This article presents an overview of a powerful and elegantly simple solution to address climate change. If adopted at the global level, it would allow climate change to be controlled at its very cause, which of course is the dangerous concentrations of greenhouse gases in the atmosphere.
This proposal is one particular application the a self funding fee-rebate model, which uses pricing signals to control market outcomes. Briefly, the model has a specific goal for each market outcome, which is something that can be measured in the real world, and a desired trajectory for that goal to follow over time. There is a cost price applied to economic activities that drive the market outcome away from the desired trajectory, and a reward price that is paid out to economic activities that drive the market outcome towards the goal trajectory. The revenues collected from destructive activities are fully distributed to constructive activities.
The pricing signals are dynamic, and will rise and fall according to the measured performance of the market outcome compared to the desired trajectory. If the market has outperformed the target, the pricing signal will be reduced, and if the market has under-performed the target, the pricing signal will rise to increase the power of the incentives and disincentives.
The pricing signals will control aggregate market behaviour with respect to the particular goal, without dictating to market participants how to go about their business. They will of course try to maximise their profitability, by changing their business activities to better exploit the new incentives and better avoid the disincentives created by the pricing signals, but the way they find those efficiencies and innovations is completely up to them.
The overall effect of the pricing signals is to cultivate and maximise the volume of economic activities that serve the goals, and to minimise or even eliminate economic activities that harm the goals. The ratio between the volumes of constructive and destructive activities is controlled by the dynamic pricing in an increasingly precise method of forcing the overall goal outcome to follow the specific trajectory laid out for it.
This model of control, armed with just the singular goal of controlling greenhouse gas concentrations, would be an absolute game changer. The actual costs of emissions and the actual value of carbon sinking would be embodied in the prices of all inputs to economic activities, so every economic decision would automatically take into account the impacts on greenhouse gas concentrations.
There are many approaches that public policy could take to addressing climate change, and a variety of schemes already in operation in jurisdictions around the world. In fact, there is such a diversity of schemes, that there are now published criteria by which to measure and compare their quality. So, after outlining the proposal for a global carbon sinking fund, it will be measured against the Grattan Institute’s criteria for an effective climate policy. A comparison of this model against carbon trading schemes and other climate policies will be published in a later article.
Many if not all of the proposed and active schemes to address climate change are far more complex than we actually need, and they do not achieve anything more than a much simpler scheme could deliver. The complexity comes with enormous costs, including making it difficult or impossible to ensure full accountability which means the schemes can be easily gamed and manipulated. Complexity also means that schemes are very expensive to properly administer, are very inefficient in terms of the time and energy required to change actual outcomes, and are also very difficult to explain and sell politically, which when it comes to climate action might be the greatest barrier of all.
In contrast to that unnecessary complexity, a simple scheme like a Global Carbon Sinking Fund would operate like this:
A simple global price on all emissions. The same price would apply to all countries and for all sources of greenhouse gas emissions. There are no exemptions or adjustments of any kind. There is nothing to trade. Nations pay into a single global fund for the full volume of their emissions.
A simple global price for all carbon sinking. The Paris agreement includes a vague plan for “a balance to be achieved between the rate of greenhouse gas emissions and the removal of these gases from the atmosphere.” This requires a large increase in carbon sinking, the extraction of greenhouse gases from the biosphere via natural or artificial processes. Nations receive revenue from the fund for the full volume of their carbon sinking.
A desired track for greenhouse gas concentrations to follow. The Paris agreement aims to achieve that balance, the point at which the volume of emissions equals the volume of carbon sinking, “by some time between 2050 and 2100.” This trajectory would be a smooth curve that starts from where concentrations are now, rises at a slowing rate for the near future as emissions start to fall, flattening out at a peak as we reach zero net emissions, the point of “balance” called for in the agreement, and continues on into negative emissions within the required time frame.
Protection and regeneration of natural carbon sinks. All money collected from nations for their emissions would be distributed to nations for their sinking, so the revenue for carbon sinking would be enormous. For example, if there were 10 tons of greenhouse gases emitted for each ton extracted from the biosphere, then the reward price for carbon sinking would be 10 times the emissions price. Nations that preside over natural carbon sinks like mangrove systems and rainforests would be paid large streams of revenue for preserving these natural sinks, and restoring them where possible, giving them all the incentive they need to get serious about halting the destruction currently under way.
A booming carbon sinking industry. With a huge financial reward on offer for new technologies with the potential for industrial scale carbon sinking, there would be start-ups and research projects popping up everywhere around the world, and finance corporations would be very keen to fund them. It would be a booming industry from day one, drawing in the best minds from a wide variety of science and technology disciplines (perhaps away from fossil fuel related industries, pharmaceuticals, and junk consumer products) and would grow exponentially until we were well on top of this crisis for good.
The economic and social benefits could be profound, along with the obvious environmental gains. Nations would be in competition to foster the best possible research and development environment, in order to secure a share of the enormous revenue stream. Part of the global fund can be held back until feasible technology begins to emerge, so in the beginning the natural carbon sinks will be doing all of the work and receiving all of the reward.
A game changer for all existing sustainability projects. The new pricing dynamics would serve not only businesses involved directly in carbon sinking, but would also generate an enormous boost for all projects and technologies aimed at reducing our collective carbon footprint. These opportunities have been effectively hamstrung up to now by the competing political goals of economic growth and sustainability. But under the new scheme, those two goals are in exact alignment, and things that become more sustainable will systematically become more profitable, because all material and energy inputs to any business activity will have their emissions price embodied within their purchase price. So there will be new waves of investment in these opportunities, along with rapidly declining political resistance and inertia.
