In January 2021, I published an article on the urgency for an IMF Climate Stablecoin that would offer incentives to nations to decarbonize their economy within the context of the 2015 Paris Treaty. The solution I proposed needs an update.
So far, I explained the rationale and the building blocks of the IMF Climate Stablecoin. This article will focus on the collateral management requirements as well the several ancillary benefits the IMF Climate StableCoin could offer.
IMF Stablecoin Collateral Management
The IMF would appoint collateral pool managers with an extensive track record in the respective asset classes. The team would gradually convert the collateral pool into a solid reserve of sustainable assets, consisting of 5% in Special Drawing Rights (SDRs), 40% in forests and lands, 40% in the top 1,000 most sustainably managed companies, and 15 % in renewable energy and climate tech Venture Capital.
The IMF would hold a custody account and a carbon registry account. The custody account would manage the allotted IMF Climate Stablecoins by country and the respective assets representing the overall collateral base. The carbon registry account would monitor, via satellite imagery, the specific geographic areas the countries have disclosed in their pursuit of their Nationally Determined Contributions (NDCs.)
· Land and forestry (40%)
The invested land and forests would represent significant carbon sinks, identified as tipping points by the Stockholm Resilience Center. For example, these carbon sinks could be parts of the Costa-Rican (a V20 country) rainforest or the Boreal (Taiga) forests.
The IMF would also manage a perennial carbon registry by parcel (land, forest, water surface, mangrove, etc.) identified by submitted NDCs. The contributions could center around regeneration (soil regeneration, afforestation, etc.), decarbonization, or all-out protection efforts (safeguarding rainforests, etc.) The respective IMF Climate Stablecoin allocation would be only settled against unique and third-party certified proof of work. The land and forest would be managed in close collaboration with local indigenous people, who hold the most relevant stewardship knowledge.
· Sustainably managed Corporations (40%)
The IMF collateral manager would endeavor to pursue investments in liquid shares and bonds issued by the top-1,000 sustainable or ESG compliant companies in proportion to their market capitalization. A first selection could be drawn from the World Benchmarking alliance of the most influential 2,000 companies, prominent in essential system transformation.
The exposure would be built over time. Each exposure would never exceed more than 0.5% of the overall collateral basis. The portfolio companies would be stellar underwriters of “do no harm” intent and would not engage in any extraction activity. The individual equity stake in the companies could not be more than 10% of the capital stock. The identical threshold number would both apply for a liquid bond issue, of at least $1 billion issue size, and the overall company indebtedness. In general, the companies would display a nimble if not carbon neutral footprint and seek to engage intensively with the circular economy initiatives. Furthermore, they would track at least five quantifiable impact key performance indicators, which are related to their environmental, social and governance footprint. Each of the companies would be exemplary in their sustainability disclosures as well as TCFD-reporting returns. Their sustainably managed business model would be identified by numerous sustainability-oriented index rankings and ratings.
· Climate Tech Venture Capital (15%)
The investment efforts would combine established clean energy players and early-stage venture capital (VC) type initiatives, potentially accelerating the decarbonization of electric and thermal (heating and cooling) energy procurement to the transport (green hydrogen), agriculture (regenerative practices), construction (green cement), and hard to abate industry sectors.
Only co-investment opportunities would be pursued with established global VC or industrial players regarding VC type investments. The investment experience of funds like Generation Investment Fund (with $40 Billion Assets under Management), Stripe Climate and VC2150 would be foundational for the IMF Climate Stablecoin.
The IMF would also make investments in moonshots, of which some V20 countries will be beneficiary destinations. These moonshot investments, executed in collaboration with governments, academia, and VC experts, could take the form, for example, of a global water management office, a global stable food supply center, a global carbon footprint management bureau, a regenerative agricultural research lab, a green hydrogen development lab, a coastal defense technology expertise hub, or a CERN type climate research center.
Valuation of the stablecoin
The value of the IMF Climate stablecoin would be set at $ price per ton of CO2 abated. The price would have a signaling function for mitigating one ton of carbon and be set as a function of global Emissions Trading Systems (ETS) prices.
The underlying collateral pool would be gauged monthly to ensure compliance with the unit of account function and the notion of the stablecoin. The IMF Climate Stablecoin could evolve within a band of + or – 5%. An uptick beyond that threshold would trigger the sale of the most liquid assets. The proceeds would be moved into a stabilization fund, where the fund would also benefit from an amount of seed IMF assets. In the case of a 5% drop in the overall collateral value, proceeds would be retrieved from the stabilization fund. The stabilization fund would also modify the carbon price if conditions compel to incentivize signatory countries.
In 2050, the proceeds of the overall sale of liquid investments in renewable energy initiatives, sustainably managed companies, and biotech research would be distributed to the countries in proportion to their Climate Coin holdings.
Other application opportunities
The IMF Climate Stablecoin could become a reputable pricing benchmark for carbon, taking price guidance from mandatory compliance ETS carbon markets. The indicative price would act as a floor for global carbon trading. It could be increased as a function of the remaining carbon budget and compliance status of the individual countries’ NDCs.
The IMF Climate Coin could also be used if a country faced major foreign exchange market volatility. A nation faced with balance of payments problems resulting from curtailed export activity, triggered by a pandemic outbreak or climate-change driven shorter supply chains could sell its allocated IMF Climate Coins to source hard currency.
A broader, separate IMF climate fund could be structured for climate adaptation purposes managed alongside similar principles. The converted SDRs would be managed as an insurance fund in accordance with the same investment allocations as the IMF Climate Stablecoin. If a country, small island state or other V20 country were hit by a devastating climate calamity, it could seek immediate release of such funds.
The IMF Climate Stablecoin could also be integrated with the sovereign debt restructuring process, akin to the 1989 Brady bond solution.
The defaulted creditor country could offer new security after applying an agreed haircut with the debtor parties, coupled with an additional warrant, linked and backed by their IMF Climate Coins’ value in reserve. The restructuring would be endorsed only if there was a commitment to improving on the country’s NDCs within the Paris treaty.
The size of the amassed IMF Climate Stablecoins could also contribute to improved sovereign sustainability ratings, as designed by rating firms and NGOs alike. A more favorable sustainable rating would lead to lower debt service payment and boost further efforts to maximize IMF Climate Stablecoin allocations.
Foremost, the IMF Climate Stablecoin could become a standard or anchor against which fiat, crypto-currencies, and Central Bank Digital Currencies could be benchmarked. The anchor currency would provide stable pricing guidance, backed by precious natural capital assets in a collateral pool and representing a finite coin supply to steward the essential reserve for sustainable survival on earth.
This is a monetary blueprint solution in its infancy. I invite observations and comments to improve on the current construct in the knowledge of Victor Hugo, “Our mind is enriched by what we receive, our hearts by what we give.”