Carbon Rewards

Carbon rewards are positive financial incentives for beneficial climate action.

— Dr. Delton Chen (Founder)

Carbon rewards are positive financial incentives for beneficial climate action. They will be issued as a carbon currency, and backed by central banks. The main goal of implementing carbon rewards is to manage the anthropogenic carbon balance for protecting the climate system. Carbon rewards will also be adjusted with reward weightings to incentivise better outcomes for people and planet. Carbon rewards are not explained in economics textbooks, so the key concepts are introduced below with answers to the following four questions:

§

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 financial incentives that are offered to enterprises for undertaking beneficial climate actions. Carbon rewards are unique because they are offered and paid in a carbon currency. From the perspective of the enterprises that intend to do the mitigation work, the carbon rewards will be viewed as conditional payments for their services rendered.

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 will be proportional to the net mass of carbon dioxide equivalent (CO2e) that they mitigate over the long-term. 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 and for the entire policy.

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, 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.

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 contracts.

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 mitigated for a 100-year duration”. 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).

§

Why use a Carbon Currency?

The carbon currency is a type of representative money with powerful capacity-building features for managing the anthropogenic carbon balance.

The carbon reward is a unique type of market policy because the rewards are provided as a carbon currency, which is a type of representative money (see Carbon Currency). Each unit of the carbon currency represents 1000 kg of carbon dioxide equivalent (CO2e) that is verifiably mitigated over the long-term. By definition, the economic value of the carbon reward is equal to the exchange rate of the carbon currency—and for this reason the terms ‘carbon reward’ and ‘carbon currency’ may be used interchangeably.

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 an investment-grade currency.

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 mitigated over the long-term;
  • 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 monetary expansion.

The equivalent of several trillion USD 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 from national currencies into the carbon currency via a coordinated program of currency trading by the world’s central banks. Through this approach, the cost of climate mitigation will be channeled into monetary inflation, and the inflation will be spread evenly around the world economy so that it is socially and commercially benign. The advantage of this approach is that there will be no direct costs imposed on citizens, businesses or governments. Central banks will play a major role in the policy by expanding the supply of national fiat currencies, and using the additional currency reserves to buy the carbon currency from the open market. With this approach the exchange rate of the carbon currency will be managed/pegged, but no new debts will be created.

The carbon currency may be described as a potential new type of Central Bank Digital Currency (CBDC) however the correct taxonomy is undecided or unknown given that this is an emerging field in monetary policy. Further details on the carbon currency and its potential utility in carbon markets are provided in the sections on Carbon Currency and Pricing Theory. Links to news items, podcasts and blogs concerning this policy and related developments are provided in the news section of this website (see Carbon Coin and Central Banks).

§

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 reward and the carbon tax are understood in terms of a new theory for ‘carrot and stick’ carbon pricing (see Pricing Theory).

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 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 the GCR policy, and this involves all central banks working together to expand the global money supply in a coordinated and orderly fashion.

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).

§

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 and biophysically effective.

It is proposed here that the world economy can achieve a net-zero carbon balance in an orderly fashion if a negative feedback on carbon emissions can be implemented. The negative feedback must be self-reinforcing based on the social and biophysical relationships that are established through policy development (see Pricing Theory).

Carbon rewards appear to have the capacity to provide the required negative feedback because they work in synergy with common social behaviours—including the profit motive—and because currencies are a powerful economic tool that can be used to influence entire economies.

An important feature of the GCR is that it offers a formal resolution to the problem of dirty economic growth (see Biophysical Analysis). The resolution is the proposed negative feedback and an associated biophysical model for improving the world economy, called a closed-loop control system.

In general, a closed-loop control system is an engineered system that can maintain biophysical outputs within a pre-defined range. Closed-loop control systems are as old as the steam engine, and they are essential to the design of innumerable mechanical, chemical and electronic machines and devices. The design of an imperfect closed-loop control system for the world economy represents a major innovation in control theory, and it requires the design of a negative feedback on carbon emissions that will be effective and controllable.

It is proposed here that the GCR will have a positive transformative effect on the world economy because the social responses of the policy are inherently consistent with control system theory. This resolution to dirty economic growth is called optimal growth, and it may be considered an extension of previous interpretations of optimal growth theory. Optimal growth is not the same as de-growth because optimal growth does not follow a predefined or falling trajectory for gross world product (GWP). GWP that emerges from optimal growth will be a dependent variable, because it will result from a tradeoff between (1) global energy efficiency, and (2) global carbon safety. In other words, GWP could rise or fall depending on how the tradeoff plays out. The GCR policy will stimulate productive activity, and it will include reward weightings that can incentivise job creation, and so the tradeoff could potentially result in a sustainable rise in GWP.

An economy that achieves optimal growth may satisfy some of the ambitions of the de-growth movement however optimal growth is managed with market incentives rather than with command-and-control measures. Although some command-and-control policies will have unique advantages, it proposed here that the complete control over the means of production would be counter-productive because it will undermine the creativity and efficiency of markets.

