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.
A self funding control system
This proposal is one particular application of the 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.
Control market outcomes, not businesses
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.
Grow the good, and shrink the bad
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.
The ultimate model of climate action
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.
Simplicity is critical
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.
How the scheme works
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.
Nations remain free to tailor their climate action
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.
Same model for other goals
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.
How the scheme performs
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 best possible scheme
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.
One goal for each greenhouse gas
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.
Other applications for the scheme
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.
Improving the message
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. Clearly this article is meant as a work in progress, and constitutes barely a broad conceptual summary of this innovative method of controlling market outcomes via dynamic pricing and explicit goal trajectories.
A full presentation of the argument for this model of change would require more examples, better explanations, and a thorough exploration of the real challenges that might stand in the way of this model of change, especially the enormous task of building the political will, especially at the global scale.
Any feedback you are willing to share would be appreciated, whether positive or negative, because it just might help to speed the improvement process along.
15 Replies to “Global Carbon Sinking Fund”
Everything would need a meter to measure CO2 emissions…..every human , animal , plant, vehicle, building, factory emits some CO2. How do you accurately measure and tax this. How do you differentiate between a regular farmer and an organic farmer. Every level from individuals to towns to cities, states, nations would argue against their assessment. In Utopia this may work but I struggle to see this working in the real world.
Hi Sean. Thanks for your comment. Scepticism is valuable and welcome here.
The short answer is in 2 parts: much of the necessary data is already being collected, and in the beginning only big picture figures are required.
Here is the official Australian Government site for collected emissions data, and it contains a link to the official UN database of the greenhouse gas inventories of other developed nations:
The vast majority of greenhouse emissions are produced by a small number of sources: For example you can see government data here:
These categories are the only level of detail needed in the beginning, and each of these sectors will in turn have a small set of activities that are responsible for most of the emissions. There is no need to drill down any further, and in the beginning the methodology included in the proposal might be to only include the set of activities that together constitute say 90% of emissions. So everything else that together adds up to less than 10% of emissions can be totally ignored.
As long as the system can determine the approximate volume of each of the significant economic activities, and the approximate quantities of greenhouse gases emitted by those activities, the pricing signals can be calculated.
This is a big data solution, and there are enormous amounts of data available, so as the pricing signals take effect, the changes in the volumes of destructive and constructive activities can be measured ever more accurately, as can the changing values of the real world outcomes being measured, in this case the actual concentrations of greenhouse gases. So, the values used for both the correlations between economic activities and greenhouse gas emissions, and for the pricing signals, become self calibrating and ever more accurate over time.
Over the longer term, if there are significant reductions in the share of emissions coming from some of the currently dominant sources, then other sources may rise to relative significance, and the activities responsible would show up in the data as contributing to that top 90% of emissions.
We would probably want the scheme to have a finer and finer resolution over time, so that requirement for 90% of emissions sources to attract fees might be agreed to increase to say 95% after 10 years. The means for measuring activities and impacts can be rolled out gradually over time as the system works at a higher resolution, but the reality is that there will probably always be a small set of activities that are responsible for the major share of emissions, and the higher level of detail is simply not required.
In the beginning, broad strokes are good enough, and what matters most is the direction the pricing signals are pushing, and that the biggest contributors to the problem and solution are subject to the most powerful incentives and disincentives.
Brandon, not related but this was the only spot I was able to find in order to make contact.
Have you written a piece on ‘Housing Affordability’ specifically?
If you have, I’d really like to read it. (I have more questions).
Hi Anita. The giant housing price bubble is certainly a major cause of financial and economic dysfunction in Australia, and many of the factors driving it are doing the same harm in many other countries too.
It is also potentially a political minefield and would be a real challenge for me to navigate objectively, or for me to be seen to be analysing objectively from various points across the political spectrum.
The bottom line cause for the enormous bubble of asset price inflation, in housing and across all financial sectors, is that there is far too much money in the system, because there is no longer any effective control over the money supply. It might not help a lot, but my article on Fixing Finance and transcript of Nicole Foss on financial dysfunction both cover the broader analysis.
