Economics teaches us that our decisions are guided by incentives. Almost everything, from our choice of work to our behaviour in society to our purchasing decisions, is influenced by some kind of financial or social incentive. Games, for example, incentivise us to win; marketers incentivise us to buy. Done well, incentives have the power to change human behaviour at scale. But what happens when the incentives don’t align with our long-term interests?
Take climate change. The incentives are completely backwards. Despite the fact that most of us know that we have a climate emergency, that temperatures are expected to rise 1.5 degrees Celsus by 2050, that rising sea levels will submerge island nations, we’re not incentivised to do anything about it. In fact, we’re incentivised to do the exact opposite, to continue our plunder of the environment in the name of economic growth.
Consumption, not preservation or moderation, has been the hallmark of our economic system. The more we consume, the better it is for everyone. It means more jobs and more profits. Reduce consumption, on the other hand, and suddenly we’re looking at a dreaded recession. At no point are companies ever incentivised to produce less or individuals to consume less.
The victim in all this is the climate, because something or someone has to pay the bills for our excesses. We indiscriminately log forests, mine minerals, and poison rivers all in the name of growth and value creation for shareholders. We continually put economic growth before the climate, not necessarily because we want to, but because that’s what we’re incentivised to do.
The case of the Amazonian villager perfectly exemplifies this conundrum. Jobs are scarce, so when a corporation shows up with the promise of employment, growth wins over nature. Trees are cut down, cattle farms are set up, and the environment suffers. Self-righteous indignation from abroad does nothing to flip the incentives. It just further hammers home the point that climate action is a privilege accessible only by those who can afford it.
Image by Kanenori from Pixabay
Is Anything Being Done About it?
The questions I often ask myself are: How do we even begin to flip the deeply entrenched incentives to exploit and consume? How can we evolve our economic system to reward corporations and governments for preservation and regeneration? How can we incentivise individuals to consume less, while ensuring basic human needs are met?
Lofty questions, to be sure, but important ones. Without answers, we will continue to perpetuate the same practices that are destroying the planet and making life on earth increasingly untenable for our children and grandchildren. When, instead, what we need is a way to reward companies and individuals for actively fighting climate change. A new incentive framework for climate impact.
Carbon credits, and other climate assets, have at least partially leveraged this idea. They’re by no means perfect, but their fundamental premise is to create the necessary incentives for climate action. Corporations who come in below emissions targets can generate carbon credit revenue on the compliance market; nature-based solutions can generate more revenue by reforesting land and selling the resulting carbon credits on the voluntary market than by exploiting it.
The challenge with climate access is that they are only available to corporations and governments. Individuals don’t have much access other than through carbon offset schemes. Speaking of backwards incentives, asking people to pay a “guilt tax” for their carbon footprint will only work with the most environmentally conscious of consumers.
Instead of paying for our climate sins, we should be paid to preserve and regenerate. But for this to happen, climate assets have to be accessible by everyone so that our brightest minds can innovate. This is where Web3 can play a critical role.
Web3 Can Help
Web3 is a collection of technologies that enables three things critical to unlocking the potential climate assets and rewiring our incentives: tokenization, decentralisation, and transparency.
Tokenization allows existing off-chain climate assets to be represented as on-chain assets and new climate assets to be issued natively on-chain. Once tokenized, these assets can be traded, leveraged, collateralised, and used in decentralised finance (DeFi) projects.
Decentralisation means that tokenized climate assets can be traded without an intermediary. Brokers, for example, have been known to perpetuate fraud by double-selling carbon credits. Decentralisation also allows a group to collectively govern a shared treasury, such as a climate impact fund.
Transparency lets buyers not only verify the provenance of climate assets but also to track their transaction history. It also creates a greater sense of accountability for projects receiving venture funding and corporations offsetting their emissions.
With climate assets on-chain, we will begin to see innovation take hold and new incentives emerge. Yield-bearing stablecoins backed by climate assets can incentivise the creation of new climate assets through initiatives such as reforestation and renewable energy; decentralised autonomous organisations (DAOs) will help channel retail and institutional capital into climate projects in exchange for the resulting on-chain climate assets; easement rights represented as NFTs will allow landowners to benefit financially from preservation.
And we are likely to see creation of new classes of climate assets. Carbon credit alternatives that take into account more than carbon capture, for example. These assets can be verified using a decentralised panel of auditors a feature of Web3 that holds major promise for allowing individuals to earn for preserving or reforesting their land. Web3 can also leverage its efficient crowdfunding models to pool capital together that can be used to launch grassroots climate projects.
We know for sure that our current approach to climate action isn’t working fast enough. Without the right incentives in place, we won’t meet our emissions targets, we won’t slow down rising sea levels, and we won’t ever decrease consumption. It’s time to examine how Web3 can help us confront our most urgent crisis to date. Let’s realign the incentives and start changing the way we look at the environment. Instead of something to be plundered in the name of growth, it can be something to preserve and regenerate in the name of our future.