Discussion for CGP 30: Add voluntary carbon credits to the reserve

[Terblig]

Hello,

I am a crypto enthusiast, but my day job is actually working in the environmental field. I think that the proposal is well-intentioned, but not one that I would support nor does it really address the environmental problems of block chain.

The environmental problem of block chain is mainly threefold. First, the system requires having a network of computers running 24/7 in perpetuity. One the balance, this will increase total global energy consumption, which will always lead to a rising footprint. If crypto displaces other economic players, maybe one could hope that this would lead to a net decrease in energy demand. However, I have seen nothing to quantitatively make this analysis and am doubtful myself.

Second, the nodes are distributed, which means that it is almost impossible to ensure that they are run on clean energy. Centralized server farms have the advantage that a centralized entity can move the entire center onto a clean energy source.

Third, all of this requires hardware which generates a substantial environmental footprint in its manufacture and eventually becomes unrecyclable waste with some hazardous components.

I think that foundations governing blockchains have some opportunities to address all of these, but none of them are taking a genuinely proactive, systematic approach to stewardship beyond claims about carbon offsets, some of which are misleading.

So what is the role of carbon offsets? First, important to note that carbon offsets do not guarantee a decrease in total global emissions or atmospheric concentrations and THAT is the only goal that matters. The IPCC tells us that we have less than ten years before the goal of containing warming within 1.5 degrees becomes unachievable.

Second, carbon credits are not meant to be permanent financial assets to be traded, but rather a vehicle for enabling third parties to subsidize climate efforts by others. In the case of voluntary markets, they should be retired rather sold in secondary markets if you really want to help the environment. In the case of regulated emissions trading schemes, they are intended to have some secondary market life, but, again, the ultimate idea is that you are trying to get people to pay to remove carbon and the credits are essentially tokenizing those removed tons. You are not trying to great an asset to be traded indefinitely. That defeats the environmental objective.

If Celo wants to address its environmental footprint, then it really should be looking at how ot incentive node operators to use clean energy. Could we come up with a smart contract system that would reward operators that can demonstrate purchasing clean electricity? Can the foundation conduct environmental education programs for operators? Could it broker clean energy purchasing agreements that operators could tap into? Could it purchase renewable energy credits in the United States and other countries with similar systems?

From a financial perspective, I don’t understand how tokenized credits would be a prudent financial investment from a reserve perspective. Their price is not going to evolve in a predictable manner in the coming years and they represent an artificial market. I hope that the market grows, but I would never use it as a reserve vehicle. Instead, the celo community should look at it as an investment into a better planet and a separate choice from a reserve element.

In terms of helping carbon credit markets, simply holding credits won’t accomplish anything because credit markets do not have attributes comparable to that of other financial assets. Perhaps if blockchains purchased enough credits to shift the demand curve, it would raise the value of credits and theoretically bring more projects to market, but that would not be a genuine market solution on carbon as much as a philanthropic subsidy that could exit the market as easily as it entered if governance priorities change.

I’ve also seen something about purchasing land and tokenizing it. This could have conservation benefits, but ONLY if the land is actually stewarded. Owning the deed to a tract of tropical forest does nothing to protect it. You need the communities living on or near the land to work in collaboration with the deed owner to protect it from illegal logging and other types of exploitative activity. This kind of strategy could work with things like conservation easements in the USA where there is a strong legal infrastructure, but much harder elsewhere. The land on its own also won’t generate a cash flow. One might be able to try to secure voluntary carbon credits in some form, but you need a partner to set up and manage a project to generate the credits and document them. Many of the major NGOs have done and continue to do this, but it is a slow strategy and I am not sure that there is a connection to generating a financial asset that belongs in a reserve fund.

I’m really excited by the motivation to work on environmental issues through Celo, but we should make sure to find instruments and strategies suited to the purpose. I would start from buying renewable energy credits to re-sell or distribute to node operators or incentivize them to acquire such credits. But I also acknowledge that is not a reserve strategy.

[Pinotio.com]

Hi @Terblig , you bring up some good points on the reserve and insuring stewardship - as well as the open question of whether that land might yield cash flow.

With respect to energy consumption of the Celo network, the energy consumed by nodes is quite small. This is a proof of stake network, not proof of work like Bitcoin (and Ethereum currently). If you look at the amount of epoch rewards that go to buying carbon credits, that amount is really small, because the emissions of the Celo network are tiny.

[Terblig]

I’m aware that PoS uses a lot less energy than PoW, but I would have two thoughts.

First, we have to look at block chain from a systems perspective. An individual transaction might be tiny, but the vision of many is for trillions of transactions and for blockchain to vastly expand the horizons of how people engage with each other. A single drop of water is nothing, but trillions of them makes a flood. So I think that we have to try to build the blockchain as being at minimum climate neutral and ideally minimal environmental impact from the start. Once it becomes fully de-centralized, then it will become even harder to address literally a million paper cuts. An analogy would be that no single building really changes our climate or ecological trajectory. However, we have 100 years worth of built structures around the world that were designed with little attention to those concerns. Retrofitting that building stock is likely something that will require our lifetime if not longer.

Second, whether the money flowing into carbon credits is large or small, it would not change my point of view on the use of credits in connection with the reserve. From an environmental perspective, buying and holding voluntary carbon credits has minimal value as compared to other approaches. Therefore, when combined with their financial characteristics, I see little value in adding them to the reserve. It has symbolic value as a statement, but it is also a statement that can be unintentionally misleading and direct peoples’ attention away from more productive solutions and encourage a false sense of security.

To be honest, I believe that many of the claims being made by block chains are counter-productive and, in some cases, irresponsible. For example, I have seen Algorand claim to be carbon negative. That simply is not the case if one understands how people doing climate modeling use the term “climate negative.” Considering the nobel prizes connected with their team, I would have expected more diligence in this respect.

Celo could really be a leader on this, but it will involve a deeper strategy than buying carbon credits and we can’t be complacent with the fact that individual transactions are small in energy use. Unfortunately, we have allowed our climate emissions trajectory reach a point globally where simply being somewhat better than past years is nowhere near enough. We need to cut total global emissions in half before 2030 and then remove carbon from the atmosphere at a rate such that total emissions are no longer rising from 2050 onwards. Anything that is not actually reducing total global emissions or capturing carbon is unfortunately not moving us closer to the goal and may be moving us away from it.

As I said, I think that it is fantastic that the community cares about this. I just think that we should do something more systematic. I would be happy to contribute to this thinking and brainstorm ideas with others. I’m just not sure how to do so or how to translate ideas into action in a network like this.