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 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 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:
Three kinds of externality were considered in the development of the theory supporting the GCR. These include (i) negative externalities, (ii) positive externalities, and (iii) systemic externalities. Negative and positive externalities are concepts that are well known to economists, as they were defined by Arthur Pigou over 100 years ago. The negative externality refers to the economic damage (i.e. welfare loss) caused by anthropogenic greenhouse emissions and climate change. The ‘systemic externality’ is a new type of externality (proposed in this policy project) that refers to the structural features of the economy that perpetuate and worsen the market failure in carbon. It appears that the systemic externality is primarily the result of an over-reliance on debt-based finance and debt-based money creation because rising indebtedness is a driver of unsustainable economic growth and associated problems, such as wealth inequality.
The standard approach of economists is to correct the negative externality with carbon taxes (i.e. they aim to “internalise” the externality into the marketplace). The GCR is designed to correct a systemic externality by overcoming the various kinds of financial, social, and political gridlock that is worsening the market failure in carbon. The objective of the GCR is to provide scalable finance for providing a relatively safe carbon balance and regenerative development. This process of correcting the systemic externality may be called the “monetisation” of the systemic externality.
For more information on the systemic externality, please see Pricing Theory.
3. Operational Governance
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 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
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
7. Carbon Exchange Authority & Standard
8. National Interests
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
10. Accountability & Transparency
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.