Carbon impact markets would be better than current carbon markets
A simple back-of-the-envelope shows how much we need to spend to combat climate change: take the 50 billion tons of CO2 humanity emits per year and multiply by $100—roughly the average future cost per ton of carbon averted.[1] And so, it will cost ~$5 trillion a year or ~5% of world GDP to get to net zero emissions.
Without carbon markets this will be difficult, but they’re not where they need to be.
A carbon impact certificate is a special climate-related type, a carbon impact certificate—similar but slightly different to offsets and carbon credits—attesting someone has done good for the climate. However, the impact certificate also transfers bragging rights of its non-climate impact (as clean energy innovation also reduces poverty, air pollution etc. see above).
There are two types carbon markets:
- Governmental. For instance, the ~$750B European Carbon Trading market currently trading around ~$100 per ton. Another example is the Chinese Carbon Trading market which will soon launch and then be the biggest trading market).
- Voluntary: In voluntary carbon credit markets people and companies voluntarily buy carbon credits (often to offset their own footprint). This market is only ~$2B a year and offsets are sold for $4 per ton averted.[2] But by 2050, this might go up to 5B tons or 10% of all emissions and they might trade at ~$100/ton.[3],[4]
In theory, carbon credits can offer true counterfactual additionality over nationally determined contributions, but there are practical and more fundamental problems with current markets.
The key problem in current markets is that 1 credit = 1 ton of CO2 - in the EU and Californian carbon markets, 1 ton currently trades at €70[5] and $27[6] respectively. This means that the market estimates the average value willingness-to-pay for a ton of carbon, with different projects of varying quality being entirely fungible. But who certifies how many tons of CO2 a project averts i.e. how effective it is? Unfortunately, anyone can call themselves a carbon verification organization.[7] In practice, a whole cottage industry has grown around certification complete with annual Voluntary Carbon Market Rankings awarding prizes for Best Law Firm, Best Verification Company, Best Individual Offsetting Project, etc. [8] (the latter likely being 100x less effective than charities recommended by the Founders Pledge Climate Fund).
Yet, experts have argued that certification is too complicated.[9] And indeed, companies are buying large numbers of carbon offsets that don’t cut emissions.[10] Some carbon-credit schemes are even linked to increased emissions.[11] There’s systematic over-crediting in California's forest carbon offsets program.[12] Such non-equivalent credit creation undermines confidence in the integrity of crediting programs.[13] Worse yet, since crossover of regulated into unregulated offsets are allowed in California’s carbon market, this even damages governmental carbon markets (the EU ETS too until last year could use the UN clean development mechanism).
More fundamentally, this skews the markets towards easy-to-evaluate low-risk, low-reward carbon offsets. Current offsets are mostly nature-based solutions (e.g. protecting forests): But there aren’t nearly enough for all the firms trying to offset their emissions.[14] Companies cannot currently offset emissions by funding, say, clean energy R&D. There has been a call recently to ‘broaden the definition of offsets to accelerate innovation in clean energy’.[15]
Creating a profitable carbon impact market—a special case of an impact market with a special type of impact certificates for carbon—might solve the hard problem of how to trade hard-to-evaluate offsets. Put simply, we should not sell offsets ‘by the ton’ but let the market estimate the value of hard-to-estimate offsetting programs like with impact certificates. This way the carbon market would estimate the value of a particular offsetting project like the stock market tries to estimate the value of a firm.
If the owner of the impact certificate sells, then this attributes the impact of the action and bragging rights to the new owner. This creates a marketplace where profit-maximizing actors are incentivized to buy undervalued certificates to resell them. Good impact speculators make a profit and bad speculators lose their money and leave the market. This steers the market where the price of the certificate is tied to how effective the good deed it represents was.
Imagine us holding corporations and countries accountable not by how much they initially paid for offsets, but how much they currently trade for. Consider a company with 1m tons of emissions. We could hold them accountable to hold and publicly display carbon NFTs that the market values at 1m times the social cost of carbon (~$100). Thus, their NFTs should be valued at least at $100M. However, companies (or their carbon brokers) can save money as they are incentivized to buy undervalued C-NFTs cheaply, release the analysis and then see them only rise in price later.
