Collective Action Problems & Climate Change

on Tuesday, March 1, 2022

In this episode we use the example of KlimaDAO to explore the interaction between climate change and the public goods problem.

Update

We released a follow up discussion with KlimaDAO themselves which contains a more detailed analysis of how the project works. While it does not change the basic conclusions of the analaysis below it does refine some of the decription of how the project is meant to work. We'd thus recommend basing your evaluaiton of KlimaDAO on both these episodes together.

Episode Notes

Summary

There are quite a few organizations and efforts working in this space. We have chosen to dig into one specifically: KlimaDAO. Rufus and Stephen will begin by setting out what KlimaDAO is and what it is doing. They then briefly touch on a novel by Kim Stanley Robinson, The Ministry of the Future, which sees the climate crisis solved through financial engineering and technosolutionism.

Rufus and Stephen then evaluate KlimaDAO on the merits of what their aspirations seem to be according to their founders and white papers published by the organization.

Lastly, Rufus and Stephen consider the topic of public goods problems and climate change more widely.

What is KlimaDAO?

KlimaDAO is an investment vehicle which aims to give investors exposure to climate change offsetting ventures.

According to the founders of KlimaDAO: Value and price are visibly disconnected in our economy today:

In our market economy, the invisible hand works to create prosperity and individual self-interest prevails. The freedom to produce and consume as we see fit generates value for the economy; value that allows the whole of society to prosper. We generally consider that the market itself is rational, and assume that it values things in a perfect way. We ignore the paradoxes in front of us everyday. Water, a necessity for life is essentially free across (much of) the world; diamonds have no real utility for us, yet in the free market they are priced exorbitantly, excluding all but the world’s richest. According to the market, Amazon is the world’s most valuable company. But the Amazon Rainforest has no market value until its vegetation is cleared for farming, and its trees are stripped of their greenery and extracted as logs.” - KlimaDAO

Their goal, according to their own words, is to become a Climate Carbon-Based Reserve Currency... effectively a semi-algorithmic central bank with DAO governance structures.

The DAO serves the role of "de-central" bank, governing the monetary policy of this new carbon-backed currency, just as a central bank governs the monetary policy of a fiat currency. Over time, we will build an economy around KLIMA by driving adoption and unlocking growth of the crypto-carbon economy. - KlimaDAO

We have drawn up our best understanding of the underlying model of KlimaDAO as an investment vehicle:

View it here

Boiled down to the essentials, the model is as follows:

  • Someone comes along with some currency, eg a dollar or a euro, and then converts that into USDC, the stablecoin equivalent of a US dollar.
  • In exchange for depositing whatever amount of USDC, you get 1 divided by the price of Klima tokens from the Klima treasury.
  • Then the Klima organization takes the USDC that it has received, converts them back into dollars (or euros or pounds etc) and buys carbon offset certificates. Carbon offset certificates represent carbon sequestration (tree planting), methane capture, and renewable energy initiatives. The idea is then that certificates of carbon offsets come back into the treasury. As we understand it from the white paper, there's a guarantee that every Klima token that's issued is backed by at least one tonne of carbon offsets.
  • So essentially what is being done is they're collecting money together and buying carbon offsets. It's basically the equivalent of a special purpose vehicle for buying carbon offsets.
  • You can also take those Klima tokens and sell them back to the Treasury or create derivative financial products on top of them, which can potentially give you more shares in the entity itself. This is called staking and bonding. This process doesn't change the macro structure of what KlimaDAO is trying to do end to end, it just adds a level for people who are already invested in it to get more invested in it.
  • “The DAO contributors and core team are all here for the long haul: Klima has always been a long-term project with a decadal scope. We have no intention of liquidating the treasury prematurely, nor of letting the protocol stagnate.” - KlimaDAO
  • KlimaDAO runs on Polygon on top of the Ethereum blockchain.

In Summary:

  • The core idea of KlimaDAO: a reserve currency that can act as a complementary currency to the world's national currencies that can be used to do targeted quantitative easing to encourage either degrowth or decarbonisation.
  • fungible: per the ERC20 token standard
  • backed: by at least 1 tonne of tokenized verified carbon offsets locked in the KlimaDAO treasury
  • useful: holders of KLIMA will have the ability to vote on Klima DAO policy

Steel Manning KlimaDAO

  • Underlying aspiration: To sequestrate carbon, to plant more trees, and to drive up the price of carbon offsets - as we buy more of them, there'll be less supply, that will make it more expensive to pollute...
  • Klima tokens are a reserve currency that can act as a complementary currency to the world's national currencies that can be used to do targeted quantitative easing to encourage either degrowth or decarbonisation.
  • The potential to raise a lot of money due to price volatility of Klima tokens
  • KlimaDAO are engaging with important questions that need to be addressed
    • How do we find cooperative solutions to climate change? KlimaDAO are trying to address crucial questions surrounding human cooperation and institutional design.

