Regulatory Applications for Bitcoin: Environmental and Spectrum Allocation

I recently wrote a post about using property rights to avoid the tragedy of the commons.  Jesse Jenkins, of The Energy Collective, responded to my draft post that he thought my idea of allocating property rights based off of land use was too complex. I assured him that it was not and gave a logical and concise rebuttal. However, his challenge to me left me thinking about how to simplify the regulatory approach. This post is my effort to sketch out such a simplified approach.

General Structure

To begin, we discuss the general frame work. This is the skeleton of the regulation. Later, we will attach the ligaments and muscles.

I disagree with Coase that it does not matter who initially possesses the property right. I think it is fundamental to the discussion. If it is the government the allocation of the property right acts as a tax, and the government has an incentive to preserve that source of revenue and will likely enact policy to support such taxes.  History shows that once a tax is passed it is very difficult to repeal. So how to avoid this likely problem? Here I think the property right needs to be initially held by individuals.  The problem then becomes how to make the initial distribution of the property right.

A wonderfully rich example of how land held in common was distributed comes from our own history. In 1862 Lincoln signed into law the Homestead Act. This act allocated vast tracts of land held by the US government to anyone who was willing to make a claim on that land.  It had a restriction that to establish ownership an individual had to live on that land for five years. This is Locke’s idea of laying claim to land not held by another. That through mixing our labor with the land we lay claim to it.  In many regards, this is how I think of intellectual property. Our power for creation mixing of old ideas into new, establishes the right of priority for those new creations.  In this sense, the act of extracting a property right from the ether establishes ownership of that right.  Bitcoin uses this idea to divide a periodic allocation (every 10 minutes) of new bitcoins based on the fraction of labor (statistically) used to mine the new coins.

The bill creates a right of restricted access the commons. This right once possessed cannot be taken away (will provide an exception later) by another. It is for all intents and purposes a right to real property. The right is restricted in the sense that it is some criteria pollutant or some portion of the frequency spectrum and only applies to the portion or quantity held. The right is restricted in time and covers calendar year to calendar year. At the beginning of the new year, the right is renewed automatically for that next year. Sorry about the legalese, the definition of restricted is a very important concept that needs to be clearly understood.

The bill specifies a maximum quantity of pollution for the nation. This is designed as a unilateral cap on our emissions. In this sense it is very similar to cap and trade, however, as you will see it differs fundamentally from such legislation.  There is no specified ratchet down on the the quantity of available pollution. More on this topic later.

The quantity of rights cannot be increased except by a 60% majority of Congress. Here we want to make the creation of new rights require the super majority to increase our ability to pollute as a nation. It has to be clearly in the “national interest” to do so.

Emitters that are in compliance with current pollution laws, receive a quantity of pollution based on their recent emissions.  The implementation of the bill cannot arbitrarily shutdown current plants. Thus if you comply with the current law, you have the right to continue. What is, is.  A utility with multiple plants would have some aggregation of past pollution of all compliant plants establish their initial right. This would be some method of temporal averaging (e.g. exponential weighted moving average over a study period say 10-years) If a plant is not online by the time the bill is enacted it will have to purchase the necessary right or use existing rights.

The regulator ensures that emitters have the necessary rights. The regulator’s purpose is to ensure the the property rights are being used properly and that the accounting of the criteria pollutants is correct for the rights, and to assess fines based on the the pollution above the rights held.

The maximum quantity of rights would be above the rights distributed to existing facilities. This point will require debate to resolve what is the appropriate level.

Unissued rights don’t exist until they are mined. This is perhaps one of the most important points. The rights that are not initially distributed exist in theory. They have to be “discovered” through the expense of effort. Here, we borrow from Bitcoin’s algorithm. To establish ownership of a right a miner has to decrypt a complex algorithm and generate what is called a proof of work.  This expenditure of work is what establishes ownership. Like Bitcoin, the ability to access rights becomes more difficult the more people are working to discover new rights and the rights are released at a predetermined rate to the maximum cap.

A small transaction fee is levied on every transaction. This fee is used to pay the miners to maintain and grow the encryption of the blockchain. The fee may also be used to fund the regulator. The distribution between the miners and the regulator is set by Congress as is the fee itself.  The fee is important because it is what provides the miners with an incentive to provide their services.

The government mines the blockchain initially to establish an adequate level of encryption. The law would define the initial startup period, where the government has sole access to mine the blockchain. This will establish a quantity of rights owned by the government that can be used to meet various policy objectives.  This acts to establish enough level of security in the blockchain to prevent forking during the initial adoption phase.

A polluter who emits a concentrated pollution that carries a specific and demonstrable harm can be held liable.  This is an important feature. Because various forms of pollution (interference in the EM spectrum) are difficult to fully quantify, we need to rely on a common law process to attribute liability and the level of harm.  If through a right to access the commons an individual or groups of individuals cause a specific and demonstrable harm to another then, they are at fault and can be held liable for their actions.  This is a difficult condition to prove in court because the harm must be specific and demonstrable.

The regulator is responsible for maintaining the source code acting like an open source software foundation. The regulator maintains the source code in an open source manner, where individuals contribute to the software. Revisions require hearings, unless there is a response to a fork in the block chain or other such emergency.  Those emergency situations are specific and enumerated by law. The regulator is unable to change the constraints of the regulation unless authorized to do so by a specific act of Congress.

This should do to provide the initial structure and to show how the pollution or EM spectrum rights can be commoditized, while respecting the current status quo.  The only way for an a holder of a right to give it up is to voluntarily sell it. This leads into the next task; to tie this concept into wider market and regulatory realms.

Integration and Conclusion

We have a commodity that can be bought, sold, or held. Like any other commodity an individual can purchase a quantity and hold onto them and not use them.  This will tend to raise the price. It also allows individuals to hold the right and to trade rights. Such trading could be done on any commodity market, e.g. the Chicago Mercantile Exchange.  Futures contracts can be bought or sold. Traders can hold the position long or short based on what they think the future will have in store. Reporting of the possession of rights is compulsory if and only if they are used within that calendar year to emit a criteria pollutant or a portion of the EM spectrum.  I think it is important to allow institutional holders and individual holders to not disclose their ownership of the right to protect their anonymity.

Because we are allowing trading of this commodity, like any new commodity added to the market it falls under established SEC and CFTC rules.  There is no need to specify a separate regulation for handling these contracts.  Additionally, because of how the blockchain is structured the problem of double spending of the right is eliminated as is counter party risk.

If you are interested in understanding bitcoin from a policy angle here is an excellent primer discussing how bitcoin works from the George Mason University’s Mercatus Center by Jerry Britto and Andrea Castillo, “Bitcoin: A Primer for Policymakers“.

With the creation of Bitcoin, we have a number of new tools that we can use in the policy process to help improve our policy.  The United States is correct in not acting unilaterally on climate change, because it does not benefit our interests as a nation. We disadvantage ourselves relative to other nations.  My purpose with this proposed structure is to show how unilateral action can be used to make ourselves better off.  Our current environmental and spectrum regulations are for the most part inflexible command and control type responses. They are punctuated by a brief spell in the 1990’s where we established property rights (SOx Cap and Trade and cell phone spectrum auctions) and developed some of our most effective regulations.  I am only suggesting an avenue where we scrap the command and control structure and replace it with one based on property rights.  Our past experience shows how effective this can be.

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