Can financial incentives make a sustainable difference? Can we tackle climate change on a blockchain? This year Dr. Delton Chen is launching a Carbon Coin to make a global impact. But why is this different from Carbon Tax or Carbon Offsetting? In the Finoverse this year we jump into the future to see how a currency for the world could save the human race.
Walter Jennings: Welcome to Waves in the Finoverse. I'm Walter Jennings, the host of a podcast brought to you by Finoverse. We're talking with the wave makers creating ripples, waves and tsunamis across finance, crypto, FinTech, Web3 and beyond. Listen weekly to hear the changemakers talk firsthand about their experiences in this dynamic industry. Today in the Finoverse, we're going to look at one of the largest challenges facing humankind at the moment. This is bigger than COVID and crypto winters, we're looking at climate change, and what can be done to effectively address the challenges.
Dr. Delton Chen is the founder of the Global Carbon Reward Initiative. He is a qualified civil engineer and geo hydrologist with over 20 years experience in groundwater management, environmental impact assessment, geothermal energy and climate mitigation. His initiative the global carbon reward scheme, is actually featured by Kim Stanley Robinson in his best-selling novel " The Ministry for the Future". Let's hear more how blockchain can help with the global climate crisis. Welcome to the Finoverse Dr. Delton Chen.
Delton, the 2015 Paris Agreement aim to cap global warming to 1.5 degrees Celsius, yet, seven years later, the climate is still warming up. Has the Paris Agreement been a success or a failure?
Delton Chen: It has potential to be success. But in my mind, it has so far been a failure. And the reason is we don't have enforceable financial incentives and mechanisms. And we don't have sufficient cooperation across all levels of society to attempt one and a half degrees, because it's such a big transition for industrial civilization.
Walter Jennings: The traditional carbon markets have tried to solve the crisis. Why haven't they been as effective?
Delton Chen: Well, the traditional carbon markets, we might call them traditional, but they're quite new still. I would say they're traditional because they're based on standard economics. And standard economics has a particular theory about externalities and how to price them. My opinion is that those theories can work for most market failures, but not for this one.
My opinion, this is a very special market failure, that is much more structural, and would require new thinking, new economics, and new policy. The policies that are implemented the existing carbon markets cap and trade taxes, carbon credits and so on. They do help. I'm not cynical about them. I think they're necessary. However, they've shown to be relatively incremental.
Walter Jennings: Right. So the idea of paying to offset your carbon isn't the incentive enough for the majority of industries and corporations to take it up?
Delton Chen: Let's start with the carbon tax, because that's really where the economists start with standard economics. The carbon tax is there to price emissions. The idea being we are experiencing a market failure. The damages are called the negative externality. And economists have the idea of pricing, putting a price on the negative externality is the social cost of carbon, call it what you want, but it's, you know, somewhere around 50- 250 or $200, a tonne, depending how it's calculated, estimated.
And the idea is to apply a global carbon tax at that level to internalise this negative externality, reduce emissions and allow the whole world economy to be more efficient. Why doesn't it work well, because so many sectors and industries and people don't want the tax or don't want to be taxed too much. And so, there's political vulnerability for those policies, particularly when the fossil fuel industry steps in, because they have a lot of lobbying power, and then you have the fossil fuel exporting nations, like the Gulf nations, which are dependent on fossil fuels anyway, so they're probably not going to like attacks on it.
But then you raise the question about carbon offsetting, we're not carbon offsetting, or should we offset our emissions? Personally, that type thing? Well, yeah, it could help. But because we're unable to scale it up to the level that's needed, it's probably going to be insufficient.
Walter Jennings: Do you offset your trips? I mean, you heading from here to the Hong Kong Airport, I have rarely chosen to offset my own trips.
Delton Chen: Walter, before this conversation, you said you weren't going to do a gotcha. That's a gotcha, isn't it? Now everyone's gonna know. The truth is actually I don't bother offsetting my emissions, my flights? Is that a sin? Probably. But the reason is I made a conscious decision before I started this work, that I would work on something that would be globally impactful. And offsetting my own personal emissions with our flying or not, isn't really going to be that impactful.