The Ministry of the Future - Kim Stanley Robinson

  • The Ministry for the Future is a cli-fi (climate fiction) novel by American science fiction writer Kim Stanley Robinson published in 2020. Set in the near future, the novel follows a subsidiary body, established under the Paris Agreement, whose mission is to advocate for the world's future generations of citizens as if their rights are as valid as the present generation's. At the end of the book, they are able to stave off climate change through geo engineering and financial engineering. It's basically a technocratic dream in which we save the world by better engineering, both scientific and financial.
    • “A cryptocurrency the Ministry gives out for carbon sequestration — that is, any project that sucks CO2 out of the air, whether it’s carbon capture or farmers rewilding their fields — at a rate of one coin to one ton. Oil companies get coins if they stop being oil companies, basically, leaving their assets in the ground for a century or so. Coins can then be bought and sold on currency exchanges like any other.”
    • “Specifically, a coordinated global round of quantitative easing through the issuance of a complementary currency, called the carbon coin, with a high discounted rate to be exchanged for carbon capture, is adopted.”
    • “Carbon currency will be a debt-free revenue source with a predictable value, but it will also require that each business that wants to earn the carbon currency must accept a long-term service-level agreement. The service-level agreement will ensure that one unit of the carbon currency is issued for one metric ton of carbon dioxide equivalent that has been mitigated for the long-term, such as a 100-year duration.”
  • This book is perhaps one of the most realistic efforts to portray a climate future beyond pure dystopian and beyond pure collapse.
  • It is great science fiction, and it makes us think, however it is unclear how it would work in reality.
    • Why wouldn't the central banks issuing large amounts of new currency lead to significant inflation as potentially is happening right now in the world. There's been growing concern about inflation, even before recent events, due to quantitative easing going too far. In the book, it's assumed you can just do quantitative easing and there's no impact on the economy.
    • It's also unclear why blockchain is needed in the book. You could just have a central bank issuing dollars to anyone who sequestrates carbon into the ground. There's no requirement to create a crypto currency.
  • What would the mechanism be to build such a carbon coin?
    • The issuing of a supranational complementary currency, that act like some sort of Special Drawing Rights or other supranational baskets of sovereign funds. But it just keeps coming back to the quantitative easing problems; money just doesn't work the way that science fiction describes it working.
    • Who would oversee this? Why would this person or entity not be subject to the same sclerosis and paralysis the rest of capitalism faces.
    • If the answer to most of the carbon problems in the world was that we could just pay Exxon Mobil to cease existing, we would have done that already. The world isn't that simple.
    • Until we see a white paper from the IMF outlining explicitly how this would be done it remains in the realm of science fiction.

