[22] Climate Change: Solving Big Problems with (Web 3) Incentive Design
Dear Readers,
Hope you had a great weekend!
This week, we are covering a BIG topic in climate change. BIG in that there are many angles to view this through. The goal is NOT to be exhaustive here, but we are really curious about the idea of coordination and incentives in BIG (global) problems.
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We talk about Web 3 disrupting a lot of things: entire industries like the music business, the way we work, the power users can enjoy under a shared economy.
How about policy?
Is there a world where Web 3 can transform the way policies are implemented, ultimately supercharging the outcome?
We think climate change is one area where the traditional model to manage it could be upended by Web 3.
The initial challenge with enacting any kind of large-scale change boils down to adoption: how do you motivate different people (across the globe) to care about the same thing and act on it?
Not everyone in a given country cares about climate change, but likely in all countries, at least some people do care.
And if we can find a way to aggregate those who care, then we just might have a chance at enacting real change.
It's about reaching critical mass.
But, how do we get to critical mass?
Today there are different options to organize people around certain issues at a large (global) scale:
One approach is through traditional institutions (e.g., the UN, policy organizations, etc.)
Another approach is through Web 2-like markets / mechanisms, enabled by carbon credits at a country-by-country level
The third approach is through people uniting on the internet who care and are organized via Web 3 principles
And, of course, then there is everything in-between!
So the big question is… which method above is destined to save the planet?
The answer lies in which one drives the right level of coordination and incentives among a global population. 🏔 🧗🏻♀️
We’ll dive deeper into the Carbon Credits model and then the Web 3 model, primarily because these two models use incentives differently to solve the same problem.
Making a carbon copy 🚗 💨 🚫
Anytime we talk about incentives, there are two kinds: the "carrot" and the "stick".
🥕🥕🥕 Motivation through Carrot: incentives driven by reward (e.g., do X and get paid)
❎😵😭 Motivation through Stick: incentives driven by threat of punishment (e.g., do X and avoid monetary penalties)
Carbon credits are an example of using the proverbial “stick”… i.e. corporations will pay massive fines if they don’t comply.
At a high level, a carbon credit is a permit that gives a corporation the right to emit 1 ton of carbon dioxide. Companies get allotted a certain number of credits. And the carbon credit market makes it possible to buy / sell these credits as you would any other good.
It works like this:
Governments set a cap on how many tons of carbon emissions certain industries can generate
Company A emits less than its target amount of CO2, resulting in a credit surplus
Under “cap-and-trade”, Company A can sell its remaining (unused) credits on a marketplace or roll them over for future use
Company B emits more than its target amount, either paying a fine or purchasing carbon credits from Company A to “offset” the gap
To our earlier point on coordination, the above financializes carbon and creates a marketplace where companies will either work to solve the climate issue OR find it slightly harder to keep polluting under the status quo. It’s effectively a tax that businesses agree to incur.
But is this “stick” the right incentive to curtail our biggest polluters?
Corporations with enough money can keep buying credits, instead of looking for ways to (actually) decrease carbon emissions. And by one company selling its credits to another, we’re really just moving money around from one pocket to another.
Whether it’s Company A or B burning the credit, net-net, impact to carbon emissions is neutral in this hypothetical case.
NOT saying the traditional carbon credit market can’t work… there are companies that invest in green initiatives to lower their carbon footprint and get rewarded for those efforts via this model.
But the way this market works means many corporations will end up seeing carbon credits as a cost to doing business. And they will eat the cost as long as the supply of credits and availability for purchase exist.
It ends up being a “check the box” exercise and begs the question: is this incentive system actually solving the problem it’s intended to solve?
Let’s see how a carrot model could work. 🕸3️⃣
Doing it the Web 3 way 🦄 💸 🥕
Web 3 enables mass participation at the level of the individual. Those who self-select in already have a vested interest in participating because they care or see the incentives to participate is greater than not participating.
Web 3 also preaches a shared economic model (create value together, capture value together). The mindset is, let's not dance around incentives; we all want to solve this problem because we have to (it affects us all), so we might as well all benefit. Simply put, if we see incentives to solve the problem, we will.
Either way, incentives play the key role to drive toward an outcome.
So what does it look like to solve a big problem (like climate change) via the crypto model / token model?
The general logic / flow is something like this: (1) Identify a set of actions you want your users / participants to carry out (2) Create an (crypto) economic model that incentivizes the behavior (3) Build a community and / or structure to drive coordination and action (4) Reward those who carry out the behaviors.
Some projects are already experimenting with using Web 3 to fight climate change.
Take KlimaDAO, as one example.
