Q&A: Carbon Currency Explained

Surprising as it may seem considering the elevated status of the banking and finance industry, humans are not good at economics. The current economic systems will not cope, says the Bank of England. In almost 30 years since the first UN climate negotiations started, in 2019 before the pandemic global CO2 emissions were rising as fast as ever.

All policies introduced so far have fallen short. This isn’t helped by the fact that the United Nations base a lot of their economic predictions on modelling by the Nobel Prize-winning economist William Nordhaus in the 1990s and 2000s which economists now say is so wrong, it should be thrown out – see the Nobel prize-winning economics of climate change is misleading and dangerous – here’s why.

Society has spent the last 250 years developing an economy based almost exclusively on burning carbon, and we are giving ourselves 30 years to turn this around and hit zero carbon emissions by 2050 (or preferably sooner if at all possible).

This would go down in history as the most astounding social, political and economic success.

How can our political system provide a thousand smart, rigorous and radical answers to the thousand or more changes that are needed to decarbonise our lives? Persuade a democratic majority to tolerate it? And keep up the momentum for 30 years or even raise the bar?

The chances do not look good in 2021, as most corporations across the globe are badly off-target, most government actions are not compatible with their targets, and policy experts warn that governments risk being overwhelmed by the challenge (“decision lag”).

But instead of trying to deal with all the thousands of issues politically, we can set up one major umbrella framework now: an economic mechanism – a carbon currency based on universal carbon credits – to cover everybody in all parts of the economy.

After that, the actions of individual citizens deal with every issue. Our actions as citizens drive decarbonisation throughout commerce and industry.

We cannot be radical enough in dealing with these issues.

Sir David Attenborough at the UK House of Commons Business, Energy and Industrial Strategy Committee 2019, New Scientist.com

Recent credible opinion polls show that a large majority of Europeans and US citizens in all nine countries surveyed agree that climate change requires a collective response, whether to mitigate climate change or adapt to its challenges.  Majorities in Spain (80%) Italy (73%), Poland (64%), France (60%), the UK (58%) and the US (57%) agree with the statement that “we should do everything we can to stop climate change.” The EU Reporter, quoting the Open Society European Policy Institute.

“Total Carbon Rationing” is how we originally referred to the idea of Universal Carbon Credits as a Carbon Currency. It’s kind of snappy, you can make a 3-letter abbreviation out of it and it contains the word “Total” because every product or service that is bought and sold is subject to the system: every vendor, every merchant, every shopkeeper, every professional who trades in any sense must put a carbon credit price tag on their product or service next to the usual price. But it came across too extreme.

The process is driven by the energy companies who must obtain enough carbon credits to account for the fossil carbon pumped out of their oil and gas fields. Anybody or any business that burns carbon-based fuels would not be able to do so without paying the carbon credits to the fuel supplier. The carbon credits flow from citizens to energy companies in a direct chain of retail and wholesale commercial transactions.

This is the same. It is a robust system to bring CO2 emissions down to zero. It’s carbon rationing, with a major enhancement (the currency). It is a tuning mechanism for the economy that lets society balance CO2 emissions reduction against economic impacts, that stimulates all the right businesses, and is fair and equitable.

To ration is:

to limit the amount of a particular thing that someone is allowed to have; government intervention in a state of emergency (typically war) to ensure that the population is guaranteed fair allocation of scarce commodities

Cambridge Dictionary

Carbon rationing does not quite meet this definition: fossil fuels are not a scarce commodity. Otherwise it is the same: a Universal Carbon Credit (UCC) is a simple allowance, given in kilos of carbon, paid electronically into a digital carbon account, to citizens. Children would receive a percentage, increasing from a small fraction to almost 100% for teenagers. We, the citizens, are the ultimate reason why CO2 emissions occur and through this framework we would directly determine how CO2 emissions are reduced, by choosing where we spend those credits.

UCCs cover all CO2 emissions from all human sources. The total amount of credits in the economy directly limits the amount of carbon – fossil fuels – that is allowed to be pumped out of the ground. All UCCs used in industry, government, finance – everywhere – would come originally from the citizens. Industry and commerce, without any UCCs of its own, obtains UCCs from their consumers for use at every stage of its business.

