The Vision of a Carbon Currency
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The Vision of a Carbon Currency

Published Mon Mar 21 2022

It has become clear over the past several years that we humans have placed ourselves in a bind. Industrial activity is instrumental to economic growth. It’s necessary for producing the food, electricity, and other commodities needed to improve the standard of living for billions of people around the world. Unfortunately, that same industrial activity—through its effects on the climate—is eroding those standards of living and is set to cost us trillions of dollars.

We’ve written elsewhere about the urgent specter of climate change: CO2 emissions, current proposed solutions, and their inadequate implementation. We’ve also written about KlimaDAO’s role in solving the short-term crisis, helping to reach the goal of net-zero emissions in the next few decades.

In this article, we are going to take a step back to discuss a different set of questions:

How did the global approach to economics lead us to this point? And how does KlimaDAO represent a new way of thinking about economic value that can help us to avoid these kinds of crises in the future?

What Markets Fail to Account For

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For most of human history, a market was a physical place in which people could buy, sell, or trade goods and services. Like today, the markets of the past often failed to consider the indirect costs of a product or service—economists call these externalities.

A great example of this was the production of leather in pre-modern tanneries: the process required waiting months for the hair to rot, using urine and manure to speed up the process. The tanning process created a constant sludge of lye, urine, and rotting flesh which was dumped into the streets or a nearby river, creating a noxious odor.

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That pollution was a negative externality, because its cost was borne not just by the tanners themselves, but by the neighbors who gained nothing from the production of leather: the neighboring innkeeper who lost business, or the nearby weaver who could no longer use the water to wash her clothes. Tanners, however, paid a social price: their work was not considered respectable, and tanneries were often relegated to the outskirts of cities, downriver, where the effects of their externalities were more limited.

The Big Externality of Our Times

The tanner’s effects could be sensed from a mile away (if downwind), but not all negative externalities are so obvious. The industrial revolution brought with it a number of negative externalities which were not immediately visible, and whose effects were global. Unlike the medieval tannery, these activities could not merely be relocated to the fringes of civilization. Leaded gasoline, CFCs, and PCBs are all examples of substances whose negative externalities were initially invisible, but once discovered, led to their eventual near-elimination from use.

The challenge of the 21st century, of course, is the emission of CO2 and other greenhouse gasses. The impact of their negative externalities is now well understood: rising global temperatures, desertification, rising sea levels, etc. Those most affected will be, on average, poorer individuals and poorer countries. Emissions are produced by most industrial activities, yet their negative externalities continue to accrue, a problem for future generations to deal with.

In general, the most common way of dealing with externalities is to tie them to their economic activity—requiring the tanner to pay to clean up the river, for example. In the case of CO2 emissions, the most commonly proposed solution would be a carbon tax that would help cover the cost of offsetting carbon, and reduce carbon consumption in the process. Unfortunately, there is little political will for even a mild carbon tax in countries around the world, not to mention a sufficiently high tax that would truly account for the substantial negative externalities of carbon emissions.

However, another method has been proposed—which could be deployed alongside whatever limited carbon taxes are mustered—that would potentially transform this effort.

The economic and biochemical basis for a carbon currency

In 2018, engineer Delton Chen published a paper in which he developed a theory called the Holistic Market Hypothesis. This theory says that rather than attempt to account for CO2’s externalities downstream in the form of taxes, we should bake them into our currency, and thus our economy, itself.

At the most basic level, money is a store of value. Those who add value to the world should earn money, while those who consume should pay.  Most industrial activity produces CO2, and therefore carries with it large negative externalities that should be priced in. Carbon is ideally suited to function as the basis for a currency because of its position as the basis of organic molecules.

From a biochemical standpoint, carbon is the fundamental element of life, and its state can be viewed as a measure of value (in the form of energy) of biological systems.

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CO2 is an inorganic and therefore largely unusable form of carbon on our planet. Some organisms are able to perform carbon fixation—the conversion of inorganic CO2 into usable organic forms. This process is primarily performed by plants or algae as part of photosynthesis, converting CO2 and water into glucose and oxygen. The process always takes energy to perform; usually, that energy comes from the sun.

