Paying Ourselves To Decarbonize

Why do individuals and nation-states fight to burn more fossil fuels, knowing as they do that this will lead to catastrophe? The answer is, at first, simple: money. But it is not just a matter of greed.

There’s some of that, but the motives here are much more varied and defensible, and they need to be understood if the fight against fossil fuels is to be successfully waged. Money is not just private wealth — it’s also a medium and instrument of public welfare. And so well-meaning people may justifiably be very concerned with gaining money, keeping it and spending it on what they consider crucially important — which is to say, the functioning of the nation-state they are responsible for.

Recall that the scientific community has calculated that we can burn about 400 gigatons of CO2 before we have a 50/50 chance of pushing the global average temperature above the 1.5 degree Celsius rise, the highest we should go before we start crossing very dangerous tipping points. Then recall also that about 3,000 gigatons’ worth of CO2 in extractable fossil fuels have been located underground around the world — quite possibly more. The clear implication is that about 2,600 gigatons of CO2 need to be left in the ground, or we are cooked. So these fossil fuels are stranded assets, or they should be. But whose assets are they?

About 75% of the world’s oil reserves are controlled by nation-states. Private fossil fuel companies, which could quickly be made bankrupt and nationalized by the removal of subsidies and the levying of taxes, are not the big problem here. The big problem is the petro-states — nation-states whose economies are highly dependent on their fossil fuel reserves. The petro-states’ income from the sale of fossil fuels constitutes, on average, about half of those governments’ incomes. Sometimes, the percentage rises to 60, 70 or 80% — nearly 90% in the case of Iraq.

Roughly speaking and for the sake of discussion, of the fossil fuels that need to stay in the ground, the portion directly controlled by the petro-states is conservatively worth something like half a quadrillion dollars.

Governments of nation-states pay for their countries’ public services, including public jobs. Even governments chastised for being autocratic, kleptoparasitic or grotesquely unequal in terms of wealth distribution among their citizens still often organize, protect and pay for a variety of necessary public services. To pay for these services, they need their income streams. Taxes make up part of those income streams, but income from state-owned businesses is fundamental to the balance books of many countries. About three-quarters of the fossil fuels sold on Earth make money for state-owned enterprises.

The gross world product was about $85 trillion in 2020 — so the sudden removal of hundreds of trillions of dollars from the budgets of the world is a serious thing. These are not businesses threatened with closure, but governments responsible for their citizens in ways that can’t go wrong without massive disruption and suffering, possibly to the point of complete breakdown. Failed states happen.

The list of petro-states could include China, Russia, India, the United States, Canada, Australia, Mexico, Venezuela, Kazakhstan, Turkmenistan, Nigeria, South Africa, Saudi Arabia, Iraq, Iran and Indonesia. This list isn’t even exhaustive, and the total population of these countries comes to well over four billion people.

It won’t do to say that since these stranded assets were never sold in the first place, their disappearance shouldn’t matter. That’s not how finance works. These fossil fuel reserves are assets and, as such, they are on the books already. They have been used as collateral for loans and often leveraged far beyond their actual value. If they disappear, the world economy will collapse like a house of cards.

And yet, they have to disappear. Roughly 2,600 gigatons of carbon simply cannot be burned into the atmosphere. Biophysical reality says those assets must be stranded, and economic reality says that can’t be done without causing a super-depression — or even perhaps a breakdown of civilization.

Given all this, it should be clear why some political leaders and concerned citizens are thinking they can just sell a bit more of their fossil fuels, bulk up their monetary reserves while they can, before the bubble bursts, and then hope for the best. This might be shortsighted and even wrong, but it’s not greed. The people fighting to burn fossil fuels in this coming decade may be thinking they are doing their best to save their fellow citizens from ruin.

How can the world community deal with this situation? We will have to pay ourselves to decarbonize — pay ourselves to do the right things rather than the wrong things. But compensating the owners of fossil fuels for their lost income will not be simple or obvious. It will take a great deal of difficult discussion and negotiation.

The simpler part of paying ourselves to decarbonize involves a fiscal innovation sometimes called the carbon coin, like the one proposed by geohydrologist Delton Chen: a new currency created specifically to pay for decarbonization projects. It would need to be fiat money issued by national central banks. Cryptocurrencies, even if they turn out to be useful instruments in this process, are not currently trustworthy or powerful enough to do the job.

To serve as a proper currency, the carbon coin has to be convertible to U.S. dollars, the global benchmark currency, in order to represent its true value. One might even imagine that it would be best if carbon coins were simply issued as U.S. dollars in the first place, but rapid decarbonization is going to take so much money that all the central banks will need to join together to back any money specifically devoted to that task. Also, in the same way that the gold standard was understood to be based on a physical amount of gold, the fiscal solidity of carbon coins could be backed by a physical amount of sequestered carbon, in a way that the dollar can’t be.

The idea is that anyone, from individuals to nation-states and all types of organizations in between, would be paid for decarbonizing actions. If you sequester a certain set amount of carbon, you get paid one carbon coin, which would trade on the currency exchanges. Because of central bank support, at its lowest value, it would be held higher than the costs of sequestering that carbon.

This lowest value could be legislated, which would then require it to be backed by the central banks, since it will be very costly — or rewarding, depending on if you were paying it out or taking it in. In any case, it would be a lot of money, if a lot of carbon were being drawn down. It would be a good thing if that happened, but it would require a great deal of money to pay for it. Over the length of the entire process of getting back to planetary safety — which might be defined as returning the atmosphere to 350 parts per million of CO2, with half the Earth’s surface dedicated to our wild sibling creatures — it will probably take hundreds of trillions of dollars.

This money will be spent mainly to pay for people’s working time, as they devote that time to this project. A carbon coin of this sort would mean that people could make their living by doing decarbonization work. This would flip the current financial situation, in which individuals or organizations trying to decarbonize typically must pay to do it. 

Where would all this new money come from? From the central banks, who can make up new money through quantitative easing, as they did to keep liquidity in the economy after a credit freeze caused by a panic in the subprime mortgage market in 2008. Since the pandemic began in 2020, central banks in the U.S., U.K., EU and Japan have injected at least $10 trillion into their economies to keep the world from dropping into a pandemic-induced depression. 

Central bankers have been discussing the possibility of quantitative easing to help the decarbonization effort — an encouraging sign that something like this might be enacted. The Network for Greening the Financial System (NGFS), composed of representatives from more than 100 of the world’s central banks, has published a white paper that lists nine methods for greening money, and these procedures might add up to something like a carbon coin.

There will no doubt be calls for the central banks to generate income to balance this new carbon quantitative easing. One source of governmental income could be carbon taxes, of course, sometimes called “paying the social cost of carbon” — a phrase that is interesting, because the society indicated here is not simply humans but the entire biosphere. That’s an appropriate expansion of our conception of the social.

Another frequently used phrase is “putting a price on carbon,” as the president of the World Bank Group begged the world to do nearly a decade ago. This is a way of calling for taxes, which would require legislative action, and of course, many people don’t like the idea of taxes. But if carbon burn were taxed in a progressive way, dislike of a carbon tax might be mitigated. It might also be possible to funnel some of the taxed income directly back to citizens, also progressively.

In any case, we desperately need to put a truer price on carbon, rather than continuing with the destructively subsidized and false price we have now. Governments would then have an income as well as a pay-out when it came to carbon. This might help create a sense of stability in money despite the creation of large new amounts of it. Burn