Editor's note (by Alen): In the context of carbon neutrality, ESG (socially responsible investment, including environmental protection, ethics, human rights, etc.) has become a prominent science that can generate a premium. When digital currency is more and more out of the circle because of the explosion of NFT, discussions related to environmental protection are naturally unavoidable. Especially in recent days, "performance art" that burns physical artworks and mirrors them on the chain emerges in an endless stream, and the topic of "Renaissance" that consumes electricity with Bitcoin has been put on the table for discussion and has become an after-dinner for environmental protection enthusiasts. talking material.

Coincidentally, my good friend Iris is a Tsinghua undergraduate in environmental economics, and is currently a second-level student. It can be said that my knowledge of new energy and semiconductors comes from her. Our daily conversations are all kinds of secrets. Brainstorming and anthropomorphizing the company.

Iris's graduation thesis n years ago was on carbon trading, which can be described as profound. And under my influence (cx), she can't be said to be familiar with the currency circle, it can only be said to be very familiar. In daily communication, I found that there are many similarities between environmental protection, carbon trading and air coins, so I have the following interviews, hoping to inspire interested audiences, enjoy!

Too long to ignore the version as follows:

Iris: The environmental and natural resource economics of the undergraduate course ended up working as a brick-moving worker in the second level. My graduation thesis is about carbon trading. I wrote this topic not because I like it, but because I believe that none of the defense experts know what carbon trading is. After I finished writing, I found that carbon trading is essentially a kind of belief, and unbelief is the biggest obstacle. Later, I found that many things are the same, I believe that only one reason is needed. There are thousands of reasons for not believing.

Iris: It actually depends on what your default position is. First of all, what is high energy consumption relative to? Secondly, is high energy consumption negative?

If we want to describe this fact neutrally, it should be said that Bitcoin consumes a lot of electricity during the mining process.

I understand the criticism of Bitcoin’s high energy consumption, but the premise of this statement is that the electricity can be used in more valuable situations than mining. If this proposition is not true, then is it possible to say, "So what if Bitcoin uses a little electricity?"

However, as the currency price breaks through 60k, there are news reports that Internet cafes in some places have also started mining. The electricity used in this scenario can indeed be argued.

According to my limited understanding of mining, most of the electricity used in mining should have no better use than mining, or that electricity that no one will use—so the price of electricity is extremely low.

One of the core competitiveness of professional mining farms is low electricity prices. Mines that can persist in the ups and downs of currency prices must have two brushes in terms of electricity prices. Small hydropower is useful, and there are also mines in Northwest China and other areas where the overall supply of power resources exceeds demand. This electricity is not used for mining, and it is difficult to consume locally. The result of not being able to absorb it is to abandon electricity. This concept should be familiar to those who have speculated in new energy stocks. (Alen added: This is the logic of second-level energy storage speculation. A certain C factory: Energy storage recreates Ningde.)

The common reason that environmental protection keyboard warriors continue to refute is that the electricity can be sent to other provinces.

But so far, the best solution to domestic power resources is still on-site consumption.

If electricity is sent to other regions for use, there are leakage problems and transmission costs, as well as transaction-level problems between power grids in different regions. The degree of marketization of electricity trading in my country needs to be improved, and there are still many problems to be solved in cross-regional transmission and consumption. After adding various costs, it may not be as profitable as selling electricity to local miners for electricity selling companies.

I can give the green keyboard man a trick, how to correctly attack the high energy consumption of Bitcoin.

In the traditional mining industry, it is a traditional program to criticize mining for polluting the environment. Combined with the concept of green hydrogen invented in Europe, I propose to classify Bitcoin as well.

If it is mined with non-fossil energy, it is a pure green coin.

If it is dug out with fossil energy such as thermal power and natural gas, it is a black coin that generates a lot of carbon emissions, which is not environmentally friendly at all. There is also a carbon tax on those who hold black coins.