Regular pricing signal adjustments. Greenhouse gas concentrations will be continuously measured and plotted against the desired trajectory. Periodically, for example once every three months, the price is adjusted according to how well it is working. When the real world outcome is not meeting expectations, the pricing signal is raised, and when it is exceeding expectations the pricing signal is reduced.
Certainty for business investment. Fluctuations in the pricing signals will dampen over time, as smaller and smaller adjustments will be needed as the market adapts to and exploits the incentives on offer more smoothly. When combined with a clear future trajectory laid out for greenhouse gas concentrations, there comes real certainty for business about a stable climate policy environment and the direction of steady change, dramatically reducing risks to longer term investment. Increased investment in lower emissions intensive activities serves to further speed up the transition to a lower emissions economy.
More ambitious targets. As the scheme proves effective, and far less disruptive than might have been anticipated, there would be scope to agree on a more ambitious trajectory for the reduction in greenhouse gas concentrations, and so to reduce the risk of tipping the climate into dangerous instability, and increase the rate of progress towards full sustainability.
Other global goals. With the pricing mechanisms proven effective at addressing greenhouse gas concentrations, other serious threats to sustainability can be addressed using the same approach, such as the management of the depletion of critical finite resources, and the preservation of local ecosystems to ensure the stability of the global biosphere.
This is a simple, elegant and powerful solution, with enormous advantages over carbon trading schemes. Each nation could employ whatever policies considered most appropriate for its circumstances, including its set of natural carbon sinks and its political and economic dynamics. There are no promises or commitments required, because the flows of revenue are based purely on the measured real world outcomes.
The same conceptual approach of using destructive activities to subsidise constructive ones could be used for any goal that we might set for the economy to serve.
So, now to compare this model to the Grattan Institute’s criteria:
Credibility: ability to meet current and future targets. Yes, the pricing signals are uncapped, and can rise to overcome any level of market inertia to change. With a mix of both positive and negative signals, the market will want to head in the direction of change, and inertia will be minimal.
Political viability: capacity to evolve from current policy settings and achieve bipartisan support. Absolutely. Being governed by a smooth continuous curve, outcomes will change almost imperceptibly over time, but will accumulate exponentially. As the pricing signals grow to do more of the heavy lifting, old policies can be gradually removed, resulting in a simplified system that everyone can understand and that carries very little administrative overhead. With imperceptible rates of change, there are no short term losers, and the politics is dramatically simplified as a result.
Flexibility: ability to adjust for changes in targets, political and technological developments. Certainly. Changing targets under The Global Carbon Sinking Fund requires simply setting a new trajectory for the desired outcome, and this will be automatically reflected as prices are adjusted periodically in the normal operation of the system. Political developments have no impact on the operation of the Fund, because there are no exceptions or complex rules at all – all that matters is the total volume of emissions and the total volume of carbon sinking. Technological developments are exactly what the Carbon Sinking Fund will create – it is an innovation driven market system – and the mix of technologies will evolve to best exploit the pricing dynamics.
Adaptability: potential to move towards an economy-wide market-based scheme. Perfect adaptability. We can add more goals or adjust existing goals over time, and this introduces no complexity whatsoever. Each goal works exactly the same way, and the pricing signals are set by exactly the same process, so there are no challenges at all to directing the economy to deliver any set of outcomes we want.
Public acceptability: ability to be understood and accepted by the community. Definitely. It is simple enough to be understood by school children. For example, a parent could explain to a very young child that: The system takes some money from the bad things, and gives it to the good things. This makes the good things grow bigger, and the bad things grow smaller.
Low cost. There are essentially no costs. Given the large flows of revenue involved the administrative overhead is practically zero.
Clearly the proposal easily meets the criteria on every count. It is a self funding market solution to climate change, guaranteed to steer the market behaviour towards sustainability, to whatever extent the Earth system still has the capacity to return to its long term patterns of self-regulation, and dependent on whether we humans as a collective have the good sense to adopt such a powerful scheme and soon.
Carbon dioxide is the primary contributing greenhouse gas, but it is not the only significant one. For the sake of simplicity here I have used the familiar shortcut ‘carbon sinking’, but this scheme could easily control the concentrations of each of the gases involved, without adding any complexity at all. We would simply have a different target trajectory for each greenhouse gas we decided to control.
The dynamic pricing signals would be different for each gas. So, if carbon dioxide concentrations were tracking above their target trajectory, the pricing signals for carbon dioxide emissions and sinking would rise. If methane concentrations were below the trajectory, the pricing signals for methane emissions and sinking would fall.
The self-funding fee-rebate model will be explored for other applications in upcoming posts, so stay tuned. This model could transform the economic system and grant us the power to control all social, economic and environmental outcomes that we might set as our collectives goals.
A limited fee-rebate model has already been used by several European countries to improve the efficiency of new vehicles being sold into their markets. Those schemes using static pricing mechanisms, or ones that have predetermined step-up or step-down values over time, unlike the dynamic signals in the model presented here, which can rise to whatever levels needed to force the overall market response to follow the desired trajectory.
Thanks for reading. Please leave a comment if you have questions, objections or doubts about the model presented here, or even just to give your impressions of this post.