Walter Jennings: Well, you mentioned the idea of looking at a global solution. And it does appear that carbon offsets have largely been regional or within specific nations, how do we get to a global solution? And I will ask you about your own reward system. But I guess the question is, do you see that regionalization versus a global approach?
Delton Chen: Well, there's two major options with negative pricing. On emissions, one is attacks, and the other is emissions trading schemes or cap and trade. Now, tax is inherently a national because it has to come from the national government as a stick. ETS emissions trading schemes like in Europe and China, they're a bit more politically fluid, because there is this option to trade the emissions permits and to buy carbon offsets.
So that kind of policy has more potential to be internationalised. So perhaps in the future, the European ETS will connect with the Chinese ETS and the North American ETS wherever they exist. So there is scope there for a global price signal. However, once again, it is relatively incremental. And it's always subject to the cap anyway, what government set as caps, so we kind of left without that special global price that economists would like to see. And we were kind of handicapped.
Walter Jennings: Okay, well, Delton. This is a great time to introduce the Global Carbon Reward Policy, also known as either the Carbon Coin or the Carbon Currency. Can you introduce us to that programme? And how that is different from a cap and trade or ETF?
Delton Chen: Sure. The probably the best way to explain this because this is a very technical question. Let's think of carrots and sticks. So carbon tax cap and trade, they're inherently sticks to begin with, subsidies are carrots, subsidies that we know of include tax deductions and the Inflation Reduction Act and or whatever. They are also coming from government through their fiscal budgets.
Now, what I'm saying is that there is another kind of carrot that has not been discussed by economists, and we haven't really looked at it. The new carrot is called a Global Carbon Reward. And what's special about this carrot is that it's a Carbon Currency. It's not just a subsidy based on US dollars or Aussie dollars, or Hong Kong dollars, it's a currency for the world. And this currency would be centrally issued or sent centrally managed by an international organisation. And unlike money that we're familiar with, this currency would not be a medium of exchange, and it wouldn't have legal tender status.
It's really a currency like instrument that has economic value. So if you offer it as a subsidy for mitigation, the project owners would like it, because it got value, and they can use it to make a profit.
Walter Jennings: Diving a little deeper into that, when we spoke before the show, you had mentioned that this would largely be run by the Central Bankers or the Reserve Banks, which each nation has and that it might be linked to kind of a central bank digital currency or similar application.
Delton Chen: Right. Well, let me clarify, there are different ways to manage such an idea, but the simplest, and possibly the purest model would be to have a new international organisation to manage and implement the policy issue the carbon currency. The Central Bank's, their role is to be the buyers of last resort for this Carbon Currency, and two in a coordinated way to have all the major Central Banks being on standby to buy this carbon currency if the exchange rate is too low. And indeed, the policy aims to manage the exchange rate in such a way that will create a rising floor price.
So the floor price is the lower bound value that's allowed. A public finance guarantee provided by Central Banks will defend defend that floor price. And then the price or exchange rate can fluctuate above that simply based on supply and demand in the private sector. So this is quite a sophisticated concept. I'm not saying it's easy to understand. But if we have this finance guarantee by the central banks, and they promise to create this rising floor, it's kinda like a stable coin.
But better because you know, how stable coins have a constant value list is supposed to imagine a stable coin with a rising value. That's what we'd have with this Carbon Currency backed by Central Banks.
Walter Jennings: Okay, well, it sounds ambitious. And it also requires coordination amongst central governments around the world. How's that working so far?
Delton Chen: Well, we haven't even tried to communicate this to governments. But I think looking at recent history, I think we've done pretty amazing things. We have the Paris Climate Agreement in 2015. That's pretty amazing that the world could come together and agree on something like that it was a voluntary international agreement. However, it lacks teeth. So the world is waking up to the fact that we don't have the scalable debt free climate finance we need, because a lot of the work to be done for climate mitigation won't necessarily make a profit if it's expensive.
How can we fund it with debt finance and loans. So incomes, the carbon currency, it's debt free, scalable. It'll be in demand by the private sector because of the rising floor. And if there's not enough private demand, Central Banks can step in as buyers of last resort. And the idea is that we use this reward as a market policy to pick up all the problems that the current system isn't very good at dealing with such as decarbonizing the hard to abate sectors, you know, steel, concrete, fossil fuels, buildings.