Using green coins for transactions is at the top of the chain of contempt for carbon emissions. (Alen: This is a bit like the virgincoin premium we said, but one is for privacy and the other is for environmental protection)

As a comparison, the traditional banking industry supports so many people. The carbon footprint of these people’s daily commuting, three meals, and office electricity is calculated using carbon footprints, which is an astronomical figure... (Alen: double-sided needle warning)

Iris：

Because the environment is a public good and does not belong to any one person. The tragedy of the commons is called the tragedy of the commons when the public goods are broken.

The solution given by economics is to propertyize and value public goods, and then use price signals to correct people's behavior.

If you use the discourse system of the currency circle to understand, environmental protection is regarded as a consensus, but this consensus is not believed by many people, especially the industrial circles that produce the most pollution.

Then we will issue an air coin, which represents an environmental protection consensus. With this environmental coin, you are eligible for carbon emissions, so it is also called carbon tax or carbon quota (mentioned in the interview between Academician Ding Zhongli and Chai Jing: Carbon emission right is a kind of development right). No one may recognize it at the beginning, but it doesn’t matter, as long as everyone joins forces to fire it and empower it (administrative + consciousness output means), after three positive lines, people’s beliefs will change, and consensus will come. (error)

This air coin can be a carbon tax or an emission trading. The full name of carbon trading is actually carbon emissions trading.

The current carbon trading is to force the industry that produces the most carbon emissions, and this air coin must be purchased at the end of each year.

Abstractly speaking, the higher the emissions of this enterprise, the higher the unit emission intensity, and the more air coins need to be purchased.

Then the more expensive the air currency is, the stronger the consensus on environmental protection will be.

Taking a step back, even if companies do not believe in this consensus, they will still change their strategies when real money and various NGO alliances are involved. In the end, the actions of companies that do not believe will still be similar to those of companies that really believe.

(Alen: Similar to BCI’s trade restrictions on cotton, in addition, I feel that carbon trading has many similarities with the currency circle, such as the initial carbon quota allocation rules, similar to the token allocation and distribution mechanism of air coins, which are determined by the project If Fang decides byd or Wuling Hongguang to build pure electric cars, he can earn points and sell them. This behavior is similar to liquidity mining. If the liquidity mining mechanism is not well designed, it is easy to cause mining disasters, which will be mentioned later)

Carbon neutrality: refers to the carbon dioxide directly and indirectly emitted by human activities in a certain area within a certain period of time (generally referring to one year), which offsets the carbon dioxide absorbed through afforestation, etc., to achieve "net zero emission" of carbon dioxide.

What is the actual operation like, if I am the person in charge of this matter. I first took the methodology of my industry and the figures I recorded myself, and used a calculator to calculate this year's carbon emissions.

Then I took the methodologies of industries such as new energy and tree planting, and pressed a calculator to find out how much carbon dioxide was absorbed this year.

When the last two numbers are equal I can declare that I am carbon neutral. (As an aside, what is the equivalent of calling for carbon neutrality in September last year? It is equivalent to the feeling of a giant whale calling 100k when Bitcoin was 5k.)

carbon capture(CCS: carbon capture and storage): Separating carbon dioxide from industrial or other emission sources. This step is narrowly defined carbon capture. In a broad sense, CCS also includes the storage and utilization of carbon dioxide.

Therefore, CCS technology can be roughly divided into several directions: capture, transportation, utilization, and address storage.

It is a pity that currently co2 has not found a scenario that can be used in large quantities except for carbonated beverages (the amount is so small that it can be ignored) and geological storage (the cost is extremely high).

In my personal opinion, this can only be solved by black technology or time travel players.

Carbon Footprint(Carbon Footprint): refers to the collection of greenhouse gas emissions caused by corporate institutions, activities, products or individuals through transportation, food production and consumption, and various production processes.

In layman's terms, it is the carbon emission version of blood theory and family tree checking. Check up three generations to see if it is a pure green product. The Industrial Party tends to understand this as a new type of artificial barrier. Europe and the United States use carbon footprints to block outdated production capacity, and they can also use carbon footprints as an excuse to impose high taxes.