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Carbon oxidation is the reverse process, performed by most of earth’s organisms including humans and other animals, of extracting energy from high-energy carbon compounds as they are converted into CO2. We perform essentially the same reaction when we burn wood or fossil fuels.

Considering the biochemistry therefore, there are several broader implications:

  1. The production or release of CO2 represents a depletion of value in nature.
  2. Reduction and fixation of CO2 represents added value in nature.
  3. Trees and other plants are the primary producers of value in nature.

Because of CO2’s environmental impact, the depletion of biochemical value has concrete economic and social costs. Beyond that, Chen’s paper argued that CO2 emissions also carry the risk of future effects which are hitherto unknown. And so, like an insurance company factors risk into its premiums, we must do the same for each tonne of carbon.

KlimaDAO and the Vision of the Future

Chen envisioned a world in which a parallel global currency would be minted by each offset of carbon. Therefore, that money would derive its value from the real value added to the natural world, and the negative externalities it had offset or prevented. In other words, economic value which was traded back and forth (money) would have its origins in real biochemical value.

In this respect, KlimaDAO took inspiration from Chen’s vision. The minting of every KLIMA token is backed by at least one ton of carbon offsets, and therefore each KLIMA token embeds within it the biochemical value of carbon fixation, and the economic value of carbon offsets.

KlimaDAO has already captured over 16 million carbon tons in its treasury, equivalent to over 3.6 million cars annually, and is therefore proof that such a concept can work. KlimaDAO is also serving as a catalyst for innovation in, and maturation of, the on-chain carbon market. Moving forward, KLIMA will become the base trading pair for carbon tokens on-chain, and function as a useful exchange of value for the on-chain carbon markets. These developments are bringing the world closer to realizing Chen’s vision.

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Chen’s long-term vision is even grander; it was depicted by the science fiction author Kim Stanley Robinson in his novel, The Ministry for the Future. This novel depicts a future ravaged by climate change, in which the world’s nations create an enforcement arm of the Paris Agreement which gives its name to the novel. That ministry is responsible for the well-being of future citizens of the earth, who are deemed to have human rights like those of current citizens. The ministry therefore creates an international carbon currency backed by their national central banks.

In a Bloomberg op-ed entitled Making the Fed’s Money Printer Go Brrrr for the Planet, Robinson argued that if the world’s nations created such a currency, it could be purchased and thus financed by the world’s central banks, through Quantitative Easing (QE)—the same process by which banks have purchased vast quantities of bonds to prop up markets. Therefore unlike a carbon tax, this method would not cost the world’s taxpayers and would thus be far more politically feasible; after all, large scale QE has been ongoing for over a decade.

The economist John Maynard Keynes famously proposed, somewhat tongue-in-cheek, that governments in times of economic crisis should bury barrels of money and hire people to dig them up again, in order to stimulate economic growth, create jobs, and flood economies with money. Keynesian theory was, in part, the basis for QE of the 21st century. If central banks were to purchase a carbon currency, it would be an application of Keynesian theory with real-world value, playing a major role in solving the world’s climate.

That proposal is not yet a reality. However, KlimaDAO has made substantial strides toward the vision of a carbon currency entirely within the Voluntary Carbon Market, or VCM, and without a single dollar of government money. If QE were to be involved down the road, carbon markets would be flooded with trillions of dollars, and KlimaDAO would be well-positioned as a first mover in this space.

The Immediate Outlook

Kim Stanley Robinson’s novel is very grand, and the solutions he and Chen have proposed will require the buy-in of major global institutions and governments. In the interim, KlimaDAO represents a proof-of-concept: we have created a carbon-backed cryptocurrency, and it works. It sequesters or mitigates carbon emissions with each token minted, and therefore represents real biochemical and social value. Taken with its inflationary nature and its ease of exchange, it fulfills the role of Robinson and Chen’s envisioned carbon currency in every respect.

KlimaDAO—and the ideas it embodies—represents a revolution in economics: embedding externalities into money itself, and in so doing, changing the way people do business. No longer lamenting the unfortunate tanner next door, but instead embedding the cost of his—and all of our collective economic activities—into the money we use to do business everyday. KlimaDAO is proving that this idea works. All that’s left is for the world to jump on board.

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