This group of environmentalists and developers is using blockchain tech to increase the price of carbon assets so that corporations will be forced to reduce carbon emissions. And through their “KLIMA token” cryptocurrency, their users can profit from the accumulation of carbon credits the DAO buys up.
At a high level, it works like this:
Users buy Klima tokens via credit card (at the most basic level)
In aggregate, KlimaDAO then buys as many carbon offsets as it can, bringing them on-chain in a tokenized form
On-chain carbon offsets (in the form of tokens) have value because the token can be burned to claim it against carbon emissions (1 token equates to 1 ton of CO2 removed from the atmosphere, or a “Base Carbon Tonne”)
Base Carbon Tonnes create the backing for a reserve currency, KLIMA, whose price is set by supply & demand
There are a lot more details we won’t get into here. For more info on KlimaDAO, check out these resources: [Klima Documentation], [Tokenomics Dao Explainer], [Coinmonks Explainer].
But at a high level, KlimaDAO is bringing together people who care about climate change and creating a system where their participation has a path to value capture (e.g. incentives).
If KlimaDAO buys up the carbon offsets that polluters need, locking it away in their treasury… then carbon credit supply for corporations to purchase dwindles… plus demand from groups like KlimaDAO drives up the price of carbon credits further…
Effectively, KlimaDAO is betting that corporations will seek new ways to (actually) reduce carbon emissions, instead of via buying / selling offsets.
Fighting climate change just got real. 🌍 📈
Web 3 is flipping the script here by making the movement more bottom-up / grassroots versus top-down and regulated by the few. It’s using DEFI with a DAO governance model, coupled with more adaptable mechanisms to the underlying market changes, to solve the problem.
Instead of checking a box, this model is aligning both incentives and coordination: for individual users holding KLIMA currency, they can participate in governance and capture value, while restricting supply of carbon credits and availability for purchase at the corporate level.
This can be the coordination at a large scale that Web 2 is missing, but like everything in Web 3… it’s still early.
Why are these problems so hard? 🤔
So far, we’ve seen two different approaches to solving the same issue. We’re not saying one is superior (and not plugging KlimaDAO), rather we’re saying big problems are hard to solve, and they usually come down to coordination and incentives.
There are a few reasons why solving problems like climate change is so hard.
🙉 Agreement is almost impossible. Climate change deniers aside, who is best positioned to do the work (corporations vs. individuals) and what’s the right mechanism (e.g., carbon credits)?
There is a camp that believes corporations / governments are best at organizing large-scale projects (they’ve got the resources, influence, reach, etc.), but this also brings with it inefficiencies and makes investment less personal.
It’s easy to disassociate when you aren’t involved in the day-to-day.
🙊 At the individual level, everyone wants to think in binary outcomes: I either support or I don’t support. But large-scale problems like this are rarely either/or. And even if you commit all-in, involvement is still on a spectrum.
Different countries have different incentives and tradeoffs, which aren't necessarily aligned. People give money, time and effort to varying degrees.
How do you manage the spectrum of contribution? Which leads us to…
🙈 Coordination of efforts is challenging. Picture this: everyone thinks someone is contributing, since just about anyone can… but then no one does because everyone assumed it was someone else’s job.
Governance structures need to be put in place that incentivize ongoing contribution.
There isn’t one right answer to the above, but by creating a forum to unite individuals and make contributions transparent, we are moving one step closer.
It takes a village 🌎 🤝
Why does anyone in the village care?
In solving big problems on a large scale, the solution always revolves around coordination and incentives.
Carbon credits have operated as a capitalistic mechanism that keep green companies afloat and are forcing dinosaurs to either adapt or die — unless they can afford to check the box and carry on as usual.
So the question is, is the traditional model bringing the right minds together and will they keep contributing?
The fact that we have climate-driven projects is neat because Web 3 is global in nature. Participants are invested, incentivized, and interacting toward a common goal.
It’s a bottom-up approach where governance means community can course correct. If we deviate from the goal (fighting climate change) and enough of us agree our approach isn’t working, we can vote on it and change course.
Existing systems often solve problems through one angle (“this is the way we’ve always done things”), but Web 3 unlocks the possibility of evolving the “organization” if our tactics aren’t succeeding. A token-powered system with governance means it’s easier to evolve the “organization”, as long as enough users want it to evolve.
So, to come full circle… are we more excited when there’s a stick (tax) or a carrot (shared value capture)?
When it comes to human beings, carrots are greater than sticks.
It's win-win, which means participants are more likely to continue contributing.
Fighting climate change isn't a one-and-done, it's about ongoing stewardship.
Web 3 systems expect ongoing stewardship.