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Pitch

A voluntary approach to pricing carbon with strong economic incentives for early adopters and no government intervention until much later


Description

Summary

This seed proposal was created by the Climate CoLab staff and is not eligible for cash prizes.  Other CoLab members are encouraged to link to this proposal, comment on it, or build on its ideas. 

Many experts believe that the best way to motivate people and organizations throughout the economy to reduce their carbon emissions is to put a price on those emissions.  But almost all the methods proposed for doing this--such as carbon taxes and cap-and-trade systems--require government actions.  And it has been very hard to create the political consensus necessary for governments to take these actions.

This proposal suggests a way to put a price on carbon that can begin with no government action at all and that doesn’t require any government action until much later in the process.  Instead, the system provides strong economic incentives for individual people and organizations to voluntarily participate early.  Those who do so will have very little initial cost, and if the system is widely adopted later, they will receive a financial windfall.

Many people today (including many large oil companies) believe that governments will someday put a price on carbon.  And anyone who believes that should want to be among the first to join this system.  Then, as more and more people join, the political pressure on governments to adopt the system for everyone will grow.

In the long run, when the system is fully adopted, it will provide financial incentives for all individuals and organizations to shift from activities with high emissions to those with low emissions, and the increased costs to high emitters will be offset by increased income to low emitters.

In other words, instead of waiting for governments or idealistic consumers, this system greatly accelerates the transition to carbon pricing by appealing to peoples’ economic motivations.


What actions do you propose?

The system works as follows:

GreenCoins

There are a fixed number of GreenCoins issued per year.  Each GreenCoin corresponds to 1 ton of CO2-equivalent greenhouse gas (GHG) emissions.  The number of GreenCoins issued each year is calculated by a GreenCoin Authority (see below) to correspond to the total GHG emissions the world can “safely” make without exceeding some limit such as 2 degrees warming.  It is not essential that GreenCoins be a form of digital currency (like BitCoin), but doing so would presumably greatly reduce the transaction costs of using them.

Consumers

The GreenCoins are divided equally among all the individuals (called “Consumers") who participate in the system.  All humans in the world are eligible to participate, and if they participate, they each receive an equal share.

In order to receive their GreenCoins, a Consumer must sign a contract that includes the following:

  1. In each time period (probably a year), the Consumer will “pay” to the Authority enough GreenCoins to correspond to the GHG emissions that resulted from their activities in that time period.
  2. The Consumer may sell the remainder of their GreenCoins to anyone else or save them for future use or sale.
  3. The Consumer must continue participating in the system indefinitely (except, perhaps, for very unusual circumstances to be specified in the contract).


The emissions resulting from a Consumer’s activities are estimated by a Verification Agency (see below).   These estimates can initially be based on very crude estimates, but over time, the estimates can become much more precise.  For example, the estimates might initially be based on:  (a) the amount of money the consumer spends on all kinds of goods and services, and (b) the average emission intensity of GDP in the economy as a whole.  (Verifying a Consumer’s spending could be done through records such as for bank accounts and credit cards.)

To make the estimates more precise later, detailed emission estimates could be made for different kinds of spending  (e.g., emissions from personal automobile travel could be based on credit card charges for gasoline), and physical measures could potentially be used for things like home heating.

Organizations

The GreenCoins that Consumers pay to the Authority for their emissions are divided among all Organizations that participate in the system (including businesses, non-profits, governments, and others) in proportion to the Organizations’ Value Added.

Value Added is defined (as in economics) as the difference between the income an organization receives and the expenses it pays.  In the case of businesses, income is usually revenue.  For non-profits, it may include donations.  For governments, it includes taxes.  Expenses include the costs of all goods and services the organization purchases, except for payments to employees.  For countries that already have Value Added Taxes, the accounting methods for calculating these amounts are already in place.  For others, the creation and operation of the methods can be certified by a Verification Agency.

In order to receive their GreenCoins, an Organization must sign a contract (exactly analogous the contracts signed by Consumers) that includes paying GreenCoins for their emissions, the right to sell excess GreenCoins to others, and the obligation to continue participating indefinitely.  The emissions resulting from an Organization’s activities are estimated by a Verification Agency using methods exactly analogous to those described above for Consumers.

