be sequestered by simply cutting the seaweed loose and letting it sink, but this would be hard to track, and may be ineffective if the seaweed rots. A more effective method would be to convert the seaweed to biochar first. This would produce a carbon negative fuel (syngas), which could be sold; by tracking the amount of fuel sold, we could also track the amount of carbon sequestered.
An alternative approach is to use the oil in seaweed to produce carbon-neutral biofuel.
Since these systems produce revenue, we don't have to pay their full cost. We only have to subsidize them enough to make their products highly competitive in the market.
Preserving Sea Ice
Reducing emissions and absorbing CO2 are vital, but slow, and we're essentially out of time to prevent runaway climate change by those methods alone. Loss of summer polar ice is imminent, if veteran arctic researcher Peter Wadkins is correct. The loss of albedo would be equivalent to 25 years of carbon emissions, and would bring massive methane release from shallow arctic sea beds.
Wadkins is a founder of the Climate Restoration Foundation, which is studying a combination of geoengineering techniques to keep this from happening, with a focus on cost-effective methods that can be easily halted if necessary. Methods include marine cloud brightening by salt water, and ice cap thickening by pumping sea water onto the ice surface.
Who will take these actions?
Climatecoin will be an open source project, led by this proposal's author, with input from the Ethereum community. In particular, cryptoeconomic analysis of the governance systems would be critical.
Where will these actions be taken?
Software development will be based in the U.S., possibly with participants from around the world. Mitigation projects could be global, and governments around the world could participate.
In addition, specify the country or countries where these actions will be taken.
United States
Country 2
No country selected
Country 3
No country selected
Country 4
No country selected
Country 5
No country selected
Impact/Benefits
What impact will these actions have on greenhouse gas emissions and/or adapting to climate change?
Ethereum launched in July 2015, and two years later its currency had a total value of $20 billion, with an annual supply inflation of approximately 12% (and dropping). If Climatecoin had similar numbers, it would pay $2.4 billion annually towards climate mitigation, just from supply inflation. (By comparison, contributions to UN-REDD last year totaled only $283 million.)
With participation by governments and/or insurance companies, the total impact would no longer be limited by Climatecoin's market value and inflation rate. Total impact would depend on the overall level of carbon fees.
What are other key benefits?
The mitigation projects mentioned above would preserve biodiversity in forests and oceans, reduce ocean acidification, reduce ocean nitrogen levels, and help feed the world.
Costs/Challenges
What are the proposal’s projected costs?
As an open source project, the cost of software development will be very low. The primary cost would be paying for third-party security audits, assuming that are not done pro bono. These tend to be expensive, but we can probably get several good-quality audits for under $100K total.
Actual climate mitigation costs will vary by project, with the cheapest likely being UN REDD at $1.10 per tonne carbon.
It's worth noting the energy cost of Bitcoin and Ethereum, which currently use a very energy-intensive security mechanism called "proof of work." Fortunately, Ethereum is transitioning to a far more efficient method called "proof of stake," which will eliminate its energy consumption almost entirely.
Timeline
In principle, Climatecoin's code could be developed, audited, and deployed within a few months. We may need extra time to collaborate on the governance model. To get extreme scaling via Plasma, we'll need to wait for more documentation and tooling, but those are supposed to be available soon.
If Climatecoin is successful, then within 5 years or so we should achieve substantial market value, and provide meaningful funding to high-impact projects. We should have a thriving ecosystem of merchants accepting climatecoins for payment, individuals and companies minting coins, and mitigation projects getting funding.
Governments are gradually becoming more aware of blockchain technologies, and in many cases more supportive. The UN is already using Ethereum in a trial to distribute aid money. Within the first decade we should see some small, progressive governments incorporating Climatecoin into their carbon programs.
We're still in the early days of blockchain technology. In 1995, the Internet seemed like a fad; two decades later our economy runs on it. The same is likely to happen with blockchains. Climatecoin could be part of this process, and play a role in carbon price programs for major governments within several decades.
Over the next few decades Climatecoin is unlikely to remain unchanged. New ideas in cryptoeconomics will emerge, and better technologies on which to build them. By starting now, we build a foundation for this evolution.
In the long term, Climatecoin and its successors could be the foundation of a carbon-neutral economy. Emissions we haven't managed to eliminate would be charged at the source, and paid for by funding ecologically-friendly mitigation.
The IPCC says we need to be substantially carbon-negative if we're going to stay under 2C. Climatecoin would help pay for that.
We can live in a world where the icecaps survive, where we restore the health of the oceans with vast biodiverse seaweed farms where little life existed before, where third-world countries earn money to keep their forests healthy. And we can start now.
About the author(s)
The author of this proposal is a software developer in the U.S. with two decades of experience. Now he works full-time on Ethereum projects, and has developed several Ethereum-based currencies for clients.
He has participated in ClimateColab since 2010.
Related Proposals
This proposal has evolved over time; this year's version is substantially modified from last year's. The economic structure is different, there's more provision for partnership with governments and insurance companies, and there are new ways of choosing mitigation projects.
References
Ethereum
Proof of stake would eliminate the large energy consumption of currency mining.
Sharding is a major part of Ethereum's scaling effort.
Plasma will be a layer on top of Ethereum with the potential to scale to billions of transactions per second. This works in part by limiting computations to a "map-reduce" structure, which would work well for currency minting with Climatecoin's current design.
UN REDD
Paying people to preserve forests really seems to work
Want to protect forests in poor nations? Pay landowners not to cut, study says
3D Kelp Farming
Green Wave is a nonprofit promoting 3D kelp farming with an emphasis on seafood production.
The coming green wave: ocean farming to fight climate change
How farming giant seaweed can feed fish and fix the climate
Kelp Biofuel
This is another approach to deep-ocean kelp farming. Greenwave moves nutrients to the kelp, this approach moves the kelp to the nutrients.
Scientists hope to farm the biofuel of the future in the Pacific ocean
Could these robotic kelp farms give us an abundant source of carbon-neutral fuel
Marine Biomass is the company working on this.
Climate Restoration Foundation
By:
Dennis Peterson
