How the Coase Paradigm may be applied to Climate change
The recent Trade and Disasters Symposium panel in WTO has drawn a terrifying picture. Australia’s economic losses from natural disasters have been predicted to double by 2050. Small island developing states are being ravaged by natural disasters here and now: Hurricane Maria has stripped the island of Dominica of 242% of its GDP, raising its overall poverty rate from 28.8% to 42.8%. By 2030, about 150 mln people will have to migrate due to climate-related issues.
The industry-related climate change is one of the brightest examples of social costs or negative externalities. This collateral damage, especially related to environmental issues, remains in the focus of economic science for over 100 years and has become critically important in relation to climate change in particular.
Some say that businesses who harm the environment while producing goods and services are to blame. The manufacturers argue that they supply goods and services in demand, which at least means that the buyer of the goods and services is equally liable. From the economic point of view, it is actually the transaction between the two that causes the damage.
In his work “The Problem of Social Cost”, Ronald Coase, the British economist, who won the Nobel Prize in Economic sciences in 1991, proposed a peer-to-peer settlement of reciprocal damage “to avoid the more serious harm”.
The manufacturer can reimburse negative externality against the claim of the third party (the party exposed to the damage) in monetary form. Besides, either of the parties can provide mitigation ‘in-kind’. The third party can mitigate, avoid the damage or opt for adaptation measures. The fourth party in this concept is the professional offset provider who carries on the mitigation task: planting forests, building a power plant that produces energy from renewables, etc.
The mitigation process requires a market-based infrastructure that supports decentralized peer-to-peer interactions, the public network of negative impacts evaluation, the distribution of liability, and settlement through verified mitigation results.
Technical progress brings new ways to mitigate the industrial damage to environment and climate. One of such instruments is blockchain technology. Its obvious strengths are transparency of transactions for every member of the network and the immunity of the data stored in the network. Therefore it allows to solve the problem of scam and falsification of data. As a result, the trust between the members of the market will rise. Blockchain applications are currently being explored and applied by more than 15 UN agencies.
Among the blockchain ecosystems focused on mitigating negative societal externalities we can outline DAO IPCI (Decentralized Autonomous Organization - Integral Platform for Climate Initiatives), created by a team of green economy enthusiasts of different backgrounds. The first version of DAO IPCI allows participants in greenhouse gas (GHG) credit-based or quota-based emissions trading schemes to account for claims made towards these targets.
DAO IPCI is a digital environment based on smart contracts. It aims to make the issuance and transfer of mitigation instruments –carbon units, green bonds, etc - highly reliable, transparent and protected from intervention from the side of any centralized power.This are the reasons why blockchain solutions, and DAO IPCI in particular drew a lot of attention at the conference COP23 in Bonn (November 2007).
So, if we speak about Coase concept of externality mitigation, DAO IPCI may become an offset-provider for a large number of organizations and individuals. Its primary aim is blockchainization of existing corporate, regional, national and international environmental programs, such as implementation of renewable energy, planting forests, installing filters to catch harmful industrial emissions. The carbon footprint offsets are not just a pure experiment or an entertainment for geeks. They serve to hit the climate goals of the Paris Agreement - to harness the global warming. The creators of the platform - Anton Galenovich, Alexey Shadrin and Sergey Lonshakov, believe that the rise of trust in the market and easy trade in carbon credits will heat the investment into green projects.
The reductions of CO2 emissions are represented by digital tokens issued via coordinated actions of the Operator, the Issuer and the Independent Entity. The issuer creates environmental units registry which is further approved by the Operator. Independent Entities verify the reduction and issue environmental units to the Registry and transfer them to the possession of the Issuer. To reduce transaction costs and make arbitration truly decentralized, IoT smart sensors that monitor atmospheric pollution and Network verification have to be introduced and developed to gradually substitute manual verification by people.
The first ever blockchain-based transaction with carbon credits took place in March 2017, when the French Aera Group registered a part of its CO2 reductions performed by the solar power plant in Mauritius and equal to 400 tons of carbon dioxide. The second company to register its mitigation activities was a Russian company Khimprom located in the Siberian city of Kemerovo. Its carbon units have been recently acquired by Yuri Anisimov a fintech director at Startmesh, to compensate his personal carbon footprint.
In Chile, DAO IPCI will launch the world's first decentralized climate program for the development of solar energy in remote villages. Emissions reduction will be verified through the data from IoT sensors and confirmed via public blockchain. The IoT protocol is tested in the field, and its implementation will significantly reduce the verification costs and increase the credibility of green assets and green digital tokens.
In Kazakhstan, the organization is negotiating the implementation of blockchain in the National System of Emissions Monitoring and the carbon market, which was launched in 2018 as part of a joint program with the World Bank. If the deal succeeds, Kazakhstan will be the first country to implement a blockchain for national climate policy at the national level and will significantly improve its ecological transparency, which should increase the trust of foreign partners and contribute to the inflow of investments in renewable energy.
It is in the best interests of all DAO IPCI stakeholders to link, integrate and merge markets, and therefore to have a unified payment token. Payment token functional role is to provide for seamless market operations, fungibility of mitigation instruments, and its’ value is determined by the value of the market. The Genesis Operator, the Operator of the Russian Carbon Fund Integrated Program for Climate Initiatives (RCF IPCI Operator) has issued Mitigation Token (MITO) in total amount of 9,068,185.45, including 109,987.25 tokens, which have been actually sold or distributed among private holders.
Regular demand for tokens representing mitigation instruments comes from manufacturers, suppliers and consumers, sellers and buyers of goods and services that cause collateral damage. However, monetary claims for damages of ‘the third Party’ is also a potential source of demand, which can be satisfied either in monetary form or by ’in-kind’ offsetting. Existing smart contracts in principal allow initiating claim for damages, supporting it by secondary claimants, for and either reimbursement or offsetting the damage.
Market is the core element of DAO IPCI structure and of any independent program within the ecosystem. Other elements like issuance or retirement of mitigation instruments provide for the quality of market goods and traceability of transactions. The goods traded at these markets are not for direct consumption but are goods of a higher order, factors of further production; essentially, they represent rights for further economic activity harmful to a third party.
Most of the elements to implement the model in principle are in place in DAO IPCI. Yet, some of them are still under development, and the concept in general still needs comprehension by the communities.
Anton Galenovich