Time For IMF Climate Coin (2/3)


    This is the second article out of a series of three.

    What happened to the Special Drawing Rights (SDRs)? 

    Since 1972, the global monetary design framework abandoned the notion of the gold standard. Gold as collateral became too expensive for the Federal Reserve Bank to support its currency in the face of the relentless money printing requirement to finance the war in Vietnam. The notion of fiat currency, derived from Latin meaning “let it be done” reemerged. Overnight the USD took on the role as global reserve currency status, backed by its position as the dominant international military and economic power. 

    In 1969, efforts were undertaken to mimic the gold standard. The International Monetary Fund (IMF) introduced Special Drawing Rights (SDRs) as international reserve assets composed of U.S. dollars, Euro, Great Britain Pounds, Japanese Yen, and the Renminbi (since 2016).

    The SDRs act as a unit of account and can’t be used for payments, neither by governments nor individuals. Governments and international organizations hold SDRs. The reserve asset can be loaned to countries faced with sovereign bond default, balance of payments deficits, and turbulence on the foreign exchange markets in exchange for structural reform. A country can trade its SDR loaned allocation for a global fiat currency, mostly USD, with the IMF and support their home currency.

    The IMF has allocated to date SDR 204.2 billion (equivalent to about US$281 billion) to members, including SDR 182.6 billion in the wake of the 2008-09 global financial crisis. On the IMF balance sheet, per October 2020, reside $30 billion worth of SDRs along with more than $400 billion worth of usable currencies.

    The design of a new anchor currency concept could rekindle the purpose of SDRs.

    New currency standard

    Given the world’s current predicaments regarding climate change, the pandemic health crisis and financial market conditions, the world is ready for a multi-lateral institution-issued stable coin, complementary to existing sovereign fiat currencies, local currencies, crypto-currencies and central bank issued digital currencies (CBDC). 

    A stable coin is a crypto-currency, embedded on a blockchain, backed by a collateral base and designed to represent low price volatility. 

    The IMF, in its emblematic role as a purveyor of technical assistance to global macro-economic issues, monitor of worldwide exchange rate stability, and steward of sustainable economic growth, has the proper remit and wherewithal to issue the “Climate stable coin.”

    The crypto-currency would reside on a scalable, permissioned (with only IMF member countries participating), private distributed ledger, preserving the integrity of the encryption protocol and the immutable, authenticated chain of custody, collateral, and transaction records. 

    The new currency standard would become a cornerstone of the 2015 Paris Agreement. 

    The Climate Coin would be offered to exchange countries’ tangible progress on their voluntary Nationally Determined Contributions (NDCs). The award would be over and above what the country achieved through its respective voluntary carbon markets and/or mandatory Emissions Trading Scheme (ETS) initiatives, also called cap-and-trade systems.  The Climate Coin would especially appeal to steward eco-systems under threat identified by the Stockholm Resilience Center in their Planetary Boundary dashboard.

    The currency would have a threefold objective: act as a unit of account, store of value, and reward incentive. It would not function as a medium of exchange. A (partial) collateral pool would support the currency, initially consisting of $30 billion worth of Special Drawing Rights (SDRs) and $170 billion worth of usable currencies (other permutations can be envisaged per review of the IMF Balance sheet). The IMF would gradually convert the combined pool into a majority reserve of sustainable assets, eventually reaching 55% of land and forests, 25% in renewable energy initiatives, 15% in the top 500 most compliant ESG companies, and 5% in biotech research initiatives. 

    The overall coin supply would be deployed over a 30-year timeframe.

    Supply

    The IMF climate coin tie-in with the 2015 Paris agreement would be a fundamental requirement. Still, it would offer a strong incentive to treaty signatories to commit, to increase and deliver more speedily on their (voluntary) Nationally Determined Contributions.

    The supply of the stablecoin would be limited and expressed as a fraction of the remaining carbon budget of 1,042 Gigatons of CO2, essential to stay well beneath the 2°Celcius increase.

    At current GHG consumption rates, the reserve would be depleted in just under 20 years.  

    In practice, the IMF could issue 100 billion units in Climate Coins, or approximately 10% of the remaining budget of 1,042 Gigatons of CO2. The IMF could concurrently introduce a global carbon price of $100 for every ton of CO2 with every coin representing one ton of  CO2 equivalent.

    In the first tranche, the IMF could release 10 billion coins. At $100 a ton of CO2 (for each coin), the total value would amount to one trillion USD.  There would be an initial collateral base worth 200 billion USD of IMF assets, ensuring a target collateral ratio of 1/5.

    The IMF could award 1 million coins to high school kids around the world, presenting trailblazing climate change solutions to raise Climate Coin awareness. The awards could, along with the remainder of allotted Climate Coins, be monetized in the year 2050.

    Demand

    The coin demand would initially be driven by the magnitude of individual countries’ voluntary Nationally Determined Contributions (NDCs) to yield zero-carbon exposure by 2050, per the Paris Agreement’s intent. 

    In 2020, the world emitted around 55 gigatons in CO2 equivalent emissions. A signatory country could select high priority initiatives and pledge for a specific commitment by 2050 (or earlier) to reduce Green House Gas (GHG) emissions. In exchange for tangible delivery upon the promise, evidenced by satellite imagery and third-party Notification of Verification Services (NOVS), the IMF would release the Climate Coins.  

    Through the use of Global Positioning System, the IMF registry will guarantee that countries’ GHG reduction efforts are unique and have not been replicated on any of the existing registries. In the US’s case, the IMF registry would scan Climate Action Reserve, Verified Carbon Standard, American Carbon Registry, the California Air Resources Board, Alberta Emission Offset System Registry, and Climate Conservation Biodiversity Standard for any inconsistencies. 

    Referring to the above picture, the IMF Climate Coin initiative would focus both on the grey area and the green space, again to the extent not yet covered by regional or country voluntary or mandatory Emissions Trading Schemes.  The green area would be targeted by using the collateral base to spur re-allocation of capital and investment in carbon removal approaches. The grey zone would be earmarked by offering Climate Coins for mitigation efforts undertaken under the 2015 Paris treaty. The coin’s primary objective is to ensure that a global carbon price signal is imparted as a function of both the carbon budget and incidence of physical climate impacts. Furthermore, the Climate Coin would be procuring capital flow incentives and spearheading efforts towards the sustainable asset eco-system.

    This is the end of the second article. A third article will follow shortly.

    The author would like to thank Delton Chen and Darius Nassiry for their extensive review and comments. Any remaining errors are the author’s responsibility.



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