Could a ‘carbon coin’ solve the climate crisis?

Energy

Dealing with climate change can seem impossibly costly. By all accounts, the toll will be many trillions of dollars annually for many years to come.

So far, efforts have been patchy and painful. Washington is momentarily engaged in a high-wire act to fund a multitrillion-dollar, climate-focused package that could make or break Uncle Sam’s decarbonization effort.

Even more modest sums are tough. To date, rich-world pledges to subsidize poor countries’ climate costs  — to the tune of just $100 billion per year — remain unmet after a decade. Far tougher challenges and much higher costs lay ahead, so the prospects look grim.

What if there was a way we could fund the climate transition by creating a new global currency, off the books of national and corporate accounts?

The currency could be used to reward each ton of carbon abated, whether via cleaner energy, cleaner business or direct carbon removal and sequestration. Such a regime could not only turbocharge public and private climate investment. It could also pay to protect ecosystems, which today struggle to find funding. This regime would also be politically transformative. Corporate boards and policy makers could shift from fighting over funding to planning action.

What if there was a way we could fund the climate transition by creating a new global currency, off the books of national and corporate accounts?

From today’s system based mostly on sticks — taxes and rules — a reward would incentivize decarbonization (carrots). Just like people, global economic systems change faster with a mix of carrots and sticks.

If any of this is sounding familiar, a similar system plays a central role in Kim Stanley Robinson’s latest work of climate fiction, The Ministry for the Future, a novel tipped as a top read by Barack Obama and Ezra Klein, among others.

In the story, as the climate crisis worsens, the world’s top central banks go from cautious recalcitrance to urgent collaboration to create a global “carbon coin” to fund decarbonization. Robinson name checks the inspiration for this financial solution as “the Chen paper.”

Carbon rewards

Turns out, Delton Chen is a real person, who co-authored the real academic paper that inspired Robinson and that informs an increasingly ambitious vision to overhaul the world’s economy: the Global Carbon Reward.

Chen’s academic roots start in Australia with a Ph.D. in engineering. Around 2013, he shifted his focus to explore the barriers to addressing climate change. Clear as the science seemed, economics emerged as the key problem. Something was not working.

At a high level, he describes the global economy as an incomplete system, missing a key price — for risk — that could help resolve the climate problem. Activists like Greta Thunberg, says Chen, argue that we already have all the facts and solutions to solve the climate crisis: “I’m saying that’s not true. We don’t have all the answers because the funda­mental economics of carbon pricing appear to be incomplete.”

To fill this gap, Chen proposes a new digital global currency, created by central banks to fund a wave of global monetary policy that he calls Carbon Quantitative Easing, or CQE. That new currency is used to pay out Global Carbon Rewards, a flow of incentive payments to permanently fund the mitigation of greenhouse gases.

Chen’s theory is complex, and much of it exceeds my financial fluency — for deeper details, see links at the end of this note. That said, its high-level features are accessible and link to real world developments.

They include:

Carbon currency. One wouldn’t use Chen’s carbon coin day to day to buy groceries or gas. Rather, each virtual coin is “struck” based on the value of one metric ton of CO2 equivalent mitigated for a century. Central banks will manage the rate of conversion — into dollars, Euros, renminbi, etc. — to appreciate annually.

Because its value rises, the coin creates a reliable price signal to help companies finance costly transition plans — such as the shift from oil to green hydrogen — that are hard to finance today absent a known future value of carbon removal.

Governance and knowledge base. This system would require the transformation of existing institutions and the development of new ones too. Longer term decisions about setting the target value of the coin would be set by an authority, guided by a cost abatement curve for the planet. As the value of the coin goes up, year after year, markets would have a rising incentive to tackle increasingly gnarly decarbonization challenges.

To manage the award of coins, this system would include a registry of registries, tracking worldwide claims on carbon abatement to avoid double counting and related abuses. Such a library of methods and successes promises other benefits, too: a global, open-source repository of best practices to accelerate mitigation.

Social benefits. Today’s carbon frameworks fail profoundly to price in harder-to-quantify damage to people, culture, and ecosystems — from the extinction of a species to the desertification of rain forest. As part of the coin’s governance system, stakeholders — from indigenous peoples to environmentalists — would have input into the valuation of reward allotments.

