NEW MARKET HYPOTHESISCENTRAL BANK DIGITAL CURRENCYHOW TO SAVE THE PLANETENERGY & CLIMATE POLICY

NEW MARKET HYPOTHESIS

The problem of climate systemic risk

Read More

CENTRAL BANK DIGITAL CURRENCY

The case for a positive carbon price

Read More

HOW TO SAVE THE PLANET

Carbon Quantitative Easing

Read More

ENERGY & CLIMATE POLICY

Hypothesis for a Risk Cost of Carbon

Read More

How to save the Planet: Carbon Quantitative Easing

Bloomberg Green

Kim Stanley Robinson’s latest science fiction novel, The Ministry for the Future, is due for release in late 2020. Robinson used our “Global 4C” policy—also called a Global Carbon Reward—to formulate a storyline for how humanity might ‘save the planet’ from abrupt climate change and ecosystem collapse. The novel’s fictional storyline proposes that central banks will intervene with Carbon Quantitative Easing (CQE) to finance a global reduction in carbon emissions and to pull carbon out of the atmosphere.

This article was written in response to Robinson’s piece in Bloomberg Green (22 April 2020). Robinson claims that the policy could be used to finance fossil fuel companies to keep their fossil resources in the ground.

The Global Carbon Reward has the flexibility to finance the widest spectrum of climate mitigation actions, but the policy is not specifically designed to reward fossil fuel companies to keep their fossil resources in the ground—and for a number of reasons. In some respects, paying companies not to extract fossil resources is conceptually similar to paying for avoided deforestation however the similarities are probably not sufficient to justify a direct comparison. This is because deforestation is often carried out illegally or is unregulated, and because protecting forests also protects biodiversity, watersheds, and indigenous peoples.

Before digging into the weeds of the topic, let’s take a quick look at “carbon coin” as the policy instrument.

What is Carbon Coin?

The Global Carbon Reward is a policy that employs a new type of currency with a service based unit of account, denoted as ‘100 kg of CO2e mitigated for 100 years’. This proposed currency may be classified as ‘representative money’ or ‘service money’ because it is not ‘commodity money’ and it is not ‘fiat’. The proposed currency is not yet assigned a trading name, although the “Solar Dollar” has been suggested as a suitable trading name. In Robinson’s novel the currency is called “carbon coin”. In the policy documentation, the currency is actually referred to as “Complementary Currencies for Climate Change” (4C) because this term is technically descriptive (4C is pronounced “foresee”).

4C—or “carbon coin” as Robinson calls it—would be managed as an international Central Bank Digital Currency (CBDC). All current examples of CBDC’s are owned and managed by individual governments and their central banks, and this is because CBDC’s are generally considered to be the digital alternative to banknotes and coins.

4C has a different function to a typical CBDC because 4C is not used for trading goods and services. 4C is used to create an explicit global reward price for carbon mitigation services—as distinct from other prices for carbon as seen in existing ‘carbon markets’. 4C will be digitally created and issued to the owners of projects that successfully reduce carbon emissions or sequester carbon. 4C may then be traded in foreign exchange currency markets for fiat currencies, however it will have a pegged exchange rate as part of the monetary policy called Carbon Quantitative Easing (CQE). The exchange rate for 4C will be predictable and rising to ramp-up climate mitigation globally, and as a means of officially pricing the systemic risk of climate change into the global financial system.

Given that the exchange rate of 4C will rise over time, it emerges that 4C will behave like a ‘sovereign bond’ because it will be an investment option for currency traders. 4C will be a highly liquid and a safe investment—being backed by the world’s central banks—and for this reason the 4C market can be used to fund the global transition to net-zero carbon emissions.

Forex currency trading is on average US$ 3 trillion per day (equivalent) and so attracting the required amount of wealth for a low-carbon transition appears feasible with this monetary approach. The administration of the rewards will be managed outside of central banks, and this responsibility will fall on a new institution for a Carbon Exchange Standard (CES), as explained below.

Should we pay companies “Carbon Coins” to keep their fossil resources in the ground?

The short answer is no. This climate policy does not reward companies to keep fossil carbon in the ground. The policy is designed to reward the following actions in proportion to the mass of CO2e that is mitigated with time:

(1) Carbon Abatement with Cleaner Energy
(2) Carbon Abatement with Cleaner Consumption
(3) Carbon Sequestration

The above actions will each have specific reward rules to assess the payments and to optimise the outcomes and trade-offs for limiting the risk of dangerous-to-catastrophic climate change. The rules and standards for this policy are collectively called the Carbon Exchange Standard (CES) and it has some similarity with a Gold Exchange Standard.

So now, back to discussing why this policy does not reward fossil fuel companies to keep their fossil resources in the ground….

Firstly, we should take note of the inflation risk of Robinson’s idea, because the wealth transfer could be massive and could result in a misallocation of resources. Here are a few concerns in relation to Robinson’s proposal:

(i) The price of available fossil fuels would rise through cost-push inflation given that a portion of the fossil reserves are being excluded from extraction. The result would be rising prices for available fossil energy. The approach would incentivise exploration to earn carbon coins for new found fossil reserves and especially for poor quality fossil reserves; and the approach would incentivise the extraction and selling of the highest quality fossil reserves in international markets to meet market demand.

(ii) Governments could nationalise their fossil energy companies or take back mining/extraction licenses without paying private owners to keep the fossil resources in the ground (i.e. this would avoid paying companies to do nothing).

(iii) The approach may be deemed unethical by citizens and voters, it might lead to corruption between governments and fossil fuel companies, and it might result in a new black market in fossil energy.

Consider the huge quantity of fossil resources!

In terms of paying companies to keep their fossil resources in the ground, consider this data on extracted and available fossil energy:

(a) The total of coal, oil and natural gas that has been extracted since 1920 is equivalent to 6,500,000 TWh.
(b) The coal, oil and natural gas held in reserve is equivalent to about 9,000,000 TWh, 2,900,000 TWh, and 2,100,000 TWh, respectively.
(c) The total fossil energy in reserve is about 14,000,000 TWh, and this is more than double the total fossil energy extracted since 1920!

The above data suggest that the world cannot afford to pay to keep all of the fossil energy in the ground at today’s prices for energy—because there is just so much of it. Robinson’s approach could result in a massive transfer of wealth to fossil fuel companies thereby exacerbating wealth inequality and other economic problems.

Robinson’s proposal could be replaced with a globally enforced cap on permits to extract fossil resources—thereby allowing the marketplace to discover the price of fossil energy based on supply-and-demand. A cap on fossil resources for price discovery is operationally similar to a compensation plan because it would make the available fossil energy more valuable through scarcity.  This sounds simple, but the geopolitics of such a policy are worrisome and likely intractable, and so we might be going in circles in terms of policy ideas.

The world’s fossil fuel addiction might be resolved with a combination of regulations, caps, taxes and our current proposal for a Global Carbon Reward. This reward will reduce demand for fossil fuels, and this is how we can keep the coal, oil and natural gas in the ground on a permanent basis. No doubt some of these fossil fuel resources will be needed in certain industries because of difficulty with substitution, and so the Global Carbon Reward includes rules for carbon sequestration via Negative Emissions Technologies (NETs).

The low-carbon transition needs a major financial boost. This is why we recommend the Global Carbon Reward and Carbon Quantitative Easing (CQE) as the drivers of a just transition to ‘carbon neutrality’ and a safe climate.

As we know, the stone age did not end because of a lack of stones. Some other technology came along that was better than stones.

Show Buttons
Hide Buttons