Trustless Carbon Markets: Oracles for Validating Environmental Impact - Brenda Loya

Transcript

[Music] Yeah. So last year I was here talking about how we can use crypto and just blockchains to bring transparency to different things. Last year I actually talked about the CPI. This year I'm talking about the carbon markets. And you know I might burst a couple bubbles as I go through the presentation. But before I get completely started, you know, as I was practicing my presentation with my co-founder Nick, uh about halfways through, he was like, um, this is all really interesting, but I still don't get how that relates to crypto. So, let's start off with that question. So, you guys keep it on the

back of your heads as I go through all of this material. Um, carbon markets are were basically created by governments. But essentially we have to decide one of the of two things and this is where I think it falls into and this is the question that you guys can help me answer. Are they a shitcoin or are they a memecoin? Bottom line. Um so with that let's get started with a little bit of history. So carbon markets and research on acid rain has been done for centuries like in the 1800s this was already a phenomenon that was known. Um, Robert Angus Smith, a Scottish chemist, was actually the first person to coin this

term acid rain in 1852 in one of his books. And so this has been known that for for a very long time that pollution can cause acidity on rain and we also know that it can cause it on um we have wet and dry depositions and for dry like wind and gases or and dust. This can also become very acidic and be carried over or travel over long distances. And so whenever something or is polluting the environment, it doesn't just pollute that specific area. It actually can have an effect on areas way farther and that have nothing to do with what's happening

in that environment. In the 1970s, the US um Clean Air Act was the US attempt to to sort of address this issue. Um but this issue because everything or pollution travels so far away from the actual source where it's happening it cannot be addressed just by one country or one region addressing uh this problem. So in 1997 the Kyoto protocol was the first attempt internationally to address this and um and and the problem anyway. So, so that was in 1997. In 2005, the EU emissions trading system is the first

time that you know compliance markets were implemented. And and then in between 2007 2016, the voluntary carbon markets started to consolidate and strengthen. Even though some companies even the 1980s had already started looking or doing carbon offsets, the actual markets did not mature until until 19 2016 with the Paris agreement. The Paris agreement was our second attempt internationally to address this problem. And the problem with all of these actual agreements is that the incentives are not punitive.

Generally all of these agreements are just um very much people have or countries opt in to to them and they set their own caps and then they are just expected the next year or over a period of time to reach those caps. And if they don't um sometimes there's nothing done. There's very little that can be done really. And sometimes they they'll have like uh okay well if you don't meet it then next year you have to meet it meet meet your expected threshold plus 20% or something along those lines. The problem with that is if they're not meeting it to begin with it's going to be very hard for them to exceed them the next year. And they

don't have a lot of um punitive mechanisms within these uh treaties because they also don't want countries to lie about what they're doing. Right? And they want countries to share their knowledge to be able to improve the processes all everybody at once hopefully or from developed countries that maybe have better processes share that knowledge with developing countries that need to implement those processes. May or may not be feasible for them to have the money to actually implement them or the companies to want to just because there's no punitive real uh damages done to to these companies.

Um, so one thing that always comes to mind when everybody's talking about these type of of incentives or carbon markets is who should be paying the most for the damage that has been done. Those that have already caused the damage or those that are causing it right now. Uh, in general, historically, the US and the EU have been the biggest offenders. And so now we see China as they've continued to develop being the biggest offender as of now. But the damage has been done and a lot of a lot of this damage what happens is it doesn't just last a year or two in our atmosphere. It lasts from hundreds of years to thousands of years.

