Carbon Rewards
Carbon rewards are positive financial incentives for beneficial climate action.
— Dr. Delton Chen (Founder)
What are Carbon Rewards?
Carbon rewards are financial incentives for beneficial climate actions, whereby the rewards are offered and paid in a carbon currency.
Carbon rewards are provided debt-free, and they are not loans. Carbon rewards are not involved in carbon offset schemes either, and the associated carbon is managed separately from other carbon markets. The quantity of carbon rewards to be paid to enterprises that remove carbon from the atmosphere will be proportional to the net mass of carbon dioxide equivalent (CO2e) that they remove and store over the long-term. The quantity of carbon rewards to be paid to enterprises that undertake conventional mitigation (such as with renewable energy generation or the decarbonisation of industries) will be customised to achieve the desired mitigation outcome. The reward assessments may be carried out ex-ante or ex-post depending on the risks. Rewards will be allocated by a rewarding authority who will have the responsibility of reviewing the carbon stocktake of each enterprise over the long-term.
Enterprises that wish to earn carbon rewards will be required to sign a service-level agreement that will be enforced for up to 100 years and on a rolling basis, to correspond with the unit of account of the reward policy. From an operational perspective, these service-level agreements will stipulate the relevant reward rules and conditions for monitoring, reporting, assessing, paying, charging-back, defaulting, etc. The purpose of the service-level agreements is to ensure that the mass of mitigated carbon is properly assessed, and that any significant carbon leakage is discovered and rectified. Enterprises may also be required to sign a performance agreement when there are special conditions to be met, such as reward payments for “keeping fossil fuels in the ground” by substituting fossil energy production with renewables.
Carbon rewards will be offered for three types of climate action:
Businesses, scientists and industry associations will be invited to submit applications, to the rewarding authority, to include specific climate mitigation technologies and methods in the reward policy. These applications will need to show that the climate mitigation outcomes will be significant and measurable. The various mitigation technologies and methods that pass through this approval process will be supported with administrative systems and with service-level agreements and performance agreements.
The value of the reward will be determined by the exchange rate of the carbon currency. The unit of account of this currency will be “1000 kg of CO2e strategically mitigated for 100 years or more”. To see how the exchange rate of the carbon currency might vary with time, see this introduction. For a more technical explanation for how the exchange rate will be determined, see the Pricing Theory that covers the topic of supply vs. demand.
From the perspective of local communities, the various climate actions could have a significant impact on their wellbeing. The various climate actions could also have a major impact on energy networks and ecosystems. Striking a balance between unwanted impacts and the need for strong climate mitigation represents a complex management problem. To meet this challenge, each carbon reward payment will be weighted (higher or lower) as a function of the co-benefits and harms that are perceived by stakeholders (see Reward Weightings).
Updated 13 June 2024
Why use a Carbon Currency?
The carbon currency is a tradable financial asset for managing the anthropogenic carbon balance.
The carbon currency is not a medium of exchange, and it will not replace national currencies. The carbon currency is not a carbon credit and cannot be used to offset emissions because the carbon mass is non-transferable, and only the store of value is transferable.
The carbon currency has many important features that make it stand out from fiat currencies. For instance, the carbon currency will be convertible with national fiat currencies but it will not be used to trade goods and services. The carbon currency will have a predictable and rising exchange rate, and its financial function is to behave as a limited-risk financial asset.
Some of the most important capacity-building features of the carbon currency are:
- it provides accountability and transparency because the ‘unit of account’ is 1000 kg of CO2e strategically mitigated for 100 years or more;
- it circumvents many financial intermediaries because the carbon currency will be created by the rewarding authority;
- it offers a new channel of precisely targeted climate finance;
- it enables highly scalable climate finance assuming that the currency will be underwritten by central banks; and
- it facilitates the transfer of mitigation costs away from stakeholders via private trading/investing and monetary policy.