For example, whoever wants to purchase a new car, must pay the car dealer in money and UCCs. The car dealer pays the car manufacturer with UCCs as well. The manufacturer pays several suppliers, also with UCCs, including a steelworks, an energy provider, a battery manufacturer and so on. The steelworks obtains its UCCs from its customers, like the car manufacturer. It knows how many UCCs to charge, because it has to pay UCCs for the energy it uses in its furnaces – whether to a fossil fuel supplier or, in the future in much smaller quantities, to a renewable energy source.

To prevent people or businesses falling off a carbon cliff edge, anyone can sell the Universal Carbon Credits they don’t need on the centrally regulated carbon market to those people and businesses that need to buy more. Read about Personal Carbon Trading here, including the answer to that old chestnut “doesn’t Personal Carbon Trading mean the rationing is less effective?”

The energy companies who pump fossil fuels from the ground are audited to ensure they obtain credits for every kilo of fossil carbon extracted. This at-source auditing polices the entire system and ensures the value of the credits – no credits means no fossil fuel. A central carbon bank would take on this role, as well as being the primary distributor of carbon credits to citizens, and the regulator of the carbon credit exchange. This counteracts the concern that we will see repeats of the sort of horror stories that surround the European Emissions Trading Scheme where huge windfall profits were allowed as a surplus of €4.1billion in allowances were captured by ten companies (known as the carbon fat cats in the iron, steel and cement industries), four times the entire EU environment budget over the same period. Read more about the darkest days of the EU ETS: the Ember/Sandbag Carbon Fat Cats 2011 Report.

Carbon taxes are much cheaper and a good place to start, but it is not enough and ultimately it does not directly control fossil fuel supply if people are prepared to pay more.

The world’s highest regarded “tax and dividend” law in British Columbia, Canada partially suppresses the use of fossil fuels and distributes the taxes equally to its citizens. However, it doesn’t solve British Columbia’s problems, with the provincial government locked into fossil fuels via state subsidies and complex legal wrangles at every attempt to improve it.

For every legislative success, there are twice as many policies which fall short, if it is even possible to work out how effective the tax is.

On its own, a carbon pricing policy is simply not enough.

Carbon taxes and emissions trading schemes never cover everything, always leaving out emissions for imported products, aviation, shipping, the public sector. The World Bank’s Carbon Pricing Dashboard makes it clear how painful the path to 100% coverage & emissions reduction is – last year despite all the talk, carbon pricing coverage advanced to only 23% of CO2 emissions.

Carbon taxes or emissions trading schemes in sector-by-sector programs on a nation-by-nation basis are subjectively implemented and prone to political drag, and only ever partially successful, as reported in EU ETS industrial energy reviews, UK government research briefings, the Norwegian tax, the Swedish carbon tax, David Suzuki carbon tax overview.

Carbon rationing, compared to carbon taxes, emissions trading schemes and swathes of legislation, is a comprehensive integrated approach which has credible answers to practically every facet of the energy transition. At the government level, fossil fuel extraction is controlled directly at the oil well or gas head. On a citizen level, everyone is involved. Experiments using “personal carbon trading” show it is popular and effective.

We need to end the wishful thinking and act now before another decade is lost.

Many people think that carbon rationing is not just radical and drastic, but just outright extreme. There are some suggestions for smart solutions out there, but they all have key drawbacks that make them inferior to simple rationing.

• Carbon taxes for instance are unfair, difficult to target and subject to far more political interference.
• A carbon tax with a “people’s dividend” sounds ideal – but the experience from British Columbia in Canada is that the system tends to turn into a political shitstorm.
• Emissions trading schemes are complex and difficult to administer effectively, sometimes going badly wrong.
• Government regulations such as frequent flyer tax or meat production licensing is unwieldy and piecemeal in approach.
• Finally, many people think we just need to leave it up to the markets and that the resulting technological progress will sort us out. This is actually happening – this is the “Energy Transition” – however it is too slow and we need a way to accelerate it. And of course it would be nice to have a guarantee – what happens if the market decides humans aren’t worth it?

A carbon currency based on Universal Carbon Credits would transform offsetting organisations, where every kilo of carbon a carbon drawdown operation can prove to have sequestered would earn them the equivalent carbon credits from the central carbon bank, which they would be free to use or sell. At present, many operations are eligible to earn money from carbon offsetting schemes, which are all vaguely defined by private, profit-making organisations. The result is that many operations might be worthy but don’t draw carbon out of the atmosphere permanently, for ever. A state-run carbon bank which policed carbon sequestration would be mandated to take a more robust and authoritative approach.

