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 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.
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.