Public goods, for the good of the planet

August 4, 2023

The Voluntary Carbon Market (VCM) is a relatively nascent system, having only come into being in the twenty-first century, and as such has certain constraints that are typical of early-stage markets. Some of the issues that industry bodies such as the Taskforce for Scaling Voluntary Carbon Markets have identified include:

• Lack of transparency: Information about carbon reduction projects and their impacts is often limited or not easily accessible, making it difficult for VCM participants to make informed decisions.
• Problems around additionality and double counting: There is a need to ensure that projects generate real, additional emissions reductions and that carbon credit retirements are not counted multiple times.
• Verification and auditing challenges: It can be hard to accurately measure the impact of projects and verify the claimed emissions reductions.
• Limited market size: The VCM is currently small, limiting its ability to drive significant emission reductions.
• Inadequate pricing mechanisms: It has proven difficult over the lifetime of the VCM to establish a fair market value for carbon credits.

By encouraging greater access to the VCM, as well as improved transparency, we can address these problems and better harness the power of collective action. The technology is now available to achieve this.

Since 2021, KlimaDAO has developed a suite of modularized public infrastructure that enables individuals and organizations to participate in the VCM via the Web3 tech stack. This new, open, and public blockchain-enabled version of the VCM is referred to as the Digital Carbon Market (DCM). For the DCM to succeed in radically scaling the wider carbon market, antifragile public goods—i.e. openly accessible infrastructure that becomes ever stronger through increased contact with complex systems and the stressors, shocks, and volatility they entail—that form the base layer of the DCM are essential.

What are public goods?

Public goods come in many different forms. Examples include:

• Clean air
• Information such as official statistics
• Open-source software or client code
• National defense
• Flood defense systems

These are very disparate concepts, but economists agree that what unifies them as public goods is the fact that—to some degree at least—they are both non-excludable and non-rivalrous. But what do these terms mean in practice?

Non-excludable: Non-excludable means that once a public good is provided, it is available for everyone to use and enjoy, regardless of whether they contributed to its provision or not. This means that it is difficult or impossible to prevent anyone from benefiting from the good.

Non-rivalrous: Non-rivalrous means that the consumption of a public good by one individual does not reduce the amount available for others to consume. In other words, one person's use of the good does not diminish its availability or quality for others.

To revisit the list above, we can see that clean air is a public good because it is available for everyone to breathe, and one person’s consumption of clean air does not reduce the amount available to others. Similarly, flood defense systems can be considered public goods because they provide protection against flooding for everyone in a community, regardless of whether or not they directly contributed to the construction or maintenance of the systems. On another note, the idea of Ethereum as a public good platform holds a great deal of sway in the Web3 world, and is illuminatingly explored in this article by Bankless.

Public goods often present challenges for market economies because they tend to be underprovided by private entities. Since it is difficult to exclude people from using public goods and charge them directly, private companies may not have enough incentive to produce and maintain these goods. As a result, governments typically provide public goods, but this does not have to be the case. Public goods can be privately funded, and many are in fact not human made at all but are rather natural resources (sometimes called global public goods).

However, it is important to recognize that, when theory meets reality, the complexity of the real world has to be confronted: non-excludability and non-rivalry exist on a continuum and, in practice, as this article by Vitalik Buterin discusses, many public goods are hybrid in nature.

What are common-pool resources?

A common-pool resource is a type of good that is characterized by excludability but is rivalrous in consumption. In other words, common-pool resources are natural or human-made resources that are available to a group of individuals but which can be depleted or degraded if individuals overuse or exploit them. Most of the prominent examples of common-pool resources are found in the natural world, and include:

• Fisheries: When one person catches fish from a shared fishing ground, there are fewer fish left for others.
• Forests: Logging activities by one individual may reduce the timber available for others.
• Groundwater: The extraction of groundwater by one user may reduce the availability of water for other users in the same area.

Elinor Ostrom defined common-pool resources and extensively discussed their governance. She found that many communities worldwide had developed successful systems for managing them without resorting to privatization or government intervention.

Based on her analysis, Ostrom identified eight design principles that can be used for the effective governance of common-pool resources:

1. Common-pool resources need to have clearly defined boundaries.
2. Rules should fit local circumstances.
3. Participatory decision-making is vital.
4. Common-pool resources must be monitored.
5. Sanctions for those who abuse the commons should be graduated.
6. Conflict resolution should be easily accessible.
7. Common-pool resources need the right to organize.
8. Common-pool resources work best when nested within larger networks.

These design principles aim to ensure that common-pool resources are managed sustainably and that individuals who rely on these resources have a say in their governance. By implementing these principles, communities can prevent overuse and degradation of common-pool resources, benefiting both present and future generations.

In the DCM, Ostrom is an influential figure and governance according to these design principles is a central concern. In their 2022 paper, Carlos Andres Diaz Valdivia and Marta Poblet assess how ‘Ostrom-compliant’ various DCM actors are, concluding that there is a spectrum of adherence among actors and in regard to individual principles but that KlimaDAO, Regen Network, and others continue to actively seek a decentralized governance structure that improves the market.

Public goods for the carbon markets

KlimaDAO develops public goods and provides stewardship over a common-pool resource for the DCM, stimulating economic activity that is good for the planet. We see the following modules of our current tech stack as public goods for the carbon market:

• Klima Data: Data on total digital carbon activity are made available through a set of dashboards viewable by anyone, allowing unparalleled transparency that is light years beyond the closed-system, traditional VCM, where information is often completely inaccessible to interested parties. Such data are a public good in the same way that official statistics are, as they allow people to make better-informed decisions that, in this case, ultimately contribute to a more rapid reduction of carbon emissions.