Between US $3 to $8 trillion per year of carbon rewards are likely to be needed to realise the 2015 Paris Climate Agreement. Under the GCR policy, this wealth will be transferred through voluntary carbon currency investing/trading that is backed by the world’s central banks. Through this approach, the cost of climate mitigation will be channeled into private capital reallocation and occasional open market operations by central banks, called carbon quantitative easing (CQE). Central banks will use CQE to defend a price floor for the carbon currency and to establish trust in the carbon reward market. The monetary inflation created by CQE will be spread evenly around the world economy so that it is socially and commercially benign. The advantage of CQE is that there will be no direct costs imposed on citizens, businesses or governments.
Updated 13 June 2024
What is the Social Principle?
The preventative insurance principle states that humanity should be protected from dangerous climate change by funding mitigation with rewards, but on the condition that the costs are transferred away from all stakeholders.
The carbon tax is typically designed using the market theory of Arthur Pigou, and this involves creating an explicit price on emitted carbon (i.e. the tax is a ‘stick’). The carbon tax is supported by the polluter pays principle.
The carbon reward takes the opposite approach by offering an explicit reward for climate mitigation services (i.e. the reward is a ‘carrot’). An expected outcome of using both carrot and stick incentives together, is a major improvement in social cooperation over mitigating climate change. Furthermore, by channelling the cost of the carbon reward (i.e. the ‘carrot’) into voluntary capital reallocation and benign monetary inflation, it is expected that disputes over cost sharing will be minimised.
The social justification for the carbon reward is called the preventative insurance principle. The principle states that humanity should be protected from dangerous climate change by funding climate mitigation with rewards, as long as the cost of funding the rewards is transferred away from all stakeholders. A mechanism for transferring the costs away from all stakeholders is provided with carbon quantitative easing (CQE), and this involves all central banks working together to defend a price floor for the carbon currency.
This principle has yet to be considered by nations under the UNFCCC because it is so new. It is proposed here that the preventative insurance principle should be included in the discussion and definition of Common But Differentiated Responsibilities (CBDR) and Respective Capabilities (RC).
Updated 13 June 2024
Why are Rewards Transformative?
The carbon reward is transformative because it can create a negative feedback on carbon emissions that is likely to be socially effective.
The GCR is transformative because it tackles the problem of cooperation. By shifting the focus from “sticks” to “carrots and sticks” the policy incentivises governments to work together because the GCR will be economically attractive to countries, businesses and citizens. It is proposed here that the GCR can be used to achieve a net-zero carbon balance in an orderly fashion through the creation of a negative feedback on carbon emissions. The negative feedback will be a self-reinforcing social feedback based on “carrot and stick carbon pricing” (see Pricing Theory).
A key feature of the GCR is that it will establish an international “mitigate-and-trade” market, which is distinct from conventional cap-and-trade markets, such as the EU’s Emissions Trading Scheme (ETS). Mitigate-and-trade will incentivise mitigation by creating a tradable carbon asset — the carbon currency — representing one tonne of CO2e strategically mitigated for at least 100 years. This carbon asset can be traded and invested in, providing a continuous stream of funding for decarbonisation projects. Unlike carbon credits, the carbon currency does not allow emissions offsetting, thereby avoiding the pitfalls of greenwashing and ensuring genuine carbon reductions and removals.
Another transformative aspect of this policy is its reliance on central banks’ support through a monetary program called “carbon quantitative easing” (CQE). This involves central banks purchasing the carbon currency to maintain a price floor, which guarantees the value of mitigated carbon. CQE ensures long-term financial support for global decarbonisation, making it a robust and forward-thinking strategy for addressing climate change. CQE ensures that mitigation projects are financially viable and attractive to investors, thereby mobilising significant capital flows towards decarbonisation efforts.