And importantly, then this is incredibly important to pay for carbon removal, greenhouse gas removal from the ambient atmosphere.
Walter Jennings: Now, Delton, how do we make sure the coin doesn't cause more damage than it cure, because clearly, early investors in Bitcoin were concerned about the or sorry, in Ethereum, were worried about the proof of work status and the electricity consumed. Some blockchains can be inefficient, but with proof of stake or proof of space time, there are other options. So this is a blockchain based project and how do we keep it from? How do we keep it green to?
Delton Chen: Good question. Well, the carbon currency, technically speaking, wouldn't be a crypto, it's not a crypto. How would we implement the currency? Well, if we use Central Bank digital currency technology, which is very similar, I guess, does it use proof of work? And does it produce a lot of pollution? Well, I think the answer is, it might use proof of work. But it doesn't need all that hashing, all that computer power because it would involve a consortium of computers, the identity of which is known.
And so you don't have the same security problems as you do with a fully public currency like Bitcoin. Proof of Work, the question of the energy consumption, believe just falls away. When you have a consortium of trusted institutions to manage the ledger. Will the carbon currency be a CBDC? It doesn't necessarily have to anyway to start with could be put on the rails that exist in commercial banking systems anyway. And then when CBDC technology is mature and functioning globally, it would then be probably put into that system, because it would be so much more efficient.
Walter Jennings: Okay. And you noted earlier that this might require a third party or an international body. Are there any existing organisations that could take this on whether it's the United Nations or Swift, which is connecting all the banks?
Delton Chen: Well, from a public perspective, from a global public good perspective, I think it should be an international organisation created under the UN umbrella. That's my thinking. Others might disagree. There is an organisation currently called the IPCC, the Intergovernmental Panel on Climate Change. It's a bunch of scientists who work on a volunteer basis. I kind of imagine a new organisation something like the Intergovernmental Panel on Climate Risk.
But the people who work for that could be volunteers, or they could be government officials or hired paid full salaried staff. But they would be risk experts, scientists, engineers and economists. By the way, the novel by Kim Stanley Robinson called "the Ministry for the Future". Is that concept?
Walter Jennings: Yeah, I was just going to ask you because the novel does feature the carbon coin, backed by Reserve Banks and projects in the novel, projects around the world are rapidly drawing carbon out of the atmosphere, it must have been quite a good novel for you to read.
Delton Chen: Yeah, it was. I read it in the manuscript form from the author, he asked me to check it because he adopted the policy as inspiration for his storyline. Kim Stanley Robinson, for people who don't know he's a science fiction writer. And this novel is science fiction, but it's also called cli-fi. And it's set in the near future, maybe the next 1030 years into the future.
Walter Jennings: I'm going to take a guess at cli-fi, is climate fiction?
Delton Chen: You got it.
Walter Jennings: Yeah. Fantastic. I don't like acronyms on the show. No, and in fact, Ministry for the Future was Barack Obama's book of the year. And it is doing very well in sales and also an inspiration.
Delton Chen: Yeah, I guess so. I don't know what the sales figures are. But I met Stan recently. And he seems to be pretty happy with the sales.
Walter Jennings: Now, would we be able to for this global carbon reward scheme, be able to start it out on say the Solomon Islands or Vanuatu or a smaller nation, perhaps the Vatican City?
Delton Chen: Yes, I agree. We have a project plan, which is to raise money to demonstrate the policy, proof of concept, we probably won't build a carbon coin to start with because we're more interested in the impact of the policy on people's decision making. Running a pilot carbon currency can be tricky. So we're more focused on how decision makers and businesses would respond to this new incentive.
We want to speak to central bankers, economists, do economic modelling and speak to other stakeholders, including citizens, environmentalists, ecologists and energy experts.
Walter Jennings: So we're looking at a project that is still likely a decade away if.
Delton Chen: Well, I'm laughing, but it's not a funny question. We are in a crisis and time is of the essence. Because if we don't fund clean energy quickly, the problem is. Walter, to that we will lock ourselves into dirty infrastructure and dirty energy.