• The Retirement Aggregator: Retiring carbon on the blockchain requires tools that allow individuals and organizations to burn or permanently remove carbon credits from circulation. The KlimaDAO Retirement Aggregator is open to anyone and handles this process efficiently and securely, ensuring accurate tracking,verification, and proof in the form of certificates. Other actors in the DCM are able to plug into it, such that, once integrated into the ecosystem, digital carbon of all types can be permanently and permissionlessly retired.

• The $KLIMA token:
  • Serving as the key liquidity pair for digital carbon assets, $KLIMA plays a critical role in facilitating the DCM and allowing users to tap into the pool of carbon credits.
  • It also provides open-access governance rights that allow participants to have a voice in the governance and future direction of the DCM, including whitelisting new types of carbon, deploying liquidity pools, and other vital market-expanding actions.

All of these public goods allow people to access and benefit from the DCM. They are openly available for Web3 developers and VCM actors to build with and integrate into other systems. Further, the more they are used the more antifragile they become: like nature’s systems, they feed back into each other—and from there they feed into the wider VCM, into the global economy, and ultimately into the planet itself, creating a virtuous circle in which economic transactions are no longer extractive in relation to the wider ecosystem but are instead regenerative. In the future, we envision the creation of further public goods for the DCM. These include the forward carbon projects we are developing alongside SCB Group and Aither.

Leveraging Web3 to steward common-pool resources

On the other hand, the liquidity pools consisting of digital carbon credits and a stablecoin that KlimaDAO has stewardship over are not public goods but rather common-pool resources.

Although different from traditional common-pool resources such as the natural resources explored above, both carbon credits and traditional common-pool resources represent shared resources that can be managed and utilized by various users. In the context of decentralized finance, carbon credits and stablecoins provide value to users within the ecosystem, and their proper management—which we envisage as following Ostrom’s eight principles above—is crucial for maintaining the system’s sustainability and overall market health.

These pools can, of course, be depleted so use does not fundamentally strengthen them and they cannot therefore be conceived of as public goods. However, there are multiple benefits that accrue to the market as a whole when these pools are treated as common-pool resources. These include:

• A decentralized counterparty for project developers: The objective of a carbon reduction project is to receive financing for its operations. KlimaDAO’s liquidity pools act as an always-on, instant source of settlement, where project developers can swap their issued carbon credits for currency.
• A clear price signal: Unlike other commodities, there is no consensus on the pricing of carbon credits. The automated markets made by liquidity pools establish a clear price signal for the DCM (and VCM). The pricing data derived from the liquidity pools is openly accessible and free to use, and can be processed by anyone – as it is done by the Klima Data Carbon Dashboard, for example.
• Permissionless access to digital carbon: In order for the DCM to aid in the scale-up of climate finance, access to digital carbon needs to be frictionless. KlimaDAO’s liquidity pools are open and permissionless to access, enabling stakeholders to meet their individual needs.
• A base layer to build on: Other actors can build directly on top of them, either directly or by integrating KlimaDAO’s public resources such as the Retirement Aggregator. For example, Carbonlink taps into the liquidity pools to settle end users’ monthly carbon offset subscription transactions, while ClimatePositive provides car badges for individuals who opt to offset their vehicles’ emissions. Furthermore, Atem provides enterprises with a carbon offsetting API to manage organizational carbon emissions, sourcing carbon credits from the KlimaDAO liquidity pools.

Thus, while the liquidity pools may be depletable themselves, their presence in the ecosystem strongly increases the antifragility of the DCM and, by extension, can play a key role in enhancing planetary wellbeing.

An antifragile future

While wind extinguishes a candle, a gale energizes a fire: the key to longevity and success in the face of adversity is to become beyond resilient. Taleb writes (Antifragility, Prologue IV) of how fragile systems fail in the face of volatility—and that “everything that does not like volatility does not like stressors, harm, chaos, events, disorder, ‘unforeseen’ consequences, uncertainty, and, critically, time.” By contrast, antifragility requires volatility—and time—otherwise the property cannot be birthed.

KlimaDAO has been forged in fire and we are fully aware that the road ahead will not be smooth. As a pioneer in this space, and undoubtedly one of the first decentralized autonomous organizations to achieve real-world, pro-planet effects, we take our collective responsibility seriously. We remain committed to our mission of developing public goods for the carbon markets and supporting the sustainable management of common-pool resources for the benefit of the planet and of future generations. Through our modular tech stack, we aim to create a virtuous cycle whereby economic activity aligns with ecosystem health. By following Ostrom's design principles for the effective governance of common-pool resources, we can prevent degradation and overuse. Additionally, we are continuously working on expanding public goods for the DCM, including forward carbon projects and other innovations to come. We welcome partnerships with other actors in the DCM, including those seeking to innovate in terms of new standards.

Humanity’s failure to scale up climate finance and get on track with 2030 and 2050 emissions targets has thus far been the result of coordination failure. As a decentralized autonomous organization, KlimaDAO seeks to solve for that—we exist because we believe we can solve this coordination failure, leveraging our unique protocol mechanics, governance structure, and technology, all of which enable us to provide public goods and common-pool resources in a way that other organizations cannot. Everything we have built, we have built for the public good. Further, the public goods we have given the DCM are beyond resilient; they are antifragile at their core and they are here to stay.