This is not the first time this routine has been used. Europe and the United States have already defined green hydrogen and gray hydrogen. The hydrogen produced by renewable energy is green hydrogen, and the hydrogen produced by chemical industry is called gray hydrogen. They are all H2, but green hydrogen is more expensive than gray hydrogen and has a green premium.

Europeans have created so many concepts based on carbon emissions, which shows that environmental protection/esg/carbon neutrality is a very useful tool.

These tools can achieve many purposes: use new energy as a selling point to attract votes, attract more customers, make the company's valuation higher, and so on.

At this point in time, top players and politicians all over the world chose this script in unison for their different goals.

Iris: Although the history of carbon trading is not long, it is still full of famous scenes. Let me explain some terms first, and then introduce the whole history.

You can skip the italic part at the beginning of the period, and read it when you look back (Alen Note: If you keep reading, you will find that there are many English abbreviations for carbon trading. I think this is also a simple problem of self-enclosure. Leek cutting behavior)

Kyoto Protocol:

The Kyoto Protocol is a supplementary clause to the United Nations Framework Convention on Climate Change (UNFCCC). It was formulated at the third meeting of participating countries of the United Nations Framework Convention on Climate Change held at the Kyoto International Hall in Kyoto City, Kyoto Prefecture, Japan in December 1997. Its goal is to "stabilize the level of greenhouse gases in the atmosphere at an appropriate level to ensure smooth adaptation of ecosystems, safe production of food and sustainable economic development"

The first commitment period is 2008-2012, and the second commitment period is 2012-2020. The second renewal had to be ratified by 144 signatories (three-quarters of 192), but only 136 signed.

Paris Climate Agreement:

The Paris Agreement is a climate agreement adopted by 195 member states of the United Nations (including the Observer State of Palestine and the Holy See) at the 2015 United Nations Climate Summit on December 12, 2015; it replaces the Kyoto Protocol and is expected to jointly curb the trend of global warming .

EU Emissions Trading System (EUETS): It is a cornerstone of the EU's climate change policy and a key tool to address climate change and reduce greenhouse gas emissions in a cost-effective manner. The system is the world's first major and the world's largest carbon emissions trading market. EUETS operates on the principle of "cap and trade".

Cap and trade:

There is a cap on the total amount of certain greenhouse gas emissions emitted by plants and facilities covered by the EU ETS. This upper limit is lowered over time, thereby reducing total emissions.

Within the upper limit, enterprises can purchase or obtain emission allowances, and can trade emission allowances between enterprises as needed. At the same time, you can also purchase international credits from emission reduction projects around the world. Limiting the total amount of emission allowances ensures the value of the allowances.

At the end of each year, companies must pay enough allowances to cover all of their emissions or face heavy fines. If a company reduces its emissions, the remaining allowances can be bankrolled for future use or sold to another company that lacks them.

In December 1997, the third meeting of the parties to the "United Nations Framework Convention on Climate Change" held in Kyoto, Japan adopted the "Kyoto Protocol" aimed at limiting greenhouse gas emissions from developed countries to curb global warming.

It is stipulated that the "Kyoto Protocol" needs to be ratified by at least 55 countries accounting for more than 55% of global greenhouse gas emissions before it can become a legally binding international agreement. It will take effect 90 days after signing the contract.

Think of the Kyoto Protocol as a treasure. There are conditions for activating skills, and they cannot be activated if the conditions are not met.

The Kyoto Protocol is a top-down agreement. At the heart of the agreement, all subsequent plans are based on an aggregate target: between 2008 and 2012, 39 industrialized countries will reduce their greenhouse gas emissions by 5.2% compared with 1990 levels. Among them, the emission reduction target of EU countries is 8%, that of the United States is 7%, and that of Japan is reduced by 6%.