Evaluation

  • The aspiration is laudable. But we want to achieve this aspiration of reducing carbon emissions and sequestering carbon in the most effective and efficient way possible. Klima does not achieve this.
    • If you are creating a special purpose vehicle for buying carbon offsets, there are really significant exchange fees. You are essentially converting dollars into crypto, and then converting crypto back into dollars to buy carbon offsets, and then hold them on your blockchain based on Ethereum which has quite high transaction fees. While it's not completely clear what the transaction costs are, one would have to guess that for every dollar going in, you're not able to buy even close to $1 of carbon offsets certificates. So at the basic level of what it's trying to do, it seems highly inefficient.
    • As an individual you can go to the market and invest in things that KlimaDAO would invest in directly without going through a hypervolatile speculative asset and DAO indirection layer.
  • A reserve currency is something a large group of people on an international scale adopt, because goods and services of their major trading partners are denominated in that currency. The whitepaper keeps referring to Klima token as a reserve currency, but in reality it cannot function as a currency.
    • Firstly, the insane price volatility means Klima can't function as a currency. The price of Klima peaked at around $3600, well above the intrinsic value of one ton of carbon. It has since collapsed, losing around 99% of its value over 1 year - it's now trading at around $20.
    • The notion that it can be a reserve currency, when nobody's denominated any kind of goods or services, seems to be an irreconcilable contradiction inherent in Klima.
    • Like many other crypto projects it seems to be a piece of financial engineering that at the bottom sits nothing but some appeal to narrative and the faith that “number go up” by creating artificial scarcity of a digital speculative asset. So not a currency.
    • If this is supposed to be a currency then it looks like the Weimar Republic.
  • Something that makes Klima exciting is this price volatility and the potential to raise a lot of money based on this price volatility.
    • Why not just raise the money at the beginning and then shut down the thing and just buy carbon offsets and hold on to them?
  • KlimaDAO are asking an important question: how can we tackle climate change using human cooperation?
    • But the white papers aren't addressing how this question is to be addressed. Why is the DeFi part required? Why do we need all the staking and bonding? Seems to add to the obfuscation of the underlying purpose.
    • Is this obfuscation part of what is allowing the system to function? By making things super complicated, people don't understand the reality of what's going on. While it seems like the Klima project is acting in really good faith, there are other web3 projects which are "rug pull" or scams and partly rely on this obfuscation to lure in unsuspecting investors - is giving the whole field a bad name. It's therefore incumbent on good faith actors such as KlimaDAO to be as clear in their communication as they can be.
  • Governance tokens are available to be purchased by any actor. What's to stop say Exxon from buying up all the governance tokens?
    • The answer: nothing. Exxon would therefore be able to take over the management structure of KlimaDAO.
  • Total market cap is currently $35,624,946.00 of an illiquid crypto token.
    • This is insignificantly tiny even if we believe this market cap number. There are some €53 trillion AUM in ESG funds.
    • One might argue that Klima is still new and it is at the beginning of it's journey. However there is no clear narrative of how it's going to grow from being funded by the crypto bubble and being smaller than most philanthropic efforts surrounding climate change, to get to the scale that they are seeming to aspire to. Rather than investing so much time, energy and money into this route, this money could have been put into simply buying carbon offsets directly.
    • A rube goldberg machine for buying carbon offsets that coincidentally has side payouts (management fee essentially) to a small group of individuals who developed this software.
  • Climate credits are a very questionable mechanism.
    • Are effectively a form of indulgence where you pay for the right to pollute the environment by paying off the damage via some future project or activity. You're not seeking to solve the problem, but rather to mitigate it. It doesn't seek to fix the root of the problem: that we're burning fossil fuels. Buying tokens that represent tree planting in the future will not solve climate change.
    • People will and can exploit these mechanisms to maximize their capacity to pollute. Secondary markets for carbon credits are driven by bizarre corruption. Tesla has made a lot of money on secondary markets trading carbon credits
  • Web3 Common Theme: Technosolutionism via the financialization of everything
    • Let’s turn the abstract idea of fighting climate change into a fictitious commodity to be traded on the market.
    • This is a distraction from actual solutions. Of which there is no financial silver bullet.
    • Just adding an additional layer of complexity to fighting climate change. Such a project absorbs time, money, and runs on proof of work which requires a large amount of energy. All these resources could be better allocated.
  • Anything we can do we can afford. The money exists, the problem is doing supranational coordination of solutions and allocating resources to those projects.
    • Mark Carney proposed to COP26 to allocate $130 trillion to help address solutions to climate change. The money to fight climate change absolutely exists, but sufficient funds is not the issue.
    • “Anything we can actually do we can afford.” — John Maynard Keynes
    • Unfettered capitalism is a process of commoditizing everything, privatizing the commons and destroying that which has no value and converting everything into private profit.
      • Crypto assets are an extension of that program to an even more extreme level.
    • Our system will continue exploiting fossil fuels so long as the private costs to capitalists are much lower than the societal cost.
    • Vague appeals to new mechanism designs and appeals to absolute free markets about “aligning incentives” can’t conceive of solutions outside their own capitalist logics.
  • Overall:
    • The aspirations of KlimaDAO seem really beautiful. The initial manifesto resonates a lot with what doesn't work about unfettered capitalism, about an unfettered market system, about the lack of provision for public goods, and yet KlimaDAO seems to go further down that same route.
    • As a currency it seems problematic. As an investment it doesn’t seem to work. As a special purpose vehicle for buying carbon credits it seems highly inefficient (e.g. massive trading fees.). Carbon credits are themselves problematic and are not going to be the answer to climate change. KlimaDAO is like a non-functional toy version of Robinson's vision, which is itself a fantasy.