The GreenCoin Authority

The GreenCoin Authority will oversee the whole system.  This organization could potentially be a government or perhaps a business, but more likely it would be a new non-profit organization set up for this purpose.  This would be analogous, for instance, to the Internet Corporation for Assigned Names and Numbers (ICANN) that oversees domain names, IP addresses, other aspects of the Internet.

The Authority will have the following primary responsibilities:

  1. Be the legal entity with which Consumers and Organizations establish the contracts that create the system.
  2. Decide how many GreenCoins to issue each year, using expert advisors.
  3. Certify Verification Agencies.


The Authority will support itself financially through some combination of the following:

  1. Donations from individuals, foundations, or governments.
  2. Fees paid by Verification Agencies to be certified
  3. GreenCoins that the Authority issues to itself and then sells to others.  (This will be a viable source of revenue only when GreenCoins have non-trivial value.)


Verification Agencies

Verification Agencies will verify the following:

  1. Identity for Consumers (i.e., that the person is who they say they are and that they have not already registered under another name)
  2. Identity and Value Added for Organizations
  3. Emissions for Consumers and Organizations.
  4. Proper payment of GreenCoins to all parties involved.


These Agencies may be existing organizations (such as accounting and auditing firms), or they may be new organizations created specifically for this purpose.

Governments

Governments (at any level) can require their citizens and organizations to participate in the system, but this is not necessary at the beginning.  Governments that require their citizens to participate may also perform some or all of the functions of Verification Agencies.

How will the system work over time?

Beginning

Consumers who join the system early have a huge potential windfall if the system becomes widely adopted.  At the beginning, the emission allotment for the whole world will be divided among the few Consumers who actually participate.  That means each person will receive far more GreenCoins than they actually need for their own emissions.  Everyone will know that if the system becomes widely adopted in the future, these GreenCoins will become much more valuable.  Thus Consumers can save these GreenCoins in anticipation of their future increase in value or sell them to others who want to invest in that possibility.

In view of the huge potential windfalls, there are very few reasons for Consumers not to participate at the beginning.  Their only out-of-pocket expenses are whatever, presumably small, fees they need to pay to Verification Agencies.  They will also receive more detailed feedback about their emissions than they receive today, so those who want to can use this information to reduce their emissions.  But since each person will receive far more GreenCoins than they need for their own emissions, they will not need to make any significant effort to reduce emissions, if they don’t want to.

As for Consumers, the Organizations that participate early have a potential windfall.  The total GreenCoins that early Consumers pay for their emissions will be split among the few Organizations that participate early.  Whether this leads to a surplus depends on the relative emissions of Consumers and Organizations that participate early.  However, as long as the participating Consumers are responsible for more total emissions than the participating Organizations, then the participating Organizations will be able to save (or sell) the excess GreenCoins they receive.

More importantly, any Organization, and any investor, can also buy GreenCoins early, when they will presumably be very inexpensive, in anticipation that they will become much more valuable when they are widely used.

Middle

As more people participate, there will come a time when Consumers who are high emitters will not receive enough GreenCoins to pay for all their own emissions.  At this point, they will need to begin buying GreenCoins from others for this purpose.  Also, at this point, there will no longer be any immediate financial benefits for high emitting Consumers to join the system.

Consumers who are low emitters will continue to receive more GreenCoins than they need, so they can sell their excess GreenCoins to other Consumers or Organizations that need them.  And low emitting Consumers who are not yet involved continue to have a strong incentive to join the system.

Over time, the financial incentives for Consumers to reduce emissions become stronger and stronger, and the overall effect of the system is to redistribute income from high emitters to low emitters.  The net economic effect, however, is still zero, because all the increased costs to high emitters are offset by increased income to low emitters.

In any periods when the total emissions of participating Organizations are greater than the total emissions that participating Consumers pay for, high emitting Organizations will need to buy GreenCoins from other Organizations or Consumers.   At these points, there is no immediate financial incentive for Organizations to join the system.  There will still, however, be incentives for Organizations that have low emissions relative to their Value Added to join.

