Could a ‘Carbon Coin’ Save the Planet?
Australian civil engineer Delton Chen explains his idea for a new currency.
4 min
In “The Ministry for the Future,” the 2020 climate-catastrophe novel by Kim Stanley Robinson, a new financial tool helps pull the world back from the edge of a global ecological meltdown: the carbon coin.
Backed by the world’s central banks, this new currency is deployed around the globe to pay fossil-fuel companies and petrostates to leave their reserves in the ground. It’s also used to reward businesses and individuals for sequestering carbon. By the end of Mr. Robinson’s book, the global economy is largely run on carbon coins, with projects around the world rapidly drawing carbon out of the atmosphere.
Mr. Robinson didn’t cook up the carbon-coin idea out of thin air. It’s the brainchild of Australian civil engineer Delton Chen. He’s the founder of the Global Carbon Reward initiative, which aims to create financial incentives to drive down carbon emissions.
While ambitious, the carbon-coin scheme remains far from seeing the light of day and would face fierce opposition from both the political and financial realms. In Mr. Robinson’s book, for instance, U.S. Federal Reserve officials express fears that the carbon coin could threaten the stability of the dollar, the world’s reserve currency.
Mr. Chen said that shouldn’t be a problem as the carbon currency, as he envisions it, couldn’t be used as a medium of exchange.
We recently caught up with Mr. Chen to ask him how it would work.
Most people are familiar with the idea of a carbon tax, which penalizes companies for consuming fossil fuels. Your idea, a carbon currency that provides tangible rewards for cutting carbon emissions or removing carbon from the atmosphere, is the reverse—a carrot instead of a stick.
The carbon currency is a new kind of carrot, and it’s the tool for what’s called a global carbon reward. It’s different from other carbon-pricing systems that economists have recommended. A “reward” is different from a typical subsidy, because the value of the reward will be managed with monetary policies [controlled by central banks]. Subsidies are managed with fiscal policies.
The great advantage of shifting to a monetary policy is that it has the potential to resolve a wide collection of very nasty socioeconomic problems, including the climate finance gap and the current lack of international cooperation.
From the perspective of businesses, the carbon currency will be a debt-free revenue source with a predictable value, but it will also require that each business that wants to earn the carbon currency must accept a long-term service-level agreement. The service-level agreement will ensure that one unit of the carbon currency is issued for one metric ton of carbon dioxide equivalent that has been mitigated for the long-term, such as a 100-year duration.
How would the carbon currency be funded?
A very important distinction is that the carbon currency will not create any direct costs for governments, businesses or citizens. The costs will be covered by a globally coordinated central-bank guarantee. This guarantee will trigger private currency trading and investing in the carbon currency.
What are some specific examples of actions people or companies can take that will earn rewards?
First, by producing cleaner energy commodities. Second, by developing cleaner business models. Third, by removing carbon from the atmosphere.
The reward rules will be designed to encourage large energy companies and state-owned enterprises to decarbonize at the maximum rate that is technically feasible, and well ahead of the market demand for new clean energy.
One hypothetical example is a multinational energy company that decides to implement a comprehensive plan to switch to 100% renewable energy production and to retire its fossil energy reserves—for earning the reward.
Outside energy, what other economic sectors could take advantage of the carbon currency?
Reward rules can be developed for all sectors, including for small and medium-size businesses, and households—as long as the mitigation outcome is significant.
A hypothetical example might be a farm that transitions from animal meat production to producing vegetarian meat substitutes. The farm might combine agroforestry with soil carbon sequestration. If it is a community farm, especially in a developing country, then there are opportunities to provide co-benefits for communities and ecosystems.
Another avenue for earning the carbon currency is through lowering the carbon footprint of households.
Many companies—as well as countries—have already made pledges to reduce their carbon emissions to net zero in the next few decades. Would a carbon currency help accelerate the process?
Ideally, the value of the carbon currency will be calibrated to explicitly meet the Paris goals. In this way, the carbon currency can accelerate and guide the transition to global net-zero. Indeed, the carbon currency should become a permanent feature of the world economy.
There are two inherent limitations of existing pledges made by companies and countries. The first problem is that these pledges might not be backed by actionable plans and financial capital. The second problem is that for the companies and countries that set themselves very ambitious pledges, their motivation to reach those targets is compromised by other companies and countries that are continuing to benefit from the consumption of fossil fuels. This is sometimes described as the prisoner’s dilemma.
Do you see any downsides to the policy or significant hurdles to putting it in place?
I don’t see any significant downside. The new theory is posing a direct challenge to the standard theory for externalized costs. By proposing an explicit reward price for mitigated carbon, I’m asking economists to revise their conceptualization of the market failure. In other words, I’m proposing that a reward price—backed by central banks—is needed to address the systemic risk. The new policy is also more complex than standard policies, such as carbon taxes. It will require a more sophisticated approach to carbon accounting and monetary policy.
The main hurdle for advancing this policy is simply to find financial sponsorship to undertake the economic analysis and to complete a carbon-currency demonstration. When the policy is eventually examined by governments, I think many people will sit up and take notice because we are facing major systemic risks and we need a globally coordinated response.
When did the idea for the carbon reward come to you? You’re a civil engineer, not an economist.