How will the ground truth about the effectiveness of hard-to-evaluate interventions emerge? Countries, companies, and the world have a vested in interest in ‘policing’ that offsets are are actually as impactful as their valuation suggests. There is a neat solution to verify that the carbon was averted with high likelihood and the amount of carbon all while incentivizing trading of these certificates: Traders can short certificates and are incentivized to publish information to correct the price of publicly-traded carbon NFTs. The incentive should be to profit from finding the most cost-effective climate solutions.
emerge just like firm valuations emerge over time, and NFTs with a constant, at scale, the eventual ground-truth of such markets that could be used to resolve a prediction market.
What if a company buys a carbon NFT to offset their emissions and then re-sells it when they go bankrupt? The publicly visible ledger ensures that transactions of the NFT are visible to anyone, and so one could shame companies that bought such assets. However, a more elegant solution is on its way: it has been suggested that NFTs could be ‘burned’ i.e. be made non-transferable which would create permanent lock-in (of carbon).[16]
Normally, evaluating the impact takes a lot of analysis and people spend a lot of money on poor verification and valuation.
Other crypto-based initiative like NORI, Gwern’s CO2 Coin: Decentralized Carbon Capture Blockchains, MintCarbon, Wren, Xels, KlimaDAO, Toucan Protocol, Universal Carbon (UPCO2), MCO2 Token, all have the same drawback of not being an impact market.
Another drawback of carbon markets is the lack of public information and transparency: carbon impact certificate NFTs for projects like preventing deforestation can be sold multiple times. Selling carbon certificates on the blockchain can bring more transparency, accessibility, liquidity, and standardization to carbon markets.[17] In this market, which might trade as carbon NFTs on the blockchain, anyone can sell the impact certificate of a climate project with hard-to-evaluate (e.g. donating to a carbon tax advocacy non-profit or a research grant for a scientist working on solar energy).
But aren’t crypto, the blockchain, and NFTs bad for the climate? Every action we take affects the climate and the climate NFT is offset by its positive impact on climate policy. Moreover, Solana NFTs are more energy efficient than other NFTs and the network is carbon neutral.[18]
Current voluntary carbon markets are ‘fragmented and complex with questionable credit sale practices and limited pricing data that ‘make it challenging for buyers to know whether they are paying a fair price, and for suppliers to manage the risk they take on’. Over-the-counter exchanges have been criticized by the SEC for intransparency. To scale, the supply side needs to be integrated with a more efficient and transparent marketplace that can further increase trust and enable scalability.’ [19]
Future carbon impact NFTs could even use a Harbinger tax (or Common Ownership Self-assessed tax) to more precisely estimate emissions averted by a hard-to-evaluate project (e.g. advocacy). Say a company buys a carbon impact NFT from a non-profit, which might supply a cost-benefit analysis suggesting it averted 100k tons of CO2 for $90/tCO2 averted. The company vets this analysis and finds that this is 99% likely to be true and so pays $9M for it. The current market rate for carbon is $100/tCO2 averted, and thus, the expected benefits are positive.
The company buys the NFT, but this is always for sale and the company must put a self-estimated strike price on it. They instantly increase the price to over $100/tCO2 averted plus the transaction cost of the NFT (say 11M), so that others won’t buy it unless they think the true value is higher. However, they might also need to pay a 10% tax on ($100k), and so won’t overstate the climate impact of the project. First if you hold a rainforest NFT, you need to pay 10% tax on it annually to the If you claim the value of protecting the rainforest.[20]
Notes
[1] A review of technologies for carbon capture, sequestration, and utilization: Cost, capacity, and technology readiness
[2] VCM Reaches Towards $2 Billion in 2021: New Market Analysis Published from Ecosystem Marketplace
[14] Though ~10 GtCO₂/year in carbon credits could come from avoided nature loss (incl. deforestation); reduction of emissions like methane from landfills; and technology-based removal of carbon from the atmosphere, etc. see A blueprint for scaling voluntary carbon markets to meet the climate challenge