Over time, financial incentives for individual Organizations to reduce their emissions will become stronger and stronger, and there will also be increasing financial incentives to shift economic activity away from activities that generate above average emissions per unit of value added and toward those that are below average.  As with consumers, however, the net economic effect is zero, since the increased costs to high emitting Organizations are offset by increased income to low emitting Organizations.

End

Since the economic incentives for high emitting Consumers and Organizations to participate disappear at some point along the adoption curve, there need to be other incentives for this system to eventually become fully adopted.  We assume that this will eventually happen by government actions in more and more jurisdictions around the world.

One thing that will make this more likely (especially in democratic countries) is that far more people are low emitters than high emitters.  They will thus have continuing incentives to join the system.  And once they have done that, they will have incentives to pressure their governments to make membership in the system compulsory because that will make the GreenCoins they already have more valuable.

In the long run, when this system is fully adopted, it will effectively be a form of cap-and-trade at two levels.  For Consumers, the caps are applied to individuals, and each person gets the same cap.  For Organizations, each Organization gets a cap proportional to their Value Added.  This leads high emitting Consumers and Organizations to buy GreenCoins from low emitters, thus providing economic incentives to reduce emissions in many ways throughout the economy.

What if there are multiple, competing Authorities?

It is possible that multiple organizations could try to start systems like this, each with its own Authority.  In the short run, these different Authorities could compete with each other.  But in the long-run, the same emission rights cannot be allocated twice, so there should be some way of eventually joining any competing Authorities into a unified system.  To facilitate this, the initial contracts should specify methods for the Authority to merge with other Authorities in the future.


Who will take these actions?

Any government, business, or other organization could establish the GreenCoin Authority.   One promising possibility is for the GreenCoin Authority to be a new non-profit established with support from one or more governments, businesses, or other organizations.

The GreenCoin Authority will then certify various businesses (such as accounting or auditing firms) as Verification Agencies.

After that, any number of individual consumers and other organizations can begin participating.


Where will these actions be taken?

These actions will probably begin in one or more developed countries but will eventually spread all over the world.


What are other key benefits?

 By giving every individual human in the world an equal share of the right to emit carbon into the atmosphere, this system essentially gives everyone an equal property interest in our planet’s clean environment.  Those who want to use more than their share of these rights can do so, but only by financially compensating those who use less. 

This provides the proper incentives for everyone to reduce their carbon emissions, in any case.  But it will also have the effect of transferring money from wealthy people who use their money to buy lots of emission-intensive goods and services to less-wealthy people who buy few emission-intensive goods and services.  Many people would consider this reduction in financial inequality another benefit of the system.


What are the proposal’s costs?

The operating costs of the GreenCoin Authority and the Verification Agencies would be relatively small. 

In the long run, the system would increase the costs of high-emission goods and services, but this would be offset by the increase in people’s purchasing power for low-emission goods and services, so the net economic cost would be almost 0.


Time line


Related proposals

This proposal is based, in part, on ideas from the following Climate CoLab proposals:

1.     Sno-Caps:  The People’s Cap-and-Trade.  This proposal was the source of ideas for a global cap-and-trade system with caps allocated equally to all humans and for using digital currencies like BitCoin for such a system.  This proposal, however, did not include the ideas suggested here for allocating emission rights to businesses in proportion to their Value Added and for greatly increasing the incentives for early adopters by letting them share all the available GreenCoins.

2.     ClimateCoin.  This proposal was the source of the ideas for using a new digital currency that is initially allocated among only the people participating in the system and that thus has a value which increases over time as more people participate.  This proposal, however, used the digital currency only for offsetting carbon emissions, not for restricting emissions in the first place.


References

Genesis of this proposal

This proposal was written by Thomas Malone after a conversation about this topic with Jason Jay and Christian Catalini.  The proposal also benefited from subsequent conversations Malone had with Philip Evans, Roy Lowrance, and John Chisholm.