The first step is that the Kyoto Protocol allocates the Assigned Amount Unit (AAU) to each country, and AAUs can be traded between developed countries. The loophole in this step is that the Eastern European countries represented by Russia and Ukraine do not need to take any emission reduction measures due to economic recession and industrial depression, and carbon emissions themselves are declining.

To use the current new words, because Eastern European countries have already reached their carbon peak, the result of issuing quotas according to the historical law is that Eastern European countries lie down to make money and sell AAUs at low prices to countries that have not reached their carbon peak, such as the European Union. There is a word for this type of problem: hot air.

The second step is how to distribute AAU to different industries in the country. In the early days, due to the lack of historical data on carbon emissions, no one knew how to distribute it. So how to solve it?

In the first and second phases of euets (EU Emissions Trading System), a bottom-up approach was thought of: all EU member states decide on their own the allocation of emission allowances. It was calculated and submitted using National Allocation Plans (NAPs). NAP is based on each country level, that is, the total quota of all national allocation plans adds up to the EU's quota ceiling.

The result of self-declaration is that the quota is higher than the emission, and the price of the quota is worthless, which is equivalent to the air coin falling to the floor, and the already fragile consensus will disintegrate faster.

Soon people found that this self-declaration method has no future. Finally, EUETs decided to abolish NAP and replace it with the National Implementation Measures (NIMs) established at the EU level and synchronized between countries to determine the emission reduction of each country. How many quotas the business ends up getting. The historical method (grandfathering) is basically no longer used, because there are enough historical data over the years. Quota allocations are determined based on an iterative baseline method (benchmark).

In the third step, when companies fulfill their emission reduction obligations, they can use offset carbon credits based on project output in addition to quotas.

CERs: Certified Emission Reductions (Certified Emission Reductions, referred to as CERs) refer to the emission reduction indicators obtained from an approved CDM project through the collection, measurement, certification, and issuance of one ton of carbon.

The use of CER and ERU in the first and second phases of EUETS is limited to about 10%, and each country has set slightly different usage standards. In the third stage, EUETS only accepts CER projects from LDCs (Least Developed Country).

There are dozens of types of CDM projects, but most of the CDM projects focus on wind power photovoltaics, biomass energy, hydropower, landfill gas power generation, energy efficiency improvement, and fuel replacement.

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Image source: World Bank. Mapping carbon pricing initiatives 2013

There are many different interpretations of the historical price movements of EUA and CER.

I studied for a long time when I had a headache for the thesis, but I couldn't see the relationship between price and fundamentals. Intuitively, the relationship between price and liquidity is greater. Now that I am an old leek, I am more sure that liquidity is the father of risky assets.

The price of EUA was high when it first came into the market, so it is the same logic as it is to speculate on Cixin now. I don’t know what to speculate first. With the financial crisis turning into a European debt crisis, there is no reason why asset prices should not collapse. Although many academic papers explain the collapse of this paragraph because of excessive supply of quotas and changes in trading rules.

Then the EUA price stabilized at around 10 yuan. But in the far east, East Asians with new energy projects know that they can file their own projects through application and get a lot of CERs after approval. At that time, the price of CERs was still around 5 Euro/ton CO2. A small project can produce 10,000-20,000 tons per year, a medium-sized project can produce 60,000-80,000 tons, and a large-scale project can produce more than 100,000 tons per year. This is an extra income for the project owner, and obtaining CER only needs to spend some fees for certification and application. (Alen: This is equivalent to the fact that the defi project in the currency circle was found to have a contract loophole and caused a mining disaster. A typical example is YAM. The loophole at that time would cause the mechanism to issue an additional 10 ^ 18 YAM during elastic supply, which eventually led to Project party: we failed)

Subsequently, the output of CERs from China increased sharply, and the time required for CDM projects from registration to first issuance increased from 500-600 days (in 2009) to more than 800 days (in 2011)

The price of CER is also under the almost unlimited supply of East Asians, and the price is also heading towards zero.