That said, if you have further questions, feel free to ask, even if they are not relevant to my posts.
I recently summed up this scheme in a comment on another site, here:
It may be an easier argument to challenge or debate here or elsewhere than the long post. The relevant content:
The ideal scheme would instead be global, based on an extension of the Paris Agreement, with a new global mechanism for controlling total net emissions worldwide, according to an agreed trajectory.
The scheme would have a simple global price on all emissions, from all sources, in all countries, with no exceptions, loopholes or complexity. The revenues would all flow into a single global fund, to be fully distributed for total sinking of greenhouse gases.
A global agency would administer the scheme, with absolutely transparent and accountable processes. It would issue regular invoices to all nations, perhaps yearly, or quarterly, with a total fee for the total volume of national emissions, and a rebate for the total volume of sinking.
Obviously, national governments would be trying to minimise the emissions intensity of all their industrial sectors in order to minimise costs, while doing everything possible to protect and regenerate natural carbon sinks in order to secure a share of the enormous revenue streams. The carbon sinking capacity of agricultural soils is enormous, although not infinite, so there would be plenty of incentive to make the switch to regenerative agricultural practices as quickly as possible, in order to take advantage of a very high rebate price for sinking in the beginning, when volumes of sinking are low globally, The goal of reducing net emissions would finally be aligned with government objectives to maximise national income.
The simplicity of the scheme is critical. It is what makes it so powerful, so efficient, and totally immune to political interference or being gamed by corporations and nation states.
At the national level, governments would be required to use exactly the same approach, a single pool collecting fees from economic activities that emit greenhouse gases, with the revenues fully distributed to activities that sink greenhouse gases. The agency administering the scheme at the national level would issue invoices with fees and rebates to the businesses and other organisations involved.
These pricing signals would ensure that the costs of all greenhouse gas emissions are embodied in the prices of all business inputs, and that the emissions sinking value of all natural carbon sinks like forests and soils was not just acknowledged, but automatically rewarded with direct revenues. The pricing signals would be dynamic, rising and falling according to the overall market response. If net emissions were tracking above the target trajectory, the pricing signals would automatically rise to increase the effects of the incentives and disincentives. And when net emissions were already falling ahead of the required trajectory, the pricing signals would automatically be reduced. If the reality proved that achieving net emissions reductions was actually much easier than expected because of the power of the market guidance mechanism, there would be scope for negotiating a more ambitious trajectory for net emissions to follow, and so to speed up the transition to a low emissions economy.
Obviously under the new market dynamics, the businesses that can innovate most rapidly to reduce the emissions intensity of their goods and services will become far more profitable, at the expense of those businesses that are slow to exploit the new market incentives and disincentives. The race would be on between nations to become net carbon sinks, and between businesses to have as low an emissions footprint as technologically possible.
Such a global scheme might seem improbable, but we do have at least the Paris Agreement as a starting point, even if in its current form it really is a dog’s breakfast of unnecessary complexity. We can keep the targets, add the pricing mechanisms to fund carbon sinking at the exact level required to solve climate change on the global scale, and get about serious negotiation of the new global agreement.
thanks for information
I’d just like to ask if you’ve checked the Fossil Fuel Non-Proliferation Treaty Initiative to see if it accords with any of your ideas. I’ve only skimmed through them, but it may be worth a shot.
If it doesn’t, keep thinking and writing. Although I have absolutely no power to assist you in any other way, you have a long-time fan in me. 🙂
I’ve got to tell you this is a fantastic piece of work here. I was pointed here from the conversation.com a recent article where one of the repliers had posted this link .
I really wish that something like this would occur, however I think the fundamental issue is outlined below:
Humans are incapable of large scale societal change.
Capitalism transforms even the most spectacular productivity gains not into abundance and human freedom, but into new forms of artificial scarcity.
Instead of translating productivity gains into shorter working hours, higher wages and guaranteed employment, capitalists have captured the benefits for themselves, increasing private profits while keeping wages low and retaining the threat of unemployment to discipline labour.
