The problem of climate systemic risk

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The case for a positive carbon price

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New Biophysical Theory for Carbon

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Hypothesis for a Risk Cost of Carbon

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Global 4C

| Global 4C is hosted by Possible Planet (formerly CRCS) | Latest Website Change 19 April 2019 | We welcome your feedback |

The Global 4C project presents a new market theory, called the Holistic Market Hypothesis (HMH), and a public policy for climate mitigation, called the Global 4C Risk Mitigation Policy (i.e. Global 4C). The HMH is a hypothesis that the classical theory for market externalities is inadequate for addressing the climate crisis. A major issue is that the economic welfare theory of Arthur C. Pigou (1920)—which underpins the ‘standard model’ for pricing carbon—does not address the systemic risk created by the economic system. The HMH is a theory that systemic risk is a second externality, called a systemic externality. The new theory is that the systemic externality is created by a strong physical coupling between carbon and energy, such that the problem of climate change should be considered a thermodynamic market failure—and not a classical market failure. The Holistic Market Hypothesis (HMH) is presented in three peer-reviewed publications (see banner links; see Holistic Market Hypothesis).



The ‘systemic externality’ of carbon is defined here as the cost of managing the systemic risk of unwanted climate change. This cost is currently overlooked by leading economists because it is not formally explained by Pigou’s economic welfare theory. The systemic externality of carbon is the cost of implementing a comprehensive risk management plan using a global carbon reward and parallel currency, and it may also be termed the cost of ‘preventative insurance’.

The proposal put forward under the HMH is that the discipline of economics should be applied to achieve two complementary goals, as follows:

  • (Ambition Type 1) economists who prefer orthodox and neoclassical economic methods should assess and support the Social Cost of Carbon (SCC) for the aim of implementing tax-based policies as understood using welfare theory, fiscal policy, and cost-benefit analysis; and
  • (Ambition Type 2) economists who prefer biophysical economic methods should assess and support the Risk Cost of Carbon (RCC) for the aim of implementing reward-based monetary policies as understood using risk assessments, monetary policy, and cost-effectiveness analysis.

The economic optimum is a tradeoff between (Type 1) market efficiency and (Type 2) climate safety. This tradeoff is achieved through a combination of (1) carbon taxes, and (2) a global carbon reward. Regulations and conventional policies are included in the policy toolkit, however the carbon tax and the global carbon reward are considered to be the ‘principal’ policies.



Under the Holistic Market Hypothesis (HMH), a systemic externality is the cost of ‘risk management’, and it is an externalised cost that was overlooked by Pigou. The systemic externality of carbon is a far more serious problem than market inefficiency, and this is because the systemic externality is the cost of achieving a ‘safe climate’.

The systemic risk is created by (a) structural features of the economy and (b) dynamic climate tipping points.  A structural challenge is that the world economy is becoming more energy and resource efficient over time, and this efficiency is contributing to greater overall consumption and ‘brown growth’ that is driving more carbon emissions and is making the climate problem worse.

Systemic externalities are managed with seigniorage payments and currency trading that is enabled with a parallel currency system. The systemic externality is ‘internalised’ into the existing economy with a parallel economy. The parallel economy provides a rebalancing of the existing economy to achieve net-zero (or net negative) carbon emissions within a finite time period. The cost of achieving this global goal is termed the Risk Cost of Carbon (RCC). The RCC is assessed each year in a comprehensive risk assessment.

  • The Social Cost of Carbon (SCC) is an intra-market externalised cost, and it is addressed within markets by applying carbon taxes of some kind.
  • The Risk Cost of Carbon (RCC) is an inter-market externalised cost, and it is addressed by managing the world economy with a parallel currency as the ‘global carbon reward’.

The welfare theory of Pigou provides us with a measure of the marginal spillover cost of carbon emissions—the Social Cost of Carbon (SCC). The SCC is internalised into the economy with carbon taxes to improve the efficiency of markets, but the goal of establishing a safe climate is not the same as improving market efficiency. The goal of climate safety is to remain within the carrying-capacity of the Earth’s life support system. This new goal includes the associated objectives of providing ecological and social regeneration.