I became curious about carbon pricing in late 2013. Back then I viewed the carbon-currency idea as having several useful attributes, but at that time I had no training in economics. So not surprising that it took me nearly eight years to develop the Global Carbon Reward policy. My goal was—and still is—to resolve every conundrum in climate-change economics with an interdisciplinary theory that’s compatible with neoclassical economics. I’m looking for a theory that’s consistent with sociology, ecology, biology, chemistry and physics. I think that I may have cracked this problem.
Copyright 2020, Dow Jones & Company, Inc. All Rights Reserved Worldwide. LEARN MORE
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
Competitive pressure and creativity have made Chinese-designed and -built electric cars formidable competitors
4 min
China rocked the auto world twice this year. First, its electric vehicles stunned Western rivals at the Shanghai auto show with their quality, features and price. Then came reports that in the first quarter of 2023 it dethroned Japan as the world’s largest auto exporter.
How is China in contention to lead the world’s most lucrative and prestigious consumer goods market, one long dominated by American, European, Japanese and South Korean nameplates? The answer is a unique combination of industrial policy, protectionism and homegrown competitive dynamism. Western policy makers and business leaders are better prepared for the first two than the third.
Start with industrial policy—the use of government resources to help favoured sectors. China has practiced industrial policy for decades. While it’s finding increased favour even in the U.S., the concept remains controversial. Governments have a poor record of identifying winning technologies and often end up subsidising inferior and wasteful capacity, including in China.
But in the case of EVs, Chinese industrial policy had a couple of things going for it. First, governments around the world saw climate change as an enduring threat that would require decade-long interventions to transition away from fossil fuels. China bet correctly that in transportation, the transition would favour electric vehicles.
In 2009, China started handing out generous subsidies to buyers of EVs. Public procurement of taxis and buses was targeted to electric vehicles, rechargers were subsidised, and provincial governments stumped up capital for lithium mining and refining for EV batteries. In 2020 NIO, at the time an aspiring challenger to Tesla, avoided bankruptcy thanks to a government-led bailout.
While industrial policy guaranteed a demand for EVs, protectionism ensured those EVs would be made in China, by Chinese companies. To qualify for subsidies, cars had to be domestically made, although foreign brands did qualify. They also had to have batteries made by Chinese companies, giving Chinese national champions like Contemporary Amperex Technology and BYD an advantage over then-market leaders from Japan and South Korea.
To sell in China, foreign automakers had to abide by conditions intended to upgrade the local industry’s skills. State-owned Guangzhou Automobile Group developed the manufacturing know-how necessary to become a player in EVs thanks to joint ventures with Toyota and Honda, said Gregor Sebastian, an analyst at Germany’s Mercator Institute for China Studies.
Despite all that government support, sales of EVs remained weak until 2019, when China let Tesla open a wholly owned factory in Shanghai. “It took this catalyst…to boost interest and increase the level of competitiveness of the local Chinese makers,” said Tu Le, managing director of Sino Auto Insights, a research service specialising in the Chinese auto industry.
Back in 2011 Pony Ma, the founder of Tencent, explained what set Chinese capitalism apart from its American counterpart. “In America, when you bring an idea to market you usually have several months before competition pops up, allowing you to capture significant market share,” he said, according to Fast Company, a technology magazine. “In China, you can have hundreds of competitors within the first hours of going live. Ideas are not important in China—execution is.”
Thanks to that competition and focus on execution, the EV industry went from a niche industrial-policy project to a sprawling ecosystem of predominantly private companies. Much of this happened below the Western radar while China was cut off from the world because of Covid-19 restrictions.
When Western auto executives flew in for April’s Shanghai auto show, “they saw a sea of green plates, a sea of Chinese brands,” said Le, referring to the green license plates assigned to clean-energy vehicles in China. “They hear the sounds of the door closing, sit inside and look at the quality of the materials, the fabric or the plastic on the console, that’s the other holy s— moment—they’ve caught up to us.”
Manufacturers of gasoline cars are product-oriented, whereas EV manufacturers, like tech companies, are user-oriented, Le said. Chinese EVs feature at least two, often three, display screens, one suitable for watching movies from the back seat, multiple lidars (laser-based sensors) for driver assistance, and even a microphone for karaoke (quickly copied by Tesla). Meanwhile, Chinese suppliers such as CATL have gone from laggard to leader.
Chinese dominance of EVs isn’t preordained. The low barriers to entry exploited by Chinese brands also open the door to future non-Chinese competitors. Nor does China’s success in EVs necessarily translate to other sectors where industrial policy matters less and creativity, privacy and deeply woven technological capability—such as software, cloud computing and semiconductors—matter more.
Still, the threat to Western auto market share posed by Chinese EVs is one for which Western policy makers have no obvious answer. “You can shut off your own market and to a certain extent that will shield production for your domestic needs,” said Sebastian. “The question really is, what are you going to do for the global south, countries that are still very happily trading with China?”
Western companies themselves are likely to respond by deepening their presence in China—not to sell cars, but for proximity to the most sophisticated customers and suppliers. Jörg Wuttke, the past president of the European Union Chamber of Commerce in China, calls China a “fitness centre.” Even as conditions there become steadily more difficult, Western multinationals “have to be there. It keeps you fit.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
Americans now think they need at least $1.25 million for retirement, a 20% increase from a year ago, according to a survey by Northwestern Mutual
