NEW MARKET HYPOTHESISRISK COST OF CARBONCENTRAL BANK DIGITAL CURRENCY

NEW MARKET HYPOTHESIS

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Hypothesis

Global 4C is not just a new climate policy. Global 4C is actually based on a new market hypothesis for describing the market failure in greenhouse gas emissions, and for quantifying the externalised costs of these emissions.

The hypothesis is called the Holistic Market Hypothesis (HMH), and it is most easily explained in terms of the simple carbon tax. If we take the economic relationships that define the simple carbon tax, and then reverse them all, we can create a new climate policy that is the ‘reverse’ of the carbon tax. If the relationships are reversed carefully (i.e. by taking into account the laws of nature) we end up with two ‘complementary-and-opposite’ climate policies. These policies are (a) the simple carbon tax, and (b) the global carbon reward. These two policies may also be referred to as ‘carrots and sticks’. Without going into the technical details here, the hypothesis is summarised in Table 1.

 

Table 1 The Holistic Market Hypothesis (HMH) explained in terms of complementary climate mitigation policies and their objectives

 

Holistic Market Hypothesis (HMH)

 

(Type I) Carbon Tax 

(Type II) Global Carbon Reward

Complementary Policy Responses to Climate
Change

The world economy is resilient when markets respond with complementary efficiency and certainty. A systemic risk is that a climate tipping-point will result in major irreversible climate disruption and related financial crises.

Carbon taxes are imposed on actors who create carbon emissions, and to internalize the SCC(a).

The tax is guided by SCC assessments and cost-benefit analysis to improve economic efficiency with optimal welfare.

Carbon rewards are issued as a parallel currency to actors who mitigate carbon emissions, and to internalize the RCC(b).

The reward is guided by RCC assessments and cost-effectiveness analysis to improve economic certainty with limits on risk.

Footnotes
(a) SCC = Social Cost of Carbon
(b) RCC= Risk Cost of Carbon

 

Our analysis shows that the ‘global carbon reward’ is the complement-and-opposite of the carbon tax. Our analysis also shows that the ‘global carbon reward’ involves a currency instrument and has a risk objective. The currency is a new kind of parallel currency, which we call Complementary Currencies for Climate Change (4C). The objective is the management of climate systemic risk and improving economic certainty. The objective of the global carbon reward differs from the objective of the carbon tax, because the tax aims to achieve a welfare optimum and to improve economic efficiency.

Our ability to derive the objective of the global carbon reward is made possible using the laws of nature. The natural laws that we use are the First and Second Laws of Thermodynamics. The Second Law is actually the most important, because it explains that there should be time-asymmetry between the two policies based on the opposite direction of financial flows through the economy, and opposite direction of (embodied) energy flows via the provision of goods and services. This time-asymmetry, under the Second Law, is a result of the fact that biophysical systems experience increasing entropy with time.

The discovery that the global carbon reward has the objective of managing climate systemic risk is fundamentally important, because it allows us to resolve a wide set of economic paradoxes and conundrums associated with climate change, including the most intractable of all problems: economic growth. The reason that the global carbon reward can address global growth, is based on the concept that it can address all systemic risks, and dirty growth is just one of the many systemic risks. The global carbon reward manages systemic risk by redirecting wealth (at the macro-economic scale) and resources into climate mitigation actions, and at a rate that is needed to limit the systemic risk.

The Risk Cost of Carbon (RCC) is the economic metric for pricing the global carbon reward (refer Table 1). The Social Cost of Carbon (SCC) is the economic metric for pricing the ideal carbon tax (refer Table 1).

A reason why the Holistic Market Hypothesis is likely to be valid, is an apparent ability to resolve various intractable problems that currently trouble economists, scientists, and policy makers. These intractable problems are mentioned in following is a list of the potential advantages of the global carbon reward and RCC:

  1. Scope to limit global warming to specific temperatures as a percentage probability (i.e. ability to set tolerances on expected warming).
  2. Scope to create a global price signal for carbon mitigation services.
  3. Scope to overcome the free-rider problem with a uniform inflation levy (this levy is analogous to a premium of a climate insurance policy)
  4. Scope to resolve the time-discounting paradox for the Social Cost of Carbon (SCC).
  5. Scope to create sustainable economic growth, by improving the quality of Gross Domestic Product (GDP) and the mix of the energy supply.
  6. Scope to manage the energy rebound effect that occurs with increasing energy efficiency (i.e. Jevons paradox)
  7. Scope to price climate systemic risk into all investment decisions by influencing the risk-free rate of return in global financial markets
  8. Scope to attract as much private wealth into low-carbon projects as required to achieve a risk objective
  9. Scope to bring the policy into central bank mandates and to insulate the policy from political interference
  10. Scope to synergy with and support conventional carbon taxes, carbon markets and carbon pricing schemes.
  11. Scope to incentivise long-term planning, investment and R&D for low-carbon projects and developing radical new technologies
  12. Scope to trigger a social transformation through a profit motive and risk communication
  13. Scope to finance carbon dioxide removal (CDR) projects over the long-term.
  14. Scope to provide debt-free finance to the full spectrum of mitigation technologies
  15. Scope to complement the existing debt-based fractional reserve banking system with a debt-free currency
  16. Scope to incentivise a wide range of social and ecological co-benefits

 

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