I still remember that Alen told me that he participated in yam and then said that it returned to zero within a few days, and then it was 2.0 again.

I still remember that there was a general sentence in the related report: YAM caused a loss of 760,000 US dollars. What a loss.

I really want to complain, if EUETs know that it can be patched in advance for such a small amount of money, then the CER will not be so big. Both the amount involved and the number of people involved are much larger.

In any case, this small episode of CER in 2011 allowed Europe and the United States to see the power of East Asia for the first time.

After introducing my favorite episode, let me introduce why the Kyoto Protocol is over and why it was replaced by the Paris Agreement.

The Kyoto Protocol was generally very harmonious from 1997 to 2005, and the participating parties were also quite active. But as energy saving and emission reduction really started, disharmonious voices came out.

In March 2001, Bush Jr. announced his unilateral withdrawal from the "Kyoto Protocol" on the grounds that "reducing greenhouse gas emissions will affect the economic development of the United States" and "developing countries should also undertake emission reduction obligations".

The first half of the sentence is easy to understand, and the second half means that China, as the second largest emitter of greenhouse gases at that time, should not say that it is a developing country and will not participate in the Kyoto Protocol. To put it bluntly, unless China participates, the United States will not play this game.

However, the United States was the largest emitter at the time, and once it withdrew, the 55% requirement for the activation of the Kyoto Protocol would be grayed out. So at that time, the European Union tricked Russia into participating, so that the Kyoto Protocol would not be thrown into the street because of the withdrawal of the United States.

In the end, Russia ratified the "Kyoto Protocol" in 2004, and 90 days later, the "Kyoto Protocol" met the conditions for skill activation.

In 2005, the participating countries basically still had faith. However, the 2008 financial crisis and the European debt crisis have all come, and I can’t eat anymore, so I don’t have faith in environmental protection...

Every year from 2008 to 2012, the climate conference negotiation is a goal, so that the Kyoto Protocol can be renewed for the second period. Countries that have already participated have raised their own emission reduction targets, while trying to fool China and the United States into participating. Every year the climate conference has the same plot, because the representative of the island country most affected by sea level rise gave a tearful speech. The representative of the African country said that I participated in it, but where is the technical and financial support that the developed countries have given us? ? The reaction of the representatives of the developed countries can be described by the buzzwords at the time, which is called ten-moving rejection. The developed countries were very moved, and then refused to renew the second phase of the Kyoto Protocol.

After years of wrangling like this, we came to 2013, the first year of the second phase of the Kyoto Protocol. At this time, Russia said that because China and the United States did not participate, I withdrew. Japan, New Zealand, Canada and other countries have also announced that they will not be able to withdraw. In the end, the greenhouse gas emissions of the parties to the second phase of the Kyoto Protocol accounted for only 15% of the global total.

But the agreement is dead, and the people are alive. In the end, by directly modifying the skill description, the Kyoto Protocol is forcibly revered.

In the end, everyone found that there is no future for you to engage in this top-down mandatory climate agreement, and you will end up killing yourself by setting up a skill activation condition. Thus, the bottom-up, voluntary Paris climate agreement emerged.

Compared with Kyoto, which came up with legal constraints, the Paris climate agreement looks like a new blockchain project that looks very interesting. There is no top-down national climate goal, and there is no mandatory requirement. The Paris climate agreement only provides a broader framework for action, allowing countries to make voluntary emission reduction commitments, and to increase every five years.

The Paris Agreement is one that if you believe in it, you will participate (go!), if you don’t believe it, you will not participate (do not go), it is completely voluntary.

Why does the Paris Agreement seem to have become more powerful recently, because the giant whales ran into the arena, and they even brought orders.

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South Korea: 2050+1!

Iris: Many people think that China's carbon trading market only started this year. There is a big misunderstanding here. First of all, China has established a pilot carbon trading market since 2013. There are a total of 7 pilots: Beijing, Shanghai, Guangzhou, Shenzhen, Tianjin, Hubei, and Chongqing.