The Solar Dollar is a proposed trading name for a future parallel currency that addresses the Risk Cost of Carbon (RCC) and limits the systemic risk of unwanted global warming (see P2PF Wiki Solar Dollar). The name ‘Solar Dollar’ is not essential to the working of the policy, however this trading name is recommended for cultural reasons. A generic name for all currencies that are implemented under the Global 4C policy is Complementary Currencies for Climate Change (4C).

Parallel Currencies

The current proposal for a parallel currency is consistent with the advice of thought-leaders in the field of central bank finance.

Green Quantitative Easing

Michael Metcalfe’s TED talk is not an endorsement of Global 4C, however it does show that the current proposal for Carbon Quantitative Easing (CQE) is consistent with the advice of thought-leaders in the field of central bank finance.



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The main objective of the Global 4C policy is to manage climate systemic risk over a rolling 100-year planning horizon. A hypothetical objective is to achieve a 67% chance of not exceeding 2 degrees Celsius of global warming (see Problem and Solution).

An important feature of a global carbon reward is that the price of 4C—the reward currency—will track the Risk Cost of Carbon (RCC) via an exchange rate mechanism. The currency exchange rate mechanism is used to manage the purchasing power of 4C (refer Solar Dollar) and to internalise the RCC into the global financial system. The global carbon reward is not a subsidy. The 4C reward and exchange rate mechanism are complementary to other conventional policies.

The decision to mitigate carbon emissions and apply for 4C rewards is voluntary, and the decision is made by individuals, communities, firms, and government agencies. There are no direct costs to fund the policy, and so there are no new taxes for individuals and firms, and there are no demands placed on national fiscal budgets. The 4C rewards will provide economic stimulus and new financial liquidity to the scale needed to manage the climate risk. 4C will have the downstream effect of allocating energy and other resources within the world economy to provide ecologically and socially beneficial outcomes.

The 4C parallel currency is an international ‘unit of account’ for carbon mitigation services, and it is offered as a predictable ‘store of value’ for investors; but the 4C parallel currency is not used as a ‘medium of exchange’ for general trade. 4C is a financial security that offers a ‘yield’ for investors, and it is traded by market actors and investors in currency markets. The approach is macroeconomic, and trading is conducted in open markets with central banks as the ‘buyers of last resort’.

Central banks will play a key role. They will undertake ‘carbon quantitative easing’ (CQE) and currency trading in open markets. CQE will support a managed long-term bull market in 4C trading and will attract private wealth into the 4C currency market. In other words, 4C will act like a sovereign bond and will have a predictable long-term yield.



The Silver Gun Hypothesis is developed from the Holistic Market Hypothesis (HMH). The Silver Gun Hypothesis explains the thermodynamic nature of the economy and why the economy becomes more efficient with time. It also explains why the Global Carbon Reward is needed to manage climate risk and to achieve the goals of the 2015 Paris Climate Agreement. This hypothesis requires experimental testing. If the hypothesis is proven correct, then it will fundamentally change the narrative on climate change economics and policy (see the Silver Gun Hypothesis).

The Silver Gun Hypothesis builds on the idea that carbon is strongly coupled to energy flows because of the physical properties of carbon. The hypothesis is that climate policies need to take into account the entropy of carbon in the environment because entropy (and the time-asymmetry of entropy) determines the kinds of objective that can be achieved with carbon taxes and carbon rewards. The concept of entropy is important for understanding why carbon is the main structural element of living organisms, and why it is a primary influencer of the Earth’s climate. The problem of climate change is, in effect, a problem of managing the entropy of carbon in the environment.

The Silver Gun Hypothesis leads to a major new interpretation that achieving a net-zero or a net-negative carbon balance will require a parallel currency and a parallel economy. This finding may be as significant to human society as the inventions of language and money. If implemented, the parallel economy may be as significant to the Earth’s biological history and carbon balance as the evolution of multi-cellular organisms: animals, fungi and plants.



“The main proposal presents a detailed concept of the Solar dollar global currency for carbon pricing. It is well-developed and detailed, and contains concrete and actionable steps toward implementation.”

MIT Climate CoLab Judges (2015)


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