The policy aligns with the Paris Agreement’s goals by making financial flows consistent with low greenhouse gas emissions and climate-resilient development. It also offers solutions to global inequities by providing conditional grants rather than loans, helping developing countries avoid debt distress while enhancing their capacity for sustainable development. Furthermore, the GCR is designed to be adaptable and scalable. It includes both macro-strategies for setting global and sectoral carbon budgets and micro-strategies for project-level implementation. This ensures that the GCR can be customised to fit different contexts and can be periodically reviewed and improved.
Updated 17 June 2024
Footnotes
CARBON OFFSET SCHEMES: Carbon offset schemes allow individuals and companies to invest in environmental projects around the world in order to balance out their own carbon footprints. The projects are usually based in developing countries and most commonly are designed to reduce future emissions. A ‘carbon offset’ is a certificate that represents a reduction in emissions of greenhouse gases, as carbon dioxide-equivalent (CO2e), in order to compensate for emissions made elsewhere. One tonne of carbon offset represents the reduction of one tonne of carbon dioxide or its equivalent. There are two markets for carbon offsets, compliance and voluntary. In compliance markets—like the European Union (EU) Emission Trading Scheme—companies, governments, or other entities buy carbon offsets in order to comply with legally binding caps on the total amount of CO2e they are allowed to emit per year. Failure to comply results in fines or legal penalty.
COMMON BUT DIFFERENTIATED RESPONSIBILITIES (CBDR) AND RESPECTIVE CAPABILITIES (RC): Common But Differentiated Responsibilities (CBDR) was formalised in United Nations Framework Convention on Climate Change (UNFCCC) of Earth Summit in Rio de Janeiro, 1992 (Article 3 paragraph 1): “The Parties should protect the climate system for the benefit of present and future generations of humankind, on the basis of equity and in accordance with their common but differentiated responsibilities and respective capabilities.” The CBDR principle acknowledges that all states have a shared obligation to address environmental destruction but denies equal responsibility of all states with regard to environmental protection. At the Earth Summit, nation states acknowledged disparity of economic development between developed and developing countries. Industrialisation proceeded in developed countries much earlier than it did in developing countries. The more industrialised a country is, more likely that it has contributed to climate change. States came to an agreement that developed countries contributed more to environmental degradation and should have greater responsibility than developing countries. The CBDR principle could therefore be said to be based on polluter pays principle where historical contribution to climate change and respective ability become measures of responsibility for environmental protection. CBDR evolved from the notion of “common concern” in the Convention for the Establishment of an Inter-American Tropical Tuna Commission (1949) and “common heritage of mankind” in United Nations Convention on the Law of the Sea (1982).
NEGATIVE FEEDBACK: A negative feedback occurs when a function of an output from a system is fed back into the system in a way that reduces fluctuations in the output. A negative feedback reduces perturbations and promotes stability. A positive feedback, on the other hand, may lead to instability through exponential growth, oscillations, or some chaotic behavior. A well designed negative feedback loop can result in a system with excellent stability and accuracy. Negative feedbacks are used in many engineering applications, and are studied in control systems engineering. Negative feedbacks can be seen in biological, chemical, economic and climate systems. The Global Carbon Reward (GCR) policy is based on the presumption that a negative feedback can/should be established at the scale of the world economy in order to control the anthropogenic carbon balance. It is further presumed that a suitable negative feedback loop for the economy can be derived from an analysis of carbon pricing (see Pricing Theory).
‘CARROT AND STICK’ INCENTIVES: The phrase “carrot and stick” is a metaphor for the use of a combination of reward and punishment to induce a desired behavior. In politics it refers to the concept of soft and hard power, such as the promise of economic assistance and the threat of military action. In the social sciences it refers to offering a reward for good behavior, and a negative consequence for bad behavior. It seeks to motivate people towards actionable goals based on altered behavior. Social scientists have examined the effect of carrots and sticks on people involved in games. They found that carrots alone have little influence on cooperation, whereas the combination of carrots and sticks has a dramatic effect on improving cooperation—such that rewards and punishments act as complements in producing cooperation.