So what we do now is going to have an effect on future generations to come. what we're experiencing now, it's um effects from generations way before us as well. And so initially when carbon markets came into play, another portion of that debate was whether or not this was attacks on developing countries because as they're developing, they're the ones that have um they are polluting probably the most and care a little bit less about the environment because ultimately what they're trying to do is get enough food on the table for their population and they're going to they're not going

to start caring about the environment. ment until they started reaching a standard a certain standard of living. And then you also have a lot of these corporations from more developed countries moving their operations into developing countries because it's cheaper. It's just cheaper. It's more corrupt. It's easier to to buy people basically. And so they're not even though they're in a developed country, they're still polluting but just not in their own area. Um so for carbon markets we have two different markets. We have the compliance markets where which are set by governments and then the voluntary markets. Governments basically just um come up with an estimate of how much

they are polluting and then they pledge in these treaties how much they are going to pollute for a period of time and how much they're going to be improving over time. And then they take all of these information and everybody creates these carbon credits, these governments and then they assign them to certain industries and then within those industries to specific companies. What ends up happening here a lot is lobbying, right? So lobbies will come to politicians and you know take me out to dinner or I'm not a politician. Take them out to dinner. take whatever do do their lobbying stuff and then what

they'll do or what they want is to be allocated not just what they are using but be allocated and overallocation so that they can take advantage of this free money because if you think about it when the government is just handing out these carbon credits if you don't use them all you can sell your excess to other companies that need them so um if I, you know, have a company and Dennis has a company and he's my competitor. I'm going to go and lobby the heck out of whoever I need to and get an overallocation so that he's short. And now there's a premium to be paid for my carbon credits. So that's

free money that the government is giving me for me lobbying. And this has happened in pretty much every uh every uh compliance market. It's just it's just normal business and it's the US lobbying is normal processes. It's a it's a normal process for politicians. So but that in itself it's an incentive for people to misuse this free money in essence. voluntary markets. They started in the 1980s with some people uh well not the markets but the actual offsets with companies just being uh environmentally responsible. uh but the actual voluntary markets as they

became uh more standardized and more uh mainstream they also have their issues right so for the majority of the companies they opt in for this it's either it's profit driven marketing driven right they want to make sure that their profits reach a certain level because people are conscious about the environment and so they use these voluntary markets to offset and to be net zero and to promote themselves as being green or greenwashing uh when even if they're not actually doing the the work. And so there are about four main companies that that regulate these standards and verify that people are

doing what they say they're doing. Um the problem with these companies and with just carbon credits in general is that you know greenwashing happens a lot. companies will claim that they're doing something that they're not and people will still buy from them and as long as they meet their profit thresholds, they won't care. Um, there's also a lot of low and questionable quality credits and that goes back to how you process a project that comes in with a proposal and you validate what they're going to do and then validate what they are actually doing. Um, and then there's the problem of double counting where because this is a little bit of an obscure market, um, the the

carbon credits when they're actually used, they're not always retired or what companies will do is they'll um they'll use them and sell them uh to the voluntary market and then somebody else in the voluntary market can also claim them. um they have a bunch of little different schemes that they have come out about to double count them or to double use them just because they were able to game the system. Um and they can do that because there's a lot of lack of regulation and actual oversight from the government or even private entities. Um there's also other issues with how people come up with the project proposals especially in the south where you know it's not very um

uh the equity and like you know they there's been problems where they displace local people to so take over large portions of land so they can claim these credits because it's like I said it's free money if you can get the government to approve this and get these entities to approve these credits It's basically money out of out of the air bottom line. Or you know, if you're actually planting trees and you're actually doing what you say you're doing, there is an investment or there's money that is going into that and that's why you're raising that money. But ultimately, if there's no proper oversight, that doesn't always happen.