Although the carbon trading market to be planned this year is said to be nationwide, in fact only power companies across the country will participate. The rest of the industrial sectors, such as cement, steel, electrolytic aluminum, are only planned to be included, and the time of inclusion has not yet been announced.

As for why only power companies participate, I think it is more realistic to say that because photovoltaic wind power grid parity needs to maintain a reasonable irr, selling CCERs has become a new way to increase revenue for these new energy projects.

China's carbon trading market is basically a copy of the European Union's EUETS, trading allowances and CCERs (Chinese Certified Emission Reduction). In the early stage, quotas were mainly allocated free of charge. It can be seen from the name that CCER has completely inherited the name of CER in the past. The gap in the quota of electric power companies is about 5%, and the limit of CCER is also 5%.

The problems of the current carbon trading system are very obvious, and there are huge loopholes in the methodology (pricing system and standards).

The existence of these loopholes is not unnoticed. At the macro level, Zhou Xiaochuan, the former governor of the central bank, recently hinted at the difficulty of determining the total target. The loopholes at the micro level have been continuously exposed during the pilot period that began in 2013: Take the power industry as an example , The employees of power companies do not understand carbon trading, and their job responsibilities are limited to compliance. Then in the link of submitting data, this data may not be measured but the default value used. The verification of data by third-party verification agencies is almost ineffective.

To put it bluntly, these loopholes can be fixed bit by bit by patching, but it takes time and a lot of manpower and material resources.

To put it badly, with so many loopholes, it is equivalent to a back door. This back door leaves a lot of room for manipulation. How to press the final number may be a very artistic thing.

All the data on the chain can solve the trust problem of part of the data. In addition, because carbon trading itself is a low-frequency transaction, the transaction volume usually increases significantly when the contract is almost fulfilled in a year, and the transaction volume is usually low. These characteristics are actually very suitable for the current characteristics of the blockchain that can only support low throughput.

Alen showed me a few projects in the currency circle under the banner of carbon neutrality. After reading it, my impression was: worthy of the currency circle, I discovered the biggest killer of establishing standards by myself so quickly. Environmental protection and the secondary market have not talked about this issue until now, or they may not dare to say so.

Another relatively big problem is that there are currently almost no penalties for companies that fail to perform. The EUETS penalty for non-compliance is a fine of 100 euros per tonne of CO2. In some carbon trading pilots in China, the penalty amount is 3-5 times the market price, and the carbon price is about 40 yuan per ton, so the fine is 100-200 yuan per ton.

Weak punishment does not count, because the fine is actually the upper limit of the price of the air currency to be speculated. If the upper limit is so low, the price is naturally low. If the price is low, the consensus will not be strong, it is so realistic.

Iris: In the currency circle, there is a consensus and there is a price. Carbon trading is the other way around, and there is consensus only after there is a price. (Alen: In fact, the currency circle is also... No one can escape the temptation of three positive lines)

In both cases, only a few people believed in the early days, but more and more people believed after the price went up, and the logic continued to emerge as the price rose.

But from the perspective of a bystander, green is still green, bitcoin is still bitcoin, and it is no different now than it was ten years ago, but the price and the way people look at them are hugely different.

The shortcomings of the theory of environmental protection or control of greenhouse gas emissions have not changed, but people's hearts have changed.

Skeptics will also post the picture of the change in carbon dioxide concentration since the Cambrian, attack Gore’s motivation for shooting An Inconvenient Truth, and say that the impact of water vapor on warming is much higher than that of carbon dioxide.

Bitcoin hasn't changed since it was first created, but people's perceptions have. Whether it's a skeptic or a holder, they still say the same clichés.

A new consensus, of course, depends on the cx of early users, but also takes into account the historical process. (laugh)

I don't know what carbon trading and the currency circle will eventually become. The only thing that is certain is that more and more people are now involved.

The end of the journey is not important, what matters is who you walk with