Many people feel there is too much preaching by their greener fellow citizens. If everybody looks after their own personal carbon footprint, then we can base our discussions on facts and numbers and not opinions. We will have freedom of choice about what to give up first and what CO2-intense things we continue to consume within the constraints of our carbon footprint targets.

In a system with Universal Carbon Credits, all the people who have gone green already will have the option of what to do with those extra UCCs they don’t use. Sell them, spend them, save them, destroy them. That’s the basis of the incentive to reduce our carbon footprints. It is driven by a continual reduction in the amount of UCCs given out.

The amount of Universal Carbon Credits given to citizens would be equal to the amount of fossil fuels that the oil companies are allowed to produce. This makes the chances of actually reducing emissions by the targetted amount an order of magnitude greater than for any other carbon taxation, legislative control or carbon pricing scheme.

Once Universal Carbon Credits are allocated, then the CO2 emissions that they represent become the fixed maximum that can be emitted for those credits in the system, unlike other policies. Obviously the level at which those credits and emissions are set depends on the authority choosing the level and may be impacted as much by politics as by science, but chosen level will be the final, definitive level at which CO2 emissions are held. That lends a robustness to the framework that is not found in other policies where the resultant CO2 emissions may vary considerably from the plan.

Over a decade ago in 2008, Oxford University ran a climate forecasting program over and over again using over 50,000 computers from volunteers in the UK. The resulting calculations predicted most of the climate change happening today in 2020 – David Attenborough’s 2007 documentary described the effects on Britain, and the world.

The predictions made for 2050 and 2080 were salutary.

Reviews of predictions from 1970 and 2016 show that they were also not too far off from what is actually occurring.

No-one knows for sure though what the future holds. There’s a very small chance it might be tolerable without any need for action. And there’s a realistic chance the impact will be on the same scale as nuclear war or mass extinction.

Likeliest is something in-between, varying between “highly undesirable” and catastrophic, depending on who you are and where you live in the world.

As well as this range of different predictions with different likelihoods of occurring, the scientists make the predictions for different futures, varying from “business as usual” with no let-up in CO2 emissions, through to scenarios where we manage to cut right back and hold global warming to within 1.5°C.

The best future involves cutting global carbon emissions to zero, and within a seemingly impossibly short term time frame.

But at every opportunity, politicians and world leaders prove themselves unable to execute the massive, comprehensive set of legislation and fiscal and monetary measures to do this.

In the 50 years since we’ve known about climate change and CO2 emissions, there have been no adequate programs. Emissions continue to rise and will carry on rising under current circumstances until 2040. Economic research groups like the IEA who published this in November 2019 base their predictions on realistic expectations of policy achievements.

Civilisation is not doomed though. Instead of a massive but ineffective political approach, we can put a massive commercial mechanism in place – a carbon curreny backed by Universal Carbon Credits. The political debate will then focus on how much to ration, and not on a thousand other things.

This policy would put the rations into the hands of each citizen, and the rations would apply comprehensively to every purchase or sale by every citizen or business. The rations would be required in every channel of commerce and would flow through the economy to end up ultimately with the fossil fuel producers in the oil industry.

The oil industry would have to prove how many carbon rations they obtained from the sale of their products, which would act as permits to pump. Each kilo of carbon pumped out of their oil or coal or gas fields would have to be covered by the provision of Universal Carbon Credits in the same quantity, obtained from their customers.

So since the oil companies will have to demand a ration on any sale as well as money or they’ll get into trouble, then their customers will have to demand rations on all the products that they sell, and so will the customers of their customers, and so on going all the way up through the chain to the end consumer. It will be the individual citizens who decide where in the economy the ever-reducing carbon emissions are channelled.

If the carbon ration allocation is set appropriately and rolled out across the world, it could.

Carbon taxes, carbon pricing, cap-and-trade, subsidies, partial bans, trading schemes and all other policies are open to abuse from the start by loopholes, lobbying, special interests, simple omissions, public disaffection, and political campaigning.

Carbon rationing as a comprehensive umbrella framework would be by nature more independent and robust in the face of external influences.

On setting a total carbon ration budget at a certain level, the end result in reduction of CO2 emissions is known in advance.

With other policies this is guesswork and prediction, as is the success rate.

Compared to the “free” option of doing nothing or “business as usual”, a carbon currency has a large, up-front cost with manageable, contained, on-going running costs similar to VAT or MwSt.