Climate and public goods problems

  • The question of what goods to fund, how to allocate funding can be considered to be a decision making problem.
    • This is a relatively easy problem as we already have mechanisms in place to help make those decisions, eg democratic decision making, established processes, all kinds of ways of assigning money to things once we've collected it.
  • It is the 'collective action problem', or the 'free rider problem' which is much trickier.
    • What is the 'collective action problem' or the 'free rider problem'?
      • The use of public goods by parties who do not contribute to their creation or upkeep while still extracting value from the service or good.
      • "Let others do the costly things that need to be done to ensure the upkeep of the commons."
      • If enough people stop contributing, the good disappears.
      • Rufus’s book ‘The Open Revolution’ is an extensive exploration of the internet economy, public goods, and the free-rider problem.
    • A lot of attention is being paid to this problem by people within the web3 space through things like quadratic voting, DAOs, however these don't really seem to be dealing with the issue of what to do if people aren't contributing.
    • The mechanisms we currently have in our society to address this problem have been developed over thousands of years, eg if we don't pay our taxes we go to jail, and generally the way it is achieved is that someone or some body enforces this contribution, eg the state.
      • Rufus's book goes into detail into mechanisms for funding software, goods, information, movies, music. We also have examples of funding informational public goods at a large scale, and efforts around the environment. Governments spend billions, trillions in combination, a year on international research and development. All of modern medical science, all of modern mathematics was publicly funded in some way by governments or through other mechanisms. So we have got examples of solutions to the collective action problem - most done via states. It of course comes with some oppressive characteristics, eg the state can compel you to pay taxes, but we haven't really found a mechanism better than that
    • There are often visions of libertarian solutions to the collective action problem, completely voluntary solutions. And such solutions would be great but they don't seem to exist: we charge people to use swimming pools and we build walls around them to limit access to those who have paid or those who have access by virtue of having contributed to the building of the swimming pool for example.
    • Software is one of the purest illustrations of the free rider problem. Millions, if not billions, of people use software that might have been written by only one person. Every day software engineers have to struggle with the fact that we take too much from the public sphere, and we don't give enough back. And it's not clear that there's actually a mechanism by which we can solve this; large corporations don't seem genuinely keen on contributing back to open source software, they only seem keen on taking.
    • It's a dream of many people involved in these more progressive web3 projects to be able to scale public good funding or collective action without compulsion in some way. But the dream is yet to be realized.
  • This collective action problem is what we are facing in the climate crisis. Put simply, governments have to commit to reduce the amount of carbon they emit. They have to suffer a cost to the economy to not burn oil and coal and they have to commit to this cost.
    • How do you resolve the tough questions of how much different countries contribute?
    • Collective action problems are not impossible to solve, but they are not by any means straightforward.
  • The urgency of the time scale of the climate crisis requires us to engage with existing institutions. There is no other choice, we're out of time
    • More innovative solutions to addressing the free rider problem are not mutually incompatible with compelling our institutions to behave differently, and seeking to change them from within.
    • We need to effect change from within existing institutions instead of burning everything down and replacing it with DAOs.
    • Solving climate change is going to involve some aspect of the state, it's going to involve claiming public money and putting that money towards the sustenance of public goods.
  • We need to deconstruct the $100 trillion shadow banking system that’s being used by plutocrats to evade taxes and strangle democracy. We need to on-shore that capital and redistribute it towards public interests: public works projects, R&D (fusion, solar cells, etc), green infrastructure development, relocation and international development.
    • Crypto is just enabling more shadow banking as scholars like Ann Pettifor and Hillary Allen have noted.
    • Private money is not the answer because private money has no capacity to be a widespread medium of exchange. Therefore its incentives are at-best local and not global. We need global solutions to address civilization level problems.
  • Left wing perspective on the climate collective action problem is the only coherent story. Visionary realism: A green future beyond capitalism - Yanis Varoufakis, Ann Pettifor & Noam Chomsky
    • Climate collective action problems can only be solved by kind of dialling back on the excesses of capitalism, funding more things through the state and using the state as a means to affect change on a supranational level.
  • Tackling climate change requires humanity to become wiser and more economically literate about the free rider problem. It requires new ways of thinking about economic growth and a different ontological perspective about our shared humanity in relation to our children’s future.
    • These answers cannot be rooted in more extreme forms of neoliberalism. Neoliberalism is why we have climate change and why our political system is paralyzed to address the scale of the tragedy of the commons' problems.
      • KlimaDAO manifesto: “Freedom is freedom to consume as the individual sees fit” is a neoliberal reading of freedom that becomes meaningless in the face of existential threats to human flourishing.
  • How do we imagine a radically different system?
    • Practical utopianism coupled with gaining control over our existing institutions is the path forward.
    • There is no alternative.

Conclusion

The underlying aspirations of KlimaDAO are laudable and the thought process behind the mechanism appears to be in good faith. However, this $35 million DAO that indirectly buys carbon offsets at a huge premium, seems to be at best a distraction and at worst a mechanism by which we escalate the very conditions that give rise to the political and economic conditions that brought about this climate crisis in the first place.

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