And a lot of this infrastructure will last a long time, you know, power plants, transmission lines, what have you. So we're going to look ourselves into a dirty future. That means we really are in a time urgent situation to quickly transition out of dirty energy systems and a dirty economy. So for that reason, I hope that people who are supporting us will give us the resources we need to speed things up.
Walter Jennings: I know, and clearly, on our show, we have long looked at a number of traditional finance solutions as well as decentralised finance. And always the central bankers seem to be right in the middle of everything where they're trying to interconnect the existing financial systems with tomorrow's financial systems, and they're trying to figure out how to make the plugs and the sockets all fit together.
Delton Chen: Yeah, I think they're doing a lot of retrofitting of this system. I know they're inefficient, and the blockchain CBDCs will come along and there are projects under the Bank of International Settlements and other central banks. Central banks have to look at new tech that's efficient.
Walter Jennings: I was very interested to learn of your background as a hydrologist as well, as someone who has studied the Great Barrier Reef in the coral keys for years, you're probably looking at another substance such as water that we don't seem to put the appropriate value on. You know, how do we, how does your experience as a hydrologist kind of influenced your thinking towards these carbon markets?
Delton Chen: Yeah, this is such a deep question, Walter. It's a very good question. Water Resources are quite special, because of course, we need water. But the hydrological cycle naturally is a circular economy. You know, people talk about circular economy. But think of the hydrological cycle it is naturally circular. So you would think an intelligent species homosapiens would have figured out that we have to use water within the bounds of the hydrological cycle, but we don't. And what we do is we mined water, whether it's in rivers or lakes or groundwater, often, too, we deplete it, or we pollute it.
There are good examples of over extraction of water in central United States, and Northern India and other countries where they're depleting their own water. And farmers who are doing this, they know what they're doing. They know that their farming methods won't survive, they'll eventually run out of water, and they'll have to adapt. The question why do people do that? Why do we manage industries, agriculture, unsustainably? When the answer is because we time discount, we, as a species, we value the present more than future. And also people want to make a profit, enough money to retire, build, buy a house or put their kids through school? Who knows.
So this is the inherent problem of human nature time discounting, and this relates back to environment, environmental problem, climate change, as well, the economics of climate. And the theoretical work that I've been doing looks at this problem deeply. And I think it might have answers, but it's just too technical to explain here.
Walter Jennings: Okay, well, I'm going to speaking of too technical to explain. I'm going now to give you a question auto generated by artificial intelligence, why is incentivizing people necessary for the Carbon Reward programme to succeed?
Delton Chen: The answer is for cooperation, right? There's scientific evidence that shows that human beings, we cooperate more with each other in competitive games, when we have a combination of carrot and stick incentives. So we have some sticks already. But we don't have enough carrots. So if you bring in the global carrot, the global carbon reward, it allows us to cooperate more, and we can have more sticks as well. And that's how we might trigger exponential societal change.
Walter Jennings: And for those of our listeners who are in the finance industry, or in Web3 what are some of the things they can do or think about to mitigate their carbon emission or support an initiative like the Global Carbon Reward System?
Delton Chen: Well, you know, this isn't an easy question to answer. I would like people who are listening to this to consider making a donation and helping form a ministry for the future club, raise more support through professional networks. And yeah, just be aware of what we're doing.
Walter Jennings: And at worst, start a book club by Ministry for the Future and have a rockin' good conversation.
Delton Chen: Exactly.
Walter Jennings: Now, Delton, we like to end each show with a segment we call tracks in the Finoverse. So if you were going to have some music that would motivate people to get involved in the Global Carbon Reward scheme, what would that song be?
Delton Chen: I liked the Rolling Stones. So money.
Walter Jennings: Money, that's what I want, okay. Dr. Delton Chen, thank you so much for coming in to Waves in the Finoverse and introducing us to the Global Carbon Reward scheme. It's been brilliant, and we really appreciate.
Delton Chen: It's been an absolute pleasure and thank you for this opportunity to speak to everybody. Thank you.
Walter Jennings: Thank you so much.