Precursors

As Chen’s plans gain attention, real-world financial trends that are moving in a similar direction:

Central banking. Chen’s CQE stems in part from the emergence of quantitative easing (QE) around 2008. In response to the mortgage-backed securities crisis, the Federal Reserve deployed a then new approach, which — at the risk of oversimplification — let central banks issue new debt with one hand while buying it back with the other, thereby creating new assets, and keeping credit flowing into an economy at risk of freezing up.

Skeptics howled the tactic would unleash a tsunami of inflation. They were wrong. And since then, QE has become a favorite of the world’s central banks. To date, they have funneled over $25 trillion in QE funds into the global economy, including some $9 trillion in response to COVID-19 economic disruptions, per an Atlantic Council tracker.

At a few trillion dollars per year, the river of money already created through QE is in the ballpark of the anticipated price tag for climate adjustment. And as central banks adopt the technique, they are beginning to harmonize efforts.

Chartered to maintain financial stability, sometimes measured by unemployment and inflation, central bankers are beginning to regard climate in the same frame, Chen contends. From implicitly defending housing lenders in 2008, it’s not a far leap to imagine bankers recognizing climate collapse as a fundamental systemic risk.

There are early signs of such a shift. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), launched in 2017, is a group of 80-plus central banks and supervisors, including the Federal Reserve. Besides advancing finance sector practices around climate risk management, NGFS members are working “to mobilize mainstream finance to support the transition toward a sustainable economy.”

Verification. The elements necessary to validate a global carbon currency are also coming together. Such a regime would require a platform of trusted technologies to assess and track carbon remotely in order to allocate payments.

Verification technologies are multiplying quickly. Startups such as NCX today use satellite imaging and AI processing to better monetize forestry carbon credits. A new generation of satellites able to remotely assess CO2 emissions is already outing previously unidentified mega-sources of GHGs. And these same systems can likewise pinpoint the growth of CO2-sequestering greenery.

Precedents for a coordinated global currency action exist.

Meanwhile, the technical and regulatory infrastructure of carbon offset tracking — however imperfect — is improving. In North America alone, a half dozen or more have emerged, including the Alberta Emission Offset System Registry and the California Air Resources Board.

Precedents for a coordinated global currency action exist, points out Frank Van Gansbeke, professor of the practice at Middlebury College, where he focuses on finance and capital markets. Though he developed his work independently from Chen’s, the two now regularly review and discuss developments.

Where Chen approaches the financial problem as a science-based outsider, Van Gansbeke comes to it as an former investment banker, focused more on working with existing financial institutions. He considers the planet’s finite carbon reserve the ultimate monetary policy target, from which all other debt instruments should be priced.

Van Gansbeke points to Special Drawing Rights as a possible precursor. Created in 1969 by the International Monetary Fund, as a kind of meta-currency, the IMF uses SDRs today to support national economies suffering balance of trade or other economic crises.

Used together with other reserves on the IMF balance sheet, SDRs could be used as collateral to create a climate coin. Designed as an anchor currency, the IMF unit would be a “stablecoin”: a blockchain-supported currency backed by a share of real assets in land and forestry, new climate technology ventures and the top 150 ESG compliant companies.

With a modified remit, says Van Gansbeke, the IMF has the operational capacity and expertise to take such a step. For their third-party verified GHG reductions, emerging market countries would receive a settlement in IMF climate coins.

The proceeds could then be used either as collateral, as means to repay debt or as a tool to undertake debt restructurings or foreign exchange intervention. The IMF climate coin would not only impart strong pricing signals across all market segments, but also facilitate capital allocation in a carbon adjusted manner.

For more Van Ganspeke’s plan, check out his detailed post at Forbes.com,

What next?

Could a carbon currency make the leap from science fiction to reality? When Chen’s seminal paper was published a few years ago, it might’ve been easy to wave it away as deeply researched wishful thinking.

But in the years since, much has changed: climate urgency is rising and the financial zeitgeist is shifting, as economists and financiers ponder the once-imponderable, such as minting a trillion-dollar coin.

Rewriting the rules of the global economy to manage a risky transition isn’t all that rare, either. In the 20th century, it happened twice: once, with the 44-nation agreement at Bretton Woods to reboot the world’s economies after World War II; and again, in the 1970s, with a shift away from the gold standard. Today, the rise of digital currencies and growing risks of climate change are so disruptive that another transformative moment seems likely.

Both Chen and Van Gansbeke are moving forward with implementation plans.