A novel characteristic of the carbon reward policy is that it does not treat nature as capital in the conventional sense. Mixed capitalism and natural capital are models of economic organisation that depends on property rights because they treat nature as an ‘asset’ for utilisation and consumption. The carbon reward is supportive of mixed capitalism—because it supports private/public ownership and decentralised/centralised planning—but there is a key difference between the carbon reward market and the conventional markets of mixed capitalism. The key difference is that the reward market will establish an explicit value for services that are needed to protect the climate, and it will establish an implicit value for services that are needed to regenerate ecosystems and communities.

The carbon reward market is thus framed by the economics of protection and regeneration, whereas conventional markets are framed by the economics of consumption. This finding suggests that there could potentially exist a new type of mixed capitalism that we tentatively call regenerative capitalism [l].

Updated 1 May 2021

Footnotes

a REPRESENTATIVE MONEY: Representative money is a medium of exchange, often printed on paper or made digitally, that represents something that has intrinsic physical properties. Unlike fiat money, which has no commodity backing, representative money has something that is tangible supporting its face value. Representative money may be a claim on a commodity, for example gold and silver. In the case of the Global Carbon Reward (GCR) policy, the carbon currency will represent a certain mass of carbon dioxide equivalent that has been successfully mitigated over the long term.
bPOLLUTER PAYS PRINCIPLE: The ‘polluter pays’ principle is the commonly accepted practice that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment. For instance, a factory that produces a potentially poisonous substance as a by-product of its activities is usually held responsible for its safe disposal. The polluter pays principle is part of a set of broader principles to guide sustainable development worldwide (formally known as the 1992 Rio Declaration). In environmental law, the polluter pays principle is enacted to make the party responsible for producing pollution responsible for paying for the damage done to the natural environment. It is regarded as a regional custom because of the strong support it has received in most Organisation for Economic Co-operation and Development (OECD) and European Union countries. It is a fundamental principle in US environmental law.
c

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.

d

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).

e

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).

f

SELF-REGULATION: Self-regulation is the property of a system that can maintain a state of steady outcomes, whether they are social, physical, chemical or biological. It is an interdisciplinary concept that is similar to the notion of homeostasis in biology. It refers to the stable functioning of a system when the system is exposed to a changing environment. Self-regulation can emerge with the existence of negative feedback loops that produce stability.

g

MIXED CAPITALISM: Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, a price system, the recognition of private property, voluntary exchange and wage labor. Mixed capitalism allows both private property ownership and government intervention based on regulations that are deemed in the best interest of society. Mixed capitalism does not favour strong state-ownership, meaning the government doesn’t own all of the means of production. Nearly every country in the world has a mixed capitalist economy.

h

NATURAL CAPITAL: Natural capital is the world’s stocks of natural assets which include geology, soil, air, water and all living things. Humans derive a wide range of services from natural capital, often called ecosystem services, which make human life possible. The most obvious ecosystem services include the food we eat, the water we drink, and the plant materials we use for fuel, building materials and medicines. There are many less visible ecosystem services, such as climate regulation and natural flood defences provided by forests, for example. Cultural benefits may also be included in this definition of natural capital. There are risks to businesses associated with biodiversity loss and ecosystem degradation, and hence there is also a need for business to quantify its impacts on natural capital in order to manage these risks.

i

‘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.

j

CLOSED-LOOP CONTROL SYSTEM: A control system manages the behavior of other systems based on control loops. In an open-loop control system, the controlling action is independent of the process variable. An example is a heating system that operates for a set time regardless of the resulting temperature. In a closed-loop control system, the controlling action is dependent on the process variable. An example is a heating system that utilises a thermostat to monitor the temperature and provide feed-back signal to adjust the temperature. A closed loop controller has a feedback loop which ensures that the controller can exert actions that are needed to control the process variable. For this reason, closed-loop controllers are also called feedback controllers. In the case of the world economy and climate change, the Global Carbon Reward (GCR) policy aims to establish a closed-loop control system based on a new global market that will acts as a sub-system, and a negative feedback mechanism that manages the exchange rate of the carbon currency (CC/USD, CC/EUR, CC/YEN. etc.) and the reward rules. The exchange rate will be raised/lowered to produce more/less climate mitigation services to achieve a specific carbon balance (see Pricing Theory and Biophysical Analysis).

k

DE-GROWTH: De-growth (or degrowth in Engllish, and décroissance in French) is a term used for a social movement and a set of ideas that critiques the paradigm of economic growth. It is based on a diversity of ideas, but it promotes the goal of reducing global consumption and production in order to address a perceived lack of ecological and social sustainability. A common thread within the degrowth movement is the idea of replacing GDP as the main indicator of prosperity. Other ideas in the degrowth movement include the promotion of autonomy, care work, self-organisation, commons, community, localism, work sharing, happiness, conviviality, etc.

l

REGENERATIVE CAPITALISM: The term ‘regenerative capitalism’ is proposed here as the application of the carbon pricing matrix and the Global Carbon Reward policy. This is not the same as the regenerative capitalism proposed by John B. Fullerton, although there may be similarities in terms of the desired outcomes (see Wikipedia).

§