The Winklevoss’s Crypto Carbon Capture Conundrum

Picture a metric ton of carbon dioxide. That’s tricky to do, what with it being a gas and an invisible one to boot. And there’s another problem: A ton of carbon dioxide isn’t necessarily an actual ton of carbon dioxide.

This matters because grappling with climate change means grappling with carbon dioxide. It also matters because Cameron and Tyler Winklevoss are grappling with it in relation to cryptocurrency.

Gemini Trust, a crypto exchange run by the Winklevoss twins, just donated $4 million to Climate Vault, a nonprofit co-founded by Michael Greenstone, formerly President Barack Obama’s chief economist and now a professor at the University of Chicago, to help offset the carbon emissions footprint of the Bitcoin it holds. Climate Vault used that money to buy allowances in regulated cap-and-trade emissions markets such as the one in California. The use of these allowances circumvents the problems faced in voluntary emissions-offset markets, where it can be tough to verify whether that forest you paid to conserve truly would have been cut down in the first place. Climate Vault holds onto these permits — hence the “vault” — thereby reducing the number in circulation and, consequently, the amount of carbon that companies subject to the cap can emit. Gemini, meanwhile, says this will “prevent 341,965 metric tons of carbon from entering the atmosphere.”

In theory, that should work. In theory, that is how cap-and-trade is supposed to work. In practice, it doesn’t quite work that way.

Markets are alluring because of their neutrality and efficiency (it helps that they also don’t rhyme with “taxes”). But they also have their limits in vital areas such as energy. Politicians combating climate change don’t want to lose their jobs in the process by being blamed for, say, higher power bills.

Much of the heavy lifting on dealing with climate change, therefore, avoids explicit price signals; think renewable portfolio or efficiency standards. Cap-and-trade is expected to account for less than 40% of California’s reduction in emissions by 2030, according to Barbara Haya, who leads UC Berkeley’s Carbon Trading Project.

Danny Cullenward, an energy economist who sits on California’s Independent Emissions Market Advisory Committee and co-wrote “Making Climate Policy Work,” characterizes cap-and-trade as a “political creation” that is, by design, subordinate to more robust regulatory regimes. When emitters must already comply with regulations, that limits demand for allowances. The result is a market price that often ends up being significantly lower than the marginal cost of controlling emissions.

Because this is a desirable outcome from a political point of view, further efforts are made to keep the price signal in check, such as overallotting allowances or adjusting the number in circulation if prices rise to an unacceptable level. California’s cap-and-trade market, for example, automatically adds or subtracts permits if the price gets too high or too low. This means the market there caps the price of carbon rather than the quantity, as James Bushnell, an economics professor at UC Davis, put it in this recent post.

Lauren Gifford, a research associate at the University of Arizona, perhaps sums up cap-and-trade markets best: “What is being traded are agreed-upon representations of carbon.” That is not the stuff of catchy marketing slogans.

It is this squishiness and opacity that Climate Vault aims to address. But the flaws in cap-and-trade markets present a fundamental problem. Even if Climate Vault’s purchases don’t drive the price of permits to a level prompting more to be released, the asymmetry of higher, opaque abatement costs embedded in regulations versus the lower, transparent cost of cap-and-trade means a “ton” purchased in the latter isn’t quite a ton in the physical sense.

Having said that, beyond vaulting the permits, the nonprofit aims to also use them to foster real emissions-capturing technologies down the road. Climate Vault will solicit proposals from developers, verify their feasibility and then hand them permits from the hoard to sell back into the market to fund their projects. In this way, a one-ton permit would truly ultimately link to one ton of greenhouse gas being locked up.

Today, however, the costs of carbon capture, especially longer-duration, scalable technological solutions, are lofty.Certainly, they are much higher today than the roughly $12 a ton implied by the Gemini transaction; any company able to truly deliver at that price would probably be worth more than Exxon Mobil Corp.

Jonathan Goldberg, founder of Carbon Direct, which advises companies and institutions on how to manage their emissions, says having more buyers coming into the market will help to reduce the cost of engineered carbon dioxide removal over time. He adds:

The point here isn’t that Gemini’s $4 million does nothing. In buying permits, Climate Vault should raise the marginal cost of carbon in the markets it uses, as UC Davis’ Bushnell points out, albeit only if done at sufficient scale. Moreover, if Climate Vault fulfills the second half of its plan, seeding real carbon-capture projects, it would act like a broker for much-needed venture funding. For its part, Gemini says there are “many different approaches to quantifying carbon emissions and offsetting those emissions”  — which, to be honest, rather gets at the problem —  adding that its contribution to Climate Vault is “just one component of our ongoing sustainability initiatives.”

The risk here is a familiar one in the debate over how best to address emissions; namely, that excessive faith in yet-to-be-proven capture technologies blunts efforts to reduce emissions in the first place. Investing in carbon capture makes sense but only in the context of recognizing its relative costs and probabilities of success or failure.

This goes double in the context of the crypto industry: energy-hungry, requiring solutions to a glaring emissions problem and not necessarily settling on truly ESG-friendly ones. Promoting investment in the broad carbon-capture theme is fine. Saying those dollars definitively take some quantity of carbon out of the game is dubious given how the market functions now. In seeking redemption, we mustn’t resort to indulgences.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal’s Heard on the Street column and wrote for the Financial Times’ Lex column. He was also an investment banker.

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