At the upcoming COP26 in Glasgow, Van Gansbeke and a team of finance experts will announce the Rethinking Bretton Woods initiative, in which a climate coin will be a track.

For his part, Chen is focusing on testing. His nonprofit is seeking sponsorship and grants to create a proof-of-concept demonstration in California. The demo will include a few other countries and will last a few years to showcase a variety of technological innovations. Central banks are not essential to this trial, says Chen, because their monetary role will be simulated.

In the realm of carbon currency, reality is beginning to overtake the hypothetical, as Kim Stanley Robinson put it in an interview with Bill McKibben:

It’s one of several things that’s happened since my novel came out that made me realize that in some ways, I was behind the curve in Ministry for the Future…. I found it very encouraging because we need these things. And there’s a general tendency over social media to doom and despair. We cannot get into doom. We have to actually look at all of the good work that’s already being done.[AA2]

For more on Chen’s work, start with the news page at his GCR site. To hear him explain the program in detail, check out episode 57 of the Carbotnic podcast before diving deeper into Chen’s writings.

Quick as it’s growing, the sustainable investment industry is still too small to drive a global transition to a low-carbon economy, the IMF notes in its semi-annual Global Financial Stability Report. To help it expand, governments must do more to protect investors from being misled by greenwashing, the report finds. Climate-focused investment funds remain a sliver of the overall investment universe: at end 2020, funds with a sustainability label amounted to 7 percent, or $252 billion, of $3.6 trillion in total assets.

More investors are poised to join that pool. According to FTSE Russell’s latest update of its Sustainable Investment: 2021 Global Survey Findings from Asset Owners, 84 percent of asset owners are either implementing or evaluating sustainability into their portfolios. Accordingly, the large majority of asset owners regard sustainable investment regulations favorably.

The financial zeitgeist is shifting, as economists and financiers ponder the once-imponderable.

Regulators are moving in that direction, too. As voluntary decarbonization commitments multiply and investor pressure rises, so too are calls for clearer standards. And now executives at big listed companies are asking the Financial Accounting Standards Board to set accounting rules related to ESG issues.

Meanwhile, over on Capitol Hill, U.S. Securities and Exchange Commission chair Gary Gensler testified that the SEC is considering phasing in requirements for companies to report their greenhouse gas emissions.

Led by the Carbon Disclosure Project, a collation of 220 investors managing over $30 trillion in assets has called on 1,600 companies to set science-based targets. Quantitively aligned with Paris goals, SBTs are notably rigorous, spanning emissions from scopes 1, 2, and tough-to-manage 3. Last year, CDP’s push netted 150 companies to commit to SBTs. Those that do typically cut emissions by 6.4 percent per year, well above the rate needed to hit Paris’ 1.5°C target.

Speaking of tough-to-manage scope 3 goals: A bevy of big companies announced net-zero commitments, including their scopes 3. Fast food giant McDonald’s and Mars, a UK confectioner and pet food maker, were joined by an iron ore producer and cement maker from down under.

Supply chain factors make up a huge slice of scope 3 for most companies. It follows that more firms are focusing on the challenges posed by their supply links, particularly in the wake of COVID-19-related supply-chain disruptions. Over half of executives surveyed say their firms are prioritizing funding for supply-chain sustainability, according to a survey released by research firm Verdantix.

Building and design software giant Autodesk issued its first sustainability bond, valued at $1 billion. The San Rafael (Calif.) company also announced that it achieved net-zero greenhouse gas emissions across its business and value chain for the first time in its fiscal 2021.

Bloomberg Green marks the 10th anniversary of the “Carbon Bubble,” a groundbreaking report that was among the first to link the planet’s finite carbon budget with the rising risk that fossil fuel players would face collapsing asset values. “A lot of what it warned of has already come to pass,” notes Kate McKenzie. “AngloAmerican had to pay to hive off its South African coal mines. Even Exxon had to write down the value of its reserves.”

And as part of Google’s 2021 sustainability announcement, the software giant unveiled a buffet of new eco-friendly features to help companies and consumers reduce their emissions. These include a way to sort flights by carbon emissions along with new mapping features that factor in congestion and road incline to help truckers use less fuel.

For more on Chen’s work, start with the news page at his GCR site. To hear him explain the program in de-tail, check out episode 57 of the Carbotnic podcast before diving deeper into Chen’s writings

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