# Trades for the New World Order By [No Conflict No Interest](https://paragraph.com/@realzackm) · 2022-04-06 --- 2\. Carbon (KRBN, KLIMA) ------------------------ ![](https://storage.googleapis.com/papyrus_images/37eae48eba445da2b4e248b620538fd5fe0ddbb5cb85d4eced13f1c7423197b9.jpg) Opportunity waits for no one. The KraneShares Global Carbon Strategy ETF (KRBN), which tracks the price of a global basket of carbon credit futures contracts, fell 31% in a week as Russia began their invasion of Ukraine from $51.77 to $35.60 before rapidly recovering and retracing a majority of the drawdown. As of publishing the price is $45.83. I had never heard of this product before it came across my radar for crashing so far in so little time. Basically, there are regional futures markets for trading carbon offsets. These markets are called Emissions Trading Systems (ETS), also known as “cap-and-trade.” The idea is that by putting a price on carbon emissions, regulators can effectively increase the cost of dirty energy, making more expensive green(er) energy more competitive, incentivizing more investment in green energy. ![source: Kraneshares](https://storage.googleapis.com/papyrus_images/8c74c3068d50161a696d92fd4548708a1723bd056d0a32c2c3f0971822f694dd.png) source: Kraneshares Supply of carbon offsets comes from entities investing in green energy technology which will replace energy from carbon emitting sources. Demand for carbon offsets comes from entities (typically corporations or countries) that need to offset their carbon emissions to comply with local regulations or global commitments. One offset equals one tone of CO2 equivalent (CO2e). By purchasing a futures contract, a carbon emitter can lock-in the price of their future carbon emissions, effectively hedging their financial risk on the price of carbon emissions, similar to how an airline might buy oil futures contracts to hedge the price of jet fuel. The price of carbon is driven by emissions limits (stricter limits increases demand for offsets) and the number of carbon allowances in circulation (supply). Here’s a chart of KRBN since launch just to give some context. ![](https://storage.googleapis.com/papyrus_images/9cb4df3300ed6ed113d832b40d4bafaca11ccd801aecbc1839e7bdc2d093eb00.png) Pre-invasion the investment thesis might have gone something like increasing urgency in combating climate change → stricter emissions limits on businesses → more demand for carbon offsets → price of carbon go up. So why did the price crash in response to Russia’s invasion of Ukraine? Good question and I don’t really have a good answer, which has given me slight pause. But I think the whole move was technically driven, and not to do with any long-term repricing of carbon due to events in Ukraine. What I mean by technically driven is some big player(s) probably got a margin call on something in their book that went against them, and had to indiscriminately sell carbon futures to raise liquidity. For example they could have been levered short oil futures and long carbon futures. When oil spiked, they might have been forced sellers of carbon futures to cover their losses on the oil short. That the carbon price has bounced back so rapidly seems to support this view. Obviously much has been made of the cost of Europe’s dependence on Russian oil and gas in the wake of the ongoing war. At first blush, I thought maybe what was getting priced in the carbon market was even _more_ urgency on the part of Europe to transition to renewables to get off Russian energy → less carbon emissions, sooner → less demand for carbon offsets → carbon price go down. But upon deeper reflection, I don’t think is what’s happened and while I do believe this event will usher in even more investment in renewable energy (which arguably brings forward the long-term price of carbon offsets to zero if you assume there is no demand for offsets in a carbon free world), I simultaneously think this war is a catalyst for materially better performance in KRBN over a 1-5 year time horizon. My thesis is that much of the world is currently in or on the brink of recession, in large part precipitated by high energy prices which in turn have been made worse by the downstream effects of Russia’s invasion of Ukraine. By the end of 2022, not only will talk of rate hikes be a distant memory but government’s will be looking to spend again ([they already are](https://twitter.com/realzackm/status/1507033984697618434) - some politicians just can’t help making bad situations worse!). Well, they’re always looking to spend, but they’ll have a good excuse and talking points that will be compelling to most of the electorate. Western governments are already fully pot committed to the climate change narrative, and no amount of bombing in Ukraine is going to get them to re-ignite investment in oil and gas within their borders ([just pay previously-sanctioned Venezuela and Iran to do it](https://www.cnn.com/2022/03/08/politics/joe-biden-saudi-arabia-venezuela-iran-russia-oil/index.html)). Climate change and transitioning to a carbon-free economy were already decades long investment themes. I think the narrative of needing to end dependency on oil supplied by foreign dictatorships combined with the threat of recession will create the conditions necessary for governments to pass massive spending on renewable energy infrastructure. This will be done in combination with tighter emissions regulations. This comes at a time when one of Europe’s largest sources of relatively clean energy (Russian natural gas) has been