Carbon Neutral or Bust?

Why the Carbon Credit Market Needs a Reserve Currency

On Tuesday we published a fun little piece about how the US government should get into the climate business by purchasing an electric bike for every adult who wants one. We wrote it in about 20 minutes, with little research, and mostly as a joke. And yet it ended up being one of our highest first-day view counts, despite being published on a holiday and with absolutely no fanfare. Yes, we’re confused too. 

One line that was definitely not meant as a joke; The US should issue a first-of-its-kind climate bond, disguised as a carbon credit. Let’s discuss. 

A brief history of currency (the bitcoin problem)

The idea of a currency is one of convenience. Ancient societies depended primarily on barter, and deeply personal calculations re. the value of one object against another; To the man dying of thirst, a sloshing waterskin is the most beautiful object on earth, and something for which he’d give all his worldly possessions. 

This is a fine system, but breaks down at speed and distance. When one wishes to engage in trade with a partner further away than the edge of town, it’s inconvenient and energy-inefficient to carry everything that might be an object of trade. 

So, currency; The societal norm that objects can be priced against one another, and exchanged at consistent rates for small, portable widgets. It’s surprisingly irrelevant what object is selected as the medium of choice. There is no particular reason that metal coins, polished rocks, bits of paper, and a yellow mineral should be priced against one another, but the point is that everyone agrees that they should and can be, and so they are. 

The issue with this system comes from the interconnection, and simultaneous lack thereof, between global economies. National currencies, especially those of smaller countries, are enormously subject to fluctuation in price based on global events, with the resulting discrepancies complexifying trade and strengthening / weakening the relative positions of its participants. 

Thus, reserve currencies; The collective agreement between nations that they’re mostly going to hold and conduct trade in one thing (the US dollar, since WWII), and that those things can be exchanged at predictable rates for gold if needed. 

Basically; Currencies, trade, and the global circulation of money and goods depend on the collective buy-in of all participants to keep the damn thing running in somewhat regular fashion. 

One other quick example… Does anyone else have a friend, or perhaps distant cousin, who calls occasionally to try and get you to spend money on the crypto bullshit de jour? Us too. Next time, ask them why a Bitcoin is worth anything in particular, given that its’ compared only to itself and not standardized in any discernible way. Please enjoy the resulting logic spins. 

Reserve currencies, consistency, and pegs are important. This is what the carbon market is currently missing. 

The carbon market today

A carbon offset is a token, signaling that at some point, there will not be one ton of CO2 in the atmosphere. A few sub flavors, with our thoughts on each: 

1. Planting trees which will, collectively, remove the ton of CO2 and sequester it. 

   • Is it a ton per year, and if so, how many years? Nobody knows!

   • What about trees with low permanence due to forestry, biomass production, etc? Same answer. 

2. DAC machinery that will remove the ton, compress it to solid, and then stick it underground. 

   • Where does the electricity to power this process come from, again?

3. LOIs, paid to companies as they develop technology to do one of our first two options. 

   • Gross. 

Sarcasm aside, there’s a place for all these approaches. Our point is simply that there are degrees of good; It seems obvious that not all of these offsets should receive the same price, as they vary widely in carbon intensity, energy usage, permanence, and proximity to the point of emissions. 

Today, we don’t know how to price them, because there’s no point of comparison. There’s no equivalent of gold keeping the system on track. 

We need a reserve currency for offsets. 

The carbon market tomorrow

The nature of financial markets is a continuous flight to quality and transparency. We don’t expect the retail consumer (or the professionals that pass for it here) to do in-depth research on the permanence, proximity to emission, etc of the offset. 

So just as in bonds, we see the first governmental contribution as the creation of an offset ratings agency, modeled after the bond market, and implementing a transparent ratings methodology based on our criteria above. A Triple-A offset might involve DAC based at the point of emission, with 100-year permanence, powered exclusively by renewables, and selling for $350. A Triple-C bond might be an LOI from Running Tide to sink a carbon-bearing buoy in 2026, and selling for $50. 

Consumers and companies deserve to know what they’re buying. 

The second federal contribution is the direct issuance of a AAA offset backed by the United States, to serve as the industry gold standard, and matched to a 1-1 tax break to the purchasing person or corporation. 

Electric bikes and renewable-only charging, anyone?

If you like this, check out our piece on fixing the climate capital stack.