Given that capitalism requires endless growth to extract maximum profit, any strategy that does not take into account which part of the economy should grow, and which should not, is going to fail in the long run.
As convincing as the documented negative physical effects on society are, it’s also crucially ever more irrefutable that humans are simply not equipped to behave any other way than to grow without voluntary restraint, until we deplete the resources we need to survive, and overwhelm the environment with pollution until it is so toxic that it is poisonous to virtually all forms of life. We are basically an invasive species with no more self restraint than cancers or yeast.
This is where even the most dire voices about climate change often err. It’s not libertarianism, or capitalism, or western civilization that has led us to this predicament – rather it is humanity’s exponential growth, in numbers and complexity, in technological capability, medical advances, in extraction and consumption.
We are literally consuming the planet.
The imperative to grow and consume is primordial and we cannot eliminate this biological trait despite our desire to believe in free will.
Curt, your assessment is a similar conclusion to mine.
We have developed enormous intelligence that has propelled our growth but we can’t harness that intelligence to stop our decay. We are the only species to go into plague proportions and have any self-awareness (limited though it is) of our actions causing the problem, yet can’t stop the behaviour.
It is the very definition of a tragedy.
To reconcile this dismal conclusion is not easy. My best attempt is to view human progress, like most growth, as neither steady nor evenly spread. To even be able to consider the dilemma is a contemplation of the privileged – it requires a reasonably high level of education, absence of debilitating disease, fear of immediate death or violence, lack of hunger and a degree of mental stability – a small percentage.
Then we face the limits of our adaptation. We’re pretty good at seeing the consequences of our actions for our immediate or even extended families. We do quite well at operating co-cooperatively at the village level. Larger groupings that have enough to eat, good health and low levels of violence can do OK up to an extended tribal/provincial level, but beyond that we start to see the Limits of Altruism. Our faith in what-goes-around-comes-around doesn’t go this far, distrust levels rise, and we retreat to the interests of the tribe or the self, the level to which we are comfortably evolved.
We have managed to build an enormous population clustered in massive communities, under the thin veil of ‘civilised society’. People live under constant stress because the numbers are beyond their capacity to trust, beyond the level of our evolution, leading to unrest and aggressive policing to control the symptoms. Tribalism returns, less on geographic lines than race, religion, politics, chat-group. When stresses rise we shrink from altruism and thinking globally. The recent ‘vaccine-nationalism’ was a case in point (even in the EU) as was the rush for toilet paper.
If we solved both hunger and fear of hunger, and educated all to a high standard, then we might turn around the population plague. But that isn’t going to happen because of the limits to altruism, so we won’t achieve the preconditions for adaptation to living in a multi-billion tribe. The underlying traits of greed and ensuing propensity to violence hasn’t evolved much either. So I conclude the need to forgive humans for being inconsistently evolved, well short of the PR profile, and try to live my life as a contented being while adding as little as possible to the problem side of the equation.
Hi David. Excellent comments from you and Curt, and I almost completely agree with both.
But we don’t have to change human nature, we just have to tweak the system, and do it in a way that serves the interests of those who ultimately own and operate it.
There may very well be limits to altruism, as you say, but ultimately fixing the system is critical to survival, for all of us, so it is in our self-interest, which probably has no real limit.
So I think fixing the system is not necessarily too hard, it is just a matter of very good solutions, wrapped up in very, very good marketing, that makes those solutions appeal to the necessary demographics, including the global elites.
I would love to see more discussions like this, including all of the reasons that people think solutions on the scale I am advocating can not and will not happen.
I would also greatly appreciate any suggestions people may have about how that very good marketing for this carbon sinking fund might come about.
If we get the marketing right, then all it takes to get a solution adopted is one moment of collective sanity, a global agreement to implement a global scheme, and then all the humans, governments and businesses in the world can go back to pursuing pure self interest, and the control system will drive net emissions along the required trajectory regardless.
A Concession for Developing Countries
Frank Tuijn commented on The Conversation:
My response was:
I would like to add this (the thread had closed before I could post it):