taken off the table either due to explicit sanctions or the self-sanctioning of European corporates, with dirty power sources such as coal now needed to make up the near-term shortfall. So in sum my prediction is high energy prices and political pressure to not buy Russian oil and gas leads to more use of high-carbon sources of energy such as coal in the short-term, which increases the demand for carbon credits right as regulations on carbon emissions will be getting stricter as part of a package to accelerate the transition to renewable. Now the tricky thing (to me) about the carbon trade is the same as in (some) cryptocurrencies. Since there are no cash flows, how do you value it? If you don’t know what it’s worth, how do you know when to sell? I mentioned above the conundrum of the long-term price of carbon offsets going to zero if we successfully transition to a carbon-free economy. I don’t have a good answer. When I do I’ll let you know. I’ll merely mention that, contrary to many, I think this phenomenon is a feature rather than a bug. Meaning, if there’s no fundamental value for the price of carbon to be anchored to it can go as high as it wants (a la bitcoin). In such cases, I think the best approach is simply to be active in rebalancing your allocation back to target weight. I just feel confident in this bet as a bet on more and tighter carbon emission regulations being used by governments to incentivize the transition to electric as part of an imperative to end energy dependency, the strategic importance of which has been highlighted by Europe’s dependence on Russian oil and gas. Why do you think China has invested so much in electric vehicles? They recognize their dependence on foreign oil and gas and the need to reduce/end it ASAP. Not coincidentally, they too [launched their first carbon market](https://www.csis.org/analysis/chinas-new-national-carbon-trading-market-between-promise-and-pessimism) last year. Governments love to spend and climate-change might be one of the last bastions of acceptable spending for governments to embark on. The transition to a carbon-free economy will be a multi-decade capital investment cycle, possibly the largest of our lifetimes. A higher price for carbon emissions will be part of the policies that get us from here to there. (\*Editor’s Note: as I write this a [WSJ headline ran($)](https://www.wsj.com/articles/sec-to-float-mandatory-disclosure-of-climate-change-risks-emissions-11647874814?mod=Searchresults_pos1&page=1): \*SEC Floats Mandatory Disclosure of Climate-Change Risk, Emissions. _If enacted, my take is that this would lay the groundwork for more regulation/taxing of carbon emissions through consistent and market-wide reporting, and a corresponding increase in corporate demand for carbon credits.)_ KlimaDao -------- _Caveat: I probably don’t know nearly enough about the KLIMA token I’m about to describe, the OlympusDAO tokenomics model it utilizes has earned the moniker Ponzinomics, and I have already lost a (carbon) ton of money investing in it (mark to market!). This is merely my attempt to describe it as I understand it. Do your own research and this is not investment advice (nor is anything else I ever write in this newsletter!)._ If you prefer to express your view on the future price of carbon with some web3 flavor (or to just offset your own personal carbon footprint out of the good of your heart!), look no further than KlimaDAO and the KLIMA token. First, a (way too) brief explainer. If you have no interest in the tokenomics you can skip the image below. KlimaDAO is an OlympusDAO (OHM) fork. OHM’s primary innovation in tokenomics was [bonding](https://olympusdao.medium.com/a-primer-on-oly-bonds-9763f125c124), which leads to the protocol owning its own liquidity as opposed to “renting” liquidity from liquidity providers. The practical downstream implications of this approach are 1) token emissions are extremely high, at least in the early stages (which we’re still in!), because tokens are given out to _buy_ liquidity as opposed to just _renting_ it (like you would pay more to buy a house than to rent one) and 2) the creation of a treasury, meaning the token is backed by a treasury of crypto-assets (which we’re traded in for OHM at a discount to market price - this is the bonding mechanism), which theoretically can and will be used to buyback and burn the protocol’s native token to defend the price if the market cap were to drop below the value of the assets held in treasury. If the treasury never has to be spent, it functions as a “black hole” for the assets that go into it. In DeFi, liquidity on decentralized exchanges is typically bootstrapped by offering liquidity providers incentives (in the form of tokens) to contribute collateral to liquidity pools. Think of this as earning a fee for providing liquidity for a trading pair. This enables a decentralized market for the asset (i.e. you can go to a DEX and trade OHM/ETH or OHM/USDC or any other trading pair with liquidity). Problem is, liquidity providers can withdraw their collateral at any time if they have a better use for it, so protocols need to offer enough return to incentivize them to continue providing liquidity for their token’s trading pairs. Thus, they are perpetually renting liquidity from liquidity providers (LPs). The result is massive dilution over the long arch of time. Under the OHM model (employed by KLIMA…stick with me we’re getting there), the protocol offers an incentive to contribute (“sell”) your LP tokens to the protocol’s treasury in return for the protocol’s native taken, which is given to you at a discount to the market price. The protocol then owns the LP token in it’s treasury. Thus, protocol-owned liquidity. LP profits are then distributed to token holders (via token emissions) rather than being paid to liquidity providers. To incentivize holding of the newly minted tokens, these protocols offer ludicrously high APYs on staking. The current APY for staking KLIMA is 887%. Before I go any further I’ll say \***if you buy KLIMA you must stake it or your value will be inflated away.