Doing nothing will bring global economic recessions and damage and adaptation costs of trillions, also on-going.

But taxes or trading schemes have much higher running costs to maintain the level of carbon policymaking that rationing would make redundant:

• establishing what citizens and industry have to stop doing
• democratically agreeing on it
• legislating for it
• implementing the laws
• monitoring the effects
• repeating the process, constantly strengthening the laws in the face of political opposition

And that would be repeated in all 192 nations of the world.

So the carbon tax alternatives are initially cheaper, but they have higher legislative costs as governments manage decarbonisation, legislating year after year to keep up with economic and technological developments and unforeseen issues. The longer it lasts, the more likely it is that a carbon currency turns out cheaper.

There are other costs associated with policing the usage of Universal Carbon Credits in its usage as payment currency for carbon drawdown operations, for instance satellite monitoring of forests. This is already carried out by space agencies, which is how the world became aware of the 2019 Amazon fires. Much of these costs exist already.

It would allow politicians and policy makers to focus on how much carbon emissions to allow, rather than a thousand other things. Already academic policy analysts predict that governments will be unable to rise to the challenge without fundamental organisational restructuring.

What is the alternative? A comprehensive policy making exercise in every nation, establishing what citizens and industry have to stop doing, democratically agreeing upon it, legislating for it, implementing it, monitoring the effects, going through the process again to strengthen it.

The United Kingdom’s best experts outlined their starting point here: the UK Committee on Climate Change net zero 2050 strategy and immediately hit 2 problems – are their recommendations plausible? Or even the best choice?

Instead, politicians should concentrate on what is the right amount of rations to give out that balances escaping catastrophic climate change with avoiding social and economic collapse during the withdrawal from fossil fuel dependence.

There are many situations where policy makers won’t get it right either. Many of the changes in a low carbon economy will be counter-intuitive. A politician trying to legislate for some particular piece of carbon law could quickly be forced to back down, yet when the carbon currency produces a counter-intuitive effect, it is likely to be judged together with its positive effects.

Who wouldn’t choose products and services with a smaller carbon footprint when they spend their Universal Carbon Credits? Learning carbon literate will be quick when the price label on everything tells us what we need to know.

Each of us can act on our own, favouring the lowest carbon prices, to maximise our own welfare. No-one has to decide on our behalf. This applies to business and public services as well as individual citizens.

Rationing (here via Universal Carbon Credits) is categorised by economists as a fundamentally progressive fiscal policy. There is no requirement to bolt on a “people’s dividend” policy to make an essentially regressive tax fair.

To prevent anybody being unfairly affected by rationing, the government would hold back a percentage of everybody’s Universal Carbon Credits allocation. This can be used to supplement those in extra need of carbon rations through no fault of their own.

On an international scale, all citizens from all nations would receive the same individual allocation of rations. This would start differently for different countries, but end up the same by global agreement when the UN adopts the Global Commons Institute’s Contraction and Convergence framework.

Wealthy citizens can buy extra Universal Carbon Credits to subsidise their climate-unfriendly choices, but only what other people are selling, and that will decrease regularly as the rationing continues. It is not a loophole preventing actual CO2 emissions reduction from taking place. It represents a safety valve in the system that prevents people or businesses falling off a carbon ration “cliff edge”.

The harsh reality of CO2 emissions in 2019 and prospects for their reduction means any realistic plan must include removing CO2 from the atmosphere, or global warming will overshoot 2°C.

With a carbon currency, the central carbon bank would promote “negative emissions” by awarding Universal Carbon Credits to people or businesses capturing CO2, e.g. growing trees or building futuristic Saharan solar power stations that generate power to turn CO2 from the atmosphere back into carbon or salt crystal or methanol and oxygen.

This branch of industry is already well established as summarised by Carbon Brief.

Not only would it promote research and investment into reforestation and carbon sequestration, but because the central carbon bank awards Universal Carbon Credits, it completely avoids the problem of who should pay for it. The main issue would be calculating how Universal Carbon Credit payments affect the global carbon credits budget.

Everybody would see how many Universal Carbon Credits something costs before they buy. Each merchant or vendor in the supply chain will have to balance the UCCs they spend against what they demand from their customers. The UCCs they put on their price tag will reflect cumulatively all the carbon that went into the production of whatever they are selling.

