Climate Finance 2021
Let’s start with a cold hard fact: we cannot buy our way back from climate change. Our current efforts focus on channelling funds from large corporations and conscious individuals into environmental causes, which are essentially carbon-negative projects run by institutions, auditors, and operators. This article review the various shapes and forms by which money can be used to positively impact the environment. Or in the words of Rockerfeller:
Mobilizing large pools of private capital from new sources to address the world’s most critical problems
Charity & Philanthropy
The age old institution of wealthy benefactors giving money to charitable organizations such as the Coalition for Rainforest Nations, Clean Air Task Force, or Climate Emergency Fund. Such donations are generally tax-deductible and come with few strings attached: namely that the money be used towards the stated mission (eg. forest cultivation, renewable energy resources, methane capture) or to compensate the individuals whose efforts make such initiatives possible.
Despite the selfless nature of such charitable contributions, the “don’t look a gift horse in the mouth” mentality without due diligence or public education can be perilous. The mosquito nets from the Bill & Melinda Gates foundation were meant to keep out malaria, but in some instances were used as fish nets that released deadly toxins near the beaches of Madagascar and other areas. Wanton capital or resource injection can have unintended consequences, which should be mindfully considered by project planners.
Compliance & Voluntary Markets
Towards the end of last century, governments became increasingly aware of the acute and adverse effects of pollution on climate change and society, culminating in the 1997 Kyoto Protocol agreement. The resulting regulation on “pollution markets” led to the popularization of “Cap and Trade (CAP)” and “Emissions Trading Schemes” (ETS). These systems enable carbon-intensive businesses to offset their footprint by purchasing carbon “allowances”, which help fund projects to counteract their negative environmental impact. This “Compliance” market model was later extended to the “Voluntary” carbon market, fueled by consumer awareness and corporate ESG commitments. Voluntary offsets are intended as a temporary stopgap measure that allows companies more time to transition to sustainable practices.
While this model indeed helps funnel money towards climate change, there are numerous issues that I discuss in this article. After multiple carbon credit “scandals” including those issued by Nature Conservancy (nature.org) and those from backdated 2011 wind farms with no future prospects, the Task Force for Scaling Voluntary Carbon Markets and other bodies are dedicated to popularizing a robust framework for high-quality assets that have “additionality”, or a previously unaddressed impact on the ecosystem.
Sustainable Business Models
Most modern start-ups try to build sustainability into their business model, driven by the founders values or advertising departments recommendations. “B Corporations” or other green certifications require prudent decisions around employment, supply chains, and even revenue sharing.“Gear for Good” is the motto of Cotopaxi, one of my favorite apparel brands. They use recycled materials, partner with global factories with documented ethical practices, have a carefully designed carbon-minimal supply chain, and most importantly: looks great!
Another company worth noting is the search engine Ecosia which uses ad revenue to plant trees. Their transparent and accessible reporting is popular among users.
In his post “The Case for Clean Money”, Rune Christiansen, founder of MakerDAO, confidently states there is plenty of “climate alpha” to go around. Or in other terms, investing in the environment can be profitable. Don’t just take my word for it: Mukesh Ambani, Asia’s richest man, recently purchased a number of renewable energy companies including solar wafer manufacturer NexWafe. And more broadly as we get closer to our 2030 climate goals, the value of sequestering 1 ton of carbon (or equivalent) will only increase; by extension so too will projects that efficiently, transparently, and enduringly sequester carbon, or otherwise improve the climate situation.
Venture philanthropy is an extension of this alignment of social, environmental, and financial incentives. As I understand it, the goal is to create self-sustaining, even profitable, charitable organizations that are not mortally dependent on donations. For example, a social work charity could merge with a solar company to encourage adoption of solar-powered electric stoves in developing areas with highly pollutive biomass stoves. This helps the solar provider enter new markets, allows the charity to benefit from the revenue, and could be packaged into offsets due to the emission avoidance with additionality. Such a system requires a rigorous level of oversight, but provides a path forward where all parties benefits are aligned.
Natural Capital Reserves
And now we arrive at the “2021” part of this article. Inspired by January’s retail-frenzy GME rally and April’s success of OlympusDAO’s reserve currency model, KlimaDAO recently launched a token backed by treasury assets consisting of Base Carbon Tonnes (BCT) and Liquidity Pool tokens with USDC. “Every KLIMA token is backed by 1 tonne of verified, tokenized carbon reduction or removal. These can remain locked in the treasury indefinitely, or sold to balance the price of KLIMA.”
During their “office hours” sessions on Discord, the KlimaDAO leadership makes it clear that this project is disruptive, and the KLIMA token carries a high risk profile due to its stated mission. “KlimaDAO’s goal is to accelerate the price appreciation of carbon assets. A high price for carbon forces companies and economies to adapt more quickly to the realities of climate change, and makes low-carbon technologies and carbon-removal projects more profitable.” KlimaDAO is therefore restricted to investors with disposable liquidity (ie. cash to risk), which prohibits most people from participating.
The Celo Foundation recently announced the “Climate Collective” and an initiative to onboard NatCap into the Celo reserve that backs its stable-value assets including cUSD, cEUR, cBLR, and more to come. They have already locked almost $1M in Moss CO2 tokens, and are trying to foster an unprecedented symbiosis between adoption of stablecoins and conservation of natural assets: “By allocating a fraction of assets to natural capital, the reserve can create an incentive mechanism that aligns demand for stablecoins with the protection of natural capital.”
Celo’s stablecoins are ideal for daily use, so as the ecosystem continues to grow so too would the allocation of natcap in the reserve. This reserve model was previously restricted to Sci-Fi books such as Charles Eisenstein’s Sacred Economics, but using DeFi we can actually implement such a system.
Celo’s reserve differs significantly from the previously discussed funding models: the transfer of money is not a donation, allowance, or investment. If Celo suddenly has a massive dip in circulation, it will be a nightmare to “panic sell” most of these environmental assets; and conversely if a natcap project fails, the Celo stablecoins must not end up severely under-collateralized. This system requires careful design considerations and the inclusion of diverse assets that I explore in my Carbon Schema article.
Radical DAOs and dPIPE
PleasrDAO’s purchase of the coveted 1-of-1 Wu-Tang album from widely-hated big-pharma-exec Martin Shkreli for $4M was a big moment for the “metaverse”, which now hosts the albums’ NFT deed of ownership. “Decentralized Autonomous Organizations” (DAOs) are community-driven projects that collectively make decisions based on discussions, proposals, and coin-votes. As OlympusDAO, KlimaDAO, WhaleDAO, and many other have demonstrated: people financially rally around shared causes and goals. The Olympus treasury is almost $700M, the “Total Value Locked” including the users staked funds is $3.7B, and it just launched in April — older DAOs such as Maker has almost $18B TVL that it intends to transition to “clean money” partially backed by natural capital.
Let’s extend this DAO treasury model to the SPAC renaissance in 2021 and “Private Investment in Public Equity” or PIPE. Imagine a DAO where the treasury only accepts shares of Diversified Energy Co., the largest purchaser of discounted dying oil wells that produce massive amounts of methane and other greenhouse gasses. The goal would be to take majority ownership of the company into the DAO treasury, and proceed to gradually decarbonizing the business in a decentralized way. I think we need far more robust governance in DAO’s before such management would be practical (which I discuss in this post “Small Group DAO Governance”); but I think there will be a “dPIPE” deal by the end of the decade!