** \*What matters is not only the price of KLIMA (which will likely go down over time due to increased supply) but your quantity of KLIMA (which will rapidly compound if you have staked your KLIMA) multiplied by the price. Phew. Now that we have the tedious details out of the way let’s get to the fun. ![KlimaDAO: An introduction](https://storage.googleapis.com/papyrus_images/4469da09eb3a08362e31a4c3f24e74a09ab664b29d2fb0b8b260391c3d88fb6c.jpg) KlimaDAO: An introduction [KlimaDAO’s vision](https://www.klimadao.finance/blog/klimadao-an-introduction) is to “Create a future where the cost of carbon to the climate is embedded into our economic system, through the creation and governance of a carbon-backed currency that aligns incentives between investors, civil society, and organizations.” In my own words, KlimaDAO seeks to have a positive impact on climate change by using DeFi enabled financial incentives to increase demand for carbon credits, thus raising the price of carbon credits and incentivizing cleaner energy use from countries and corporations. “Real world” carbon credits are brought on-chain via [Toucan Carbon Bridge](https://docs.toucan.earth/protocol/bridge/carbon-bridge). These [tokenized carbon credits](https://coinmarketcap.com/currencies/toucan-protocol-base-carbon-tonne/) (ticker BCT) can then be bonded and exchanged for KLIMA at discount with the KlimaDAO treasury. Thus, the treasury acts as a “black hole” for carbon and KLIMA functions as a DeFi native carbon-backed currency. (As a quick aside, I need to read many more books on money and economics and live 50 more years to have anything substantial behind this take, but something about a commodity-backed currency is intuitively pleasing to me. And something about having a digital currency (bits) connected back to the physical world (atoms) is also intuitively pleasing. Could KLIMA “carbon-dollars” or BTC “electro-dollars” (proof-of-work) become crypto/DeFi’s reserve currency a la USD “petro-dollars” being the fiat world’s reserve currency?) Although the KLIMA price has fallen from an index-adjusted (inflation-adjusted) $2,145 at launch on October 18, 2021 to $185 (-91%) as I write this, the speed of execution against the roadmap by the KlimaDAO team has been impressive to me. First, in just 5 months they’ve made a real environmental impact, black-holing 17 million tons of carbon offsets. ![source: KlimaDAO, EPA](https://storage.googleapis.com/papyrus_images/4dc82375514523163f4d3c57ab9ef8a85781afe65a1775e875ea7a52273dc7f0.jpg) source: KlimaDAO, EPA Second, they are poised to launch [Klima Infinity](https://www.klimadao.finance/blog/klima-infinity-to-carbon-neutral-and-beyond), KlimaDAO’s consumer and enterprise facing toolkit geared toward enabling individuals and corporations to easily offset their carbon footprint and transparently track, display and report on their efforts. Third, this might seem insignificant but since November their [browser DApp](https://dapp.klimadao.finance/#/stake) (decentralized application) has rolled out a number of new features and undergone an aesthetic refresh, making it much more consumer-friendly and usable to non-crypto natives. This is something it would take Twitter four years to accomplish with God knows how many more employees. But as much as I know we all strive to offset our environmental impact, if you’re reading this you’re probably interested in making money. The beauty with KLIMA (and KRBN!) is that you can do both simultaneously. So how do you make money? Adoption, Community, Narrative. As discussed, the climate-change narrative isn’t going away. Governments, corporations and individuals are pot-committed. KLIMA has the benefit of being the first crypto-native application (to my knowledge) tackling climate change. It has a good, simple story to tell: make money while saving the environment. It’s relatively easy for the average, non-crypto native person to understand. They’re making a concerted effort to engage institutions with Klima Infinity. Contrary to bitcoin, it has the ESG winds at its back. Once awareness is raised and KLIMA is adopted into the mainstream, I could see there being huge demand for this asset. Lots of individuals and corporations straight-up donate funds to offset their carbon footprint. Imagine when they learn they can get paid to do so instead of paying. Do well by doing good is a powerful narrative. Climate change is a powerful narrative. KLIMA represents the beauty of incentives, web3, DAOs and new ways of solving massive problems of human coordination, climate change being the biggest one of all. Not to mention those 1,000% APYs doeeee… _Disclosure: I own KRBN, KLIMA and BTC_ _Disclaimer: nothing published in this newsletter is financial advice. The author may be long or short any of the securities or assets discussed at any time before or after publishing._ --- *Originally published on [No Conflict No Interest](https://paragraph.com/@realzackm/trades-for-the-new-world-order-2)*