Currently when a Briton buys a smartphone made in a Chinese factory that is powered by a coal plant, the carbon emitted in its manufacture does not count as ‘British’. This Economist article outlines the widespread mis-measurement of carbon emissions.

Bananas from the Caribbean, a smartphone from China, chicken from the local farm, a skyscraper in New York or a Tesla sports car, everything would be paid for with UCCs in parallel to money. The UCCs required will tell how much carbon it needed. We would all quickly become CO2 experts, thanks to keeping a constant eye on how many UCCs we have left.

As the economy adapts, the reductions in the amount of carbon required for products will be passed on to the buyer immediately, as soon as the new product is put on sale.

Producers will pass on their CO2 emission reductions to customers by reducing the Universal Carbon Credits on the price tag – to balance their carbon budget but also to keep ahead of the competition.

The only need for state intervention will be for key products and services whose CO2 emisssions don’t reduce and where people can’t readily find alternatives.

It can be implemented unilaterally by any nation so it doesn’t require unanimous approval from hundreds of nations. Other nations can join at any point to form a larger trading block.

The national borders and customs agency would act a proxy for the foreign companies, collecting the required Universal Carbon Credits on imported goods from the buyers.

With business decisions necessarily based around reducing use of carbon credits, the system stimulates innovation directly, where all other solutions (taxes or legislation) only impact certain aspects of the economy with no guarantees about consumer behaviour regarding CO2 emissions.

Innovation in carbon-neutral technologies would generally need no subsidy. Investors and consumers would bash the door down for products that required zero Universal Carbon Credits.

It creates greater economic certainty for industry, allowing better management and planning.

Shipping provides a typical problem businesses face. The IMO agreed that shipping fuel must be used more efficiently, but despite 20 years warning, it won’t happen by the 2020 deadline or any time soon due to lack of responsibility in the industry.

Businesses mainly complain that any attempts to go carbon-neutral result in a loss of competitiveness and market share as their customers switch to cheaper imported high-carbon alternatives.

A carbon currency framework imposes the Universal Carbon Credits on imports at customs, which levels the playing field and prevents free-riders.

Rationing – the amount of Universal Carbon Credits allocated to citizens – would control how much fossil fuel is pumped out of the ground, not the market price of oil.

The oil industry can finally seriously plan for the decarbonisation of the energy industry on a level “playing field”.

Typically in CO2 emissions reduction schemes, aviation is left out of the equation because it’s cross-border, private sector, and deemed business-critical.

The current industry thinking is that aviation can buy its way out using carbon offsets and switch over to bio-fuels which can’t be supplied in the quantities required. The UN ICAO aviation body have adopted a pact called CORSIA, which is already mired in problems and for years was unable to agree a target date or baseline for measuring its progress against.

It finally adopted the policy that the industry would seek to voluntarily offset all excess CO2 emissions it causes above and beyond 2020 levels (which in 2019 at time of writing are not known yet).

So since there is now this policy in place and never mind if it will work or not, passengers don’t have to worry about the consequences.

Where then is the demand in the economy for real solutions to long-haul rapid transport (i.e. flying)?

If necessity is the mother of invention, then in this case, there won’t be much invention. Everyone can still fly as much as they wish – no necessity – no-one worrying about their rations.

Maybe Sir Richard Branson or Elon Musk will get lucky and charitably let the whole aviation industry benefit from whatever they can come up with.

Meanwhile the aviation industry will funnel money into the offsetting industry, which is not even a realistic CO2 emissions reduction strategy.

Aviation causes more than 2% of global CO2 emissions and is growing fast. That is regardless of the new European trend of flight-shaming, calls for a frequent-flyer tax and a celebrity jet ban. If global aviation was a country, it would rank in the top 10 emitters.

Do we ignore it and all the other sectors of the economy that governments tend to protect? This is exactly why “government as usual” with its carbon taxes, targetted bans and carbon pricing schemes is doomed to failure.

Such strategies will not go the distance. It’s similar to the tax on cigarettes. Despite 500% tax, people still smoke.

What if airlines collected Universal Carbon Credits from their customers to pay for all the fossil fuels those jet engines burn up? That will have a massive effect over one or two decades, even if there’s no way of knowing what it would be.

And it would be the popular choice of Universal Carbon Credit-spending citizens, who considered how much they wanted to fly compared to all their other climate-damaging activities.

Society should not wait until things become desperate, and acting now on all fronts will likely bring synergies we could never have planned for.