And then there's a problem of like uh permanence of the actual carbon credit or the carbon sequestration um project or reversal risk. Uh, some of those could be something like in California. California actually had a scandal that we'll talk in a little bit where there was a bunch of carbon credits issued for some people that claimed they were going to take a bunch of trees down and then they didn't. And I don't think they ever even intended to, but they got a bunch of carbon credits for that. Uh but imagine in California they if they do give somebody these carbon credits and they go and sell them and then there's a fire which happens a lot in California um all that

goes to nothing and there's no repercussions like everything sold they made the money and they're good there's nothing that they are going to be liable for the carbon credit verification and insurance process basically this is I I try try to create a somewhat of a a flow, but the the right side is basically the person or the entity proposing the proposal. Those are the things that they do and then the other side it's the the registries or the third parties that actually like Vera and that actually verify what they are proposing. So it starts off with them proposing providing

a design and a proposal for what they're going to do. Then this third party goes and validates it and they don't really disclose the criteria. They eventually do disclose uh their validation and why they approved them and then once they approve them they can go and register um with a standard and say okay this is the standard that we're going to be following the gold standard the vera whatever whatever they're going to be following and then and then they can start reporting and monitoring their progress and then this third party again goes back and validates that what they say they're doing and what they expect to be um cleaned up. It's cleaned up.

And then once that's done, they give them a verification of that and they issue these carbon credits and then they can go on the market and trade them and make money off of them. And that's all great, but so that's just how it works. These are some of the scandals that have come out even though there's a third party always verifying all of this information supposedly. Um, California forest offset pro offset program. This is the one that I was talking about earlier. Tens of millions of credits for forest credits that weren't even at risk. This is basically like a bunch of like rich people with a bunch of lands. They're like, "Well, we're going to cut them down if you don't give us money." You know, and they g

um the EU emissions trading and granted the California forest offset program, it's a voluntary program. The EU emissions trading system is not. That's a compliance program run by the government. Okay? And even they like they don't have very good oversight. So they uncovered lots of cheating, lots of recycling credits. It wasn't even just double counting. It wasn't just a matter of like it went from one market to another. Like these guys were just turnurning them out like like they were recyclable cans of Coca-Cola or something, you know. Um so they did that. Um and then the Vera and Rainforest offsets, same thing. Um they weren't even at at risk. They issued a

bunch of them. Vera is one of the biggest players in terms of actually um issuing carbon credits. And Tukan is the first project that I know of uh that started doing carbon credits on chain. And unfortunately for them, I think what they did was actually pretty clever. They went to Vera and they asked for all of their their bad lowquality credits to be retired so they could mint them on chain. So that way they would they wouldn't be double count them count counted. So they went they asked them to retire them. They mint them on chain and they started a market sort of like defy based and we know that crypto people really love to trade. So, they actually

had pretty good volume, but that had a pretty it had an impact on the off-chain credits. And Vera did not like that. And so, they ended up pulling away from them and saying like, "These are terrible, lowquality credits. Uh, they should have never been traded." Mind you, they were the ones that actually issued them and they never retired them knowing fully well that they were really bad. They allowed this to happen. and they basically took the money and then they were like okay it's not our problem now it's their problem I I don't know it's very hypocritical right in my view um but when you look at this uh these are like the four major players

that issue credits Vera is by far the biggest and these four are probably issued the majority of them um so with this picture we have either a monopoly in worst case or a cartel in best case. So what happens when you have that in any economy or in any industry there is no competition there's no incentive to do better and everybody takes a piece of the pie and there is no actual real impact. So why would they give this up?

Um well we they they're not going to right but the goal of carbon credits is to reduce greenhouse emissions and initially it was the market market based mechanism that will definitely drive efficiencies and motivation innovation. The problem with that is that there is no punishment. You know, it's like um being a validator on Ethereum and every time, you know, you validate a block, you include one or two transactions that are not supposed to be there and then Ethereum just tells you, "We're not going to slash you. We're just going to, you know, do better next time." That's not going to lead to any change anytime soon. And so that's what we're dealing

with. Now we're also dealing with a lot of very special interest. We have inter you know a lot of pressure from international compliance programs or treaties and a lot of politics involved in that. Even though governments might you know um get out of these treaties or not but but whatever they do there's generally a lot of political pressure between them to do better even though sometimes they might not want to accept that they want to. Um but there is a lot of competition there and then obviously you have your re regional pressures because as a person or as your constituents in wherever you live if you

start seeing that you start getting sick you're going to want your politicians to do better. And then voluntary compliance markets are basically driven in my view mostly by profit. There's very few that actually care about the environment um and do their due diligence. And so with all of these different motivations and different um conflicting sort of uh uh of motivations, it's very difficult to grow unless you have unless there comes a different party or a new entity that brings in a lot more transparency to the entire system. So the entire system and I'd say even the compliance

market that needs to be completely transparent when governments are just issuing this uh by whoever lobbies them the most it creates more damage than it than it actually helps. So everything from the project design and proposal which is currently uh public uh but what is not very clear is how these are the criteria criteria that is used to actually validate this and verify or or you know how do you measure what's one program be uh one program being better than the other. All of this information needs to be way more transparent so that people know what to expect and there's no

um or there is less ways to bribe the third party to approve or lobby the third party to approve your project over somebody else's project. Um then registering with the standard is public currently. So continue that that's that should everybody should be able to to know what standard you're actually following and and then um reporting and monitoring is currently done by the actual project managers that should be in my view a third party. there's a lot of conflict of interest there if I you know um a lot of conflict of interest probably a lot of biases generally those things needs checks and balances and

currently if you just throw it all into the person that's actually benefiting from it it's going to be very difficult for them to do the right thing the third party party validation of these actual carbon sequestering information um they make money for every like about I think Veras is like 10 cents per every uh ton metric ton that they approve. So the more they approve the more money they make. So you would think that there's a conflict of interest there in them validating whether or not that third party is doing the right thing. So that needs to be completely I I think this that's where the third party should be somewhat liable if there turns out to be

that something is not right that something went wrong. So when the third party validates, they should just issue a vested uh vest a portion of the actual carbon credits per period. And I would I would actually argue that it's better to do it after the fact. So after it's been done, after it's been verified that it has actually been done, then they can make money off of it. Um, and then there's got to be ongoing evaluation where if everything goes well, then great, the third party continues to validate and they continue to issue these carbon credits over a period of time. And then

if they don't go as they should have been, then there should be some punishment, right? Because they make money off of this. They make money out of thin air. So if they get to make money, they have to give it back. If they were able to sell their credits for however much and then they're worth trash or they're determined to not be good, they should have some pun punitive damages because they make money out of pretty much thin air. And it shouldn't just be the project giving back the credits that they sold or buying them back, but it should also be the entity. The third party needs to be punished for actually basically failing to do their job.

So even if we throw everything on chain um that doesn't fix the underlying broken mechanism that created these carbon credits. Um it can you know transparency though can increase um or can improve things over the long term. um everything being on chain and being completely transparent. I think it's like whenever they tell you don't say anything that you wouldn't be happy being uh posted on the first page of the news, right? So I think over time just because you're doing this so transparently it will clean up low

quality credits over time and also decrease double counting. Everything from the from the issuing um from the proposing to the issuing of these credits need to be done needs to be done on chain so that it's transparent all the way through and so that there's no this like side deals where you already use them and retire them and then you sell them on a voluntary market without people being able to know about it. But with that I'm running out of time. Um, with that I just want to say I think carbon credits come from a very good place. What they attempt to do is something really good uh for society in general and all around the world. It's just the implementation has been so poorly done that we need to do better.

And it's not going to be the governments and it's not going to be the current cartel that is issuing them. It's going to have to come from a third party and from from a completely different movement just like crypto is. I think crypto is a movement, not just, you know, something that means meme coins and check coins. Um, we are a a movement that wants to do and improve the world through our technology. Um, anyway, if anybody has any questions, happy to address them or I'm not even sure if I have time. I'm not sure if you have time. If anyone does have any questions, please please pose them now because it's it's a very interesting uh challenging question that you put forward. is is profitability at the cost of ethics. All right. Well,

thank you very much. Does that also count hydrogen production? I I don't know to be honest. Um but yeah sorry. So, thank you very much Brenda. Um thank you everyone for coming. It was it was a great talk.