Governance

The Global Carbon Reward needs multilateral governance to meet the needs of governments and stakeholders.

It is suggested here that a governance model for the Global Carbon Reward (GCR) should be explored in a conversation that can attract a number of candidate proposals. To seed this conversation, some comments and salient advice are provided below with regards to policy governance.

Contents

1. Policy Objectives
2. Social Principles
3. Operational Governance
4. Global Information Sharing
5. Stakeholder Representation
6. Multilateral Authority
7. Carbon Exchange Authority & Standard
8. National Interests
9. Debtor Nations
10. Accountability & Transparency

The Global Carbon Reward offers a new pathway to meeting the main ambition of the Paris Climate Agreement, but it also needs multilateral governance for serving the interests of governments and stakeholders.

1. Policy Objectives

The GCR policy and its objectives may be deliberated under the UNFCCC with a view to complementing or reinforcing the 2015 Paris Climate Agreement.

The GCR policy has two major objectives. The first objective is explicit, and it is to set a probabilistic limit on global warming by managing the anthropogenic carbon balance. The second objective is implicit, and it is to maximise co-benefits for communities and ecosystems.

The first objective will require an international agreement on the maximum acceptable levels of global warming and associated anthropogenic carbon budgets. This objective should be more specific than the 2015 Paris Climate Agreement, because it will require the articulation of percentage probabilities and planning horizons, in addition to the maximum allowable rise in the average mean surface temperature relative to the pre-industrial baseline.

The first policy objective should be limited to the management of the anthropogenic carbon balance, because solar radiation management (SRM) is outside the immediate scope of the GCR policy. The GCR policy may be used to frame future policies for SRM.

Public and private actors are not excluded from influencing the policy objectives after the policy is implemented. This is because retail and wholesale currency markets will be able to trade the carbon currency, and thus influence its market value. For example, if the official floor price is set to support a maximum of 2°C with 67% confidence, it is conceivable that markets could trade-up the carbon currency to achieve a more stringent climate target.

2. Social Principles

The GCR policy is not providing charity. Instead, it offers a financial incentive for ecosystem services and a global public good. Participation in the GCR marketplace and the trading of the carbon currency will be voluntary for market actors. The motivation to participate in the carbon reward market will be financial and moral. The social principle that is used to justify the GCR policy is not the profit motive, but rather it is termed the preventative insurance principle:

The preventative insurance principle states that humanity should be provided preventative insurance against dangerous climate change however the principle also states that the direct cost of the insurance must be diverted away from all stakeholders for the purpose of maximising cooperation across all levels of society.

The above described principle, called the preventative insurance principle, is new and complements the polluter pays principle. The polluter pays principle applies to the carbon tax and similar policies (sticks) whereas the preventative insurance principle applies to the carbon reward (carrots). The combination of these two principles may be used to revise the popular interpretation of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC) under the UNFCCC.

There are inherent weaknesses to the polluter pays principle, and these weaknesses may be discussed and studied more rigorously in response to this proposal for the preventative insurance principle.

Preventative insurance differs from conventional insurance that is typically used to insure private property against flood, fire, and theft. Preventative insurance is proposed at the global level to defend against irreversible catastrophic damages to common pool resources. These resources are irreplaceable, and they cannot be compensated if irreversibly damaged or lost. The cost of correcting the political gridlock, institutional barriers, and financial barriers to effective and scalable climate action may be considered an insurance levy, under the preventative insurance principle. Important, is that this levy will not result in any direct financial costs for citizens, businesses, or governments—on the basis that the levy will be managed using monetary policy.

Footnote on Externalities:

There are three kinds of externality that need to be considered when evaluating the GCR and the preventative insurance principle. There are negative externalities, positive externalities and systemic externalities. In conventional climate change economics, the main focus is the negative externality, which refers to the economic damage (i.e. welfare loss) caused by anthropogenic greenhouse emissions and resulting climate change. The standard approach is to address the negative externality with carbon taxes. The GCR will help mitigate the negative externality, but the GCR does more than this because it will also support a positive externality by establishing a new institution that can overcome the political gridlock that is worsening the negative externality. The new institutional arrangement is a special new type of positive externality, because it will strive for a safe carbon budget and patterns of economic activity that are socially and ecologically regenerative. In other words, the purpose of the positive externality is to overcome the political gridlock that is inherent to the mainstream economy, and which is delaying strong and effective action on climate mitigation.

Given that the GCR policy is designed to influence both negative and positive externalities at a systemic level, the GCR is not actually addressing a Pigouvian externality per se. It is argued here that the GCR is actually needed to address a “systemic externality”, which is a new type of externality that is structural and systemic. The systemic externality refers to the structural limitations of the world economy and governing institutions — and not with the behaviour of individuals and market actors. Two major causes for the systemic externality are an over-reliance on debt-based finance, and an over-reliance on debt-based money creation, given that rising indebtedness is a key driver of unsustainable economic growth.

For more information on the systemic externality, please see the GCR Policy Working Paper.

3. Operational Governance

The GCR operations will be multifaceted because it will involve a variety of technical analyses, including the assessment of the Risk Cost of Carbon (RCC) and the ideal carbon reward, which is the floor price for the carbon currency over a rolling 100-year planning horizon (refer Pricing Theory).

In addition to evaluating the ideal carbon reward, there is a need to coordinate the reward price with the reward rules. Each reward rule and each climate mitigation technology will need to be supported by a reliable administrative system.

The GCR will require the measurement, reporting and verification (MRV) of innumerable low-carbon projects. There is a need to include the MRV as a central part of the service-level agreements for low-carbon projects. These agreements will include provisions for policing, which will be needed to ensure that there is a reasonable chance of detecting data fraud and exaggerated reward claims. The legal framework for these service-level agreements will need to be enforced within each local, national, and international jurisdiction.

The commercial structure of low-carbon projects should be considered in order to determine the appropriate service level agreements and rules for offering carbon rewards. This will require a review of international and domestic trade rules, and a proposal for new trade rules if these are needed.

A goal of the GCR is to create a new global market for climate mitigation services. Narrowly focusing on the administrative duties does not explain the full intent of the GCR policy, which is to establish a global market that is expected to play a major long-term role in the world economy.

4. Global Information Sharing

The provision of a global database for optimising climate mitigation services and co-benefits should be prioritised with the implementation of the GCR policy. The proposed database should include the information that will be collected as part of the MRV for the issuance of carbon rewards.

The global database should be publicly available over the Internet to maximise the opportunities for market participants to mitigate carbon emissions and to maximise returns for investors in low-carbon projects. The provision of a global database should assist the creation of secondary markets that can support successful mitigation technologies and methods, and earn rewards.

5. Stakeholder Representation

The concept of reward weightings presents an opportunity for a new kind of decentralised governance and stakeholder representation. The reward weightings are designed to incentivise the owners of low-carbon projects to maximise the co-benefits and to minimise the harms that result from their projects.

Klaus Schwab, at the World Economic Forum, proposed the idea of stakeholder capitalism, which is the idea that corporations should serve the interests of their stakeholders and not just their shareholders. The GCR policy offers a new kind of stakeholder empowerment because the GCR will empower all stakeholders, including the people who reside outside of corporates and governments.

Under the GCR policy there is scope to invite stakeholders to form stakeholder groups. The rewarding authority will provide the criteria for membership and guidelines for group governance. Stakeholders will organise into groups for responding to three major issues: (1) energy reliability, (2) community wellbeing, and (3) ecosystem health. The administrative system for this decentralised stakeholder representation might be provided as an online platform for:

registering stakeholders into groups;
collecting stakeholders’ ranked criteria for co-benefits and harms;
achieving consensus on stakeholders’ ranked criteria;
developing a subjective scoring system for evaluating low-carbon projects; and
weighting the carbon rewards for each low-carbon project based on their scores.

6. Multilateral Authority

The implementation of the GCR policy will require a multilateral institutional and legal framework for governments to find representation, to make multilateral decisions, and to request dispute resolution.

7. Carbon Exchange Authority & Standard

There is a need to establish an authority for implementing the GCR and its associated monetary policy. The authority that will be responsible for developing and managing the monetary policy may be called the carbon exchange authority (CEA). The monetary policy may be called the carbon exchange standard (CES). The creation of the CEA and the implementation of the CES may require a new international monetary treaty/agreement and new mandates for central banks.

8. National Interests

The GCR policy may be agreeable to many national governments because the cost of the policy will not negatively impact on their fiscal position, and because any rewards that are earned will register in the national account as export income.

The actual cost of the GCR policy will be mostly ‘invisible’ to governments and market participants because it will be channelled into a thin global inflation levy. The economic contribution of nation states will likely be based on globally uniform monetary inflation, and so the contribution of each nation state will be proportional to the size of their national economy.

Most of the economic benefits of the carbon reward will flow to those nations that have the capabilities and opportunities to mitigate carbon. Consequently, each nation will be invited to develop their own domestic capacity to provide climate mitigation services in what should become a global market for carbon rewards.

9. Debtor Nations

The carbon reward will be provided debt-free. In this sense the GCR policy is not promoting colonialism, but may be considered to be supporting national independence by reducing debt levels. High levels of governmental and national debt in many countries may provide another reason to support the GCR policy and the carbon currency. Member nations that can earn carbon rewards will be less dependant on donor funds and unsustainable extractive industries. Donor funds—such as for climate mitigation, adaptation, and reparations —are likely to be unreliable and unscalable if recent history is a guide.

10. Accountability & Transparency

The issuance of carbon rewards to low-carbon projects will be conditional upon these projects being able to meet their required level of service. The key data that are used to evaluate each project can be made available to the public to improve accountability and transparency. Sensitive data, including commercially valuable data, confidential data, and private data, will be kept secure under a general privacy policy.

The investment into low-carbon projects should be internationalised/globalised however the reward weightings that are provided by stakeholder groups will be made public to provide significant protection against community and ecosystem exploitation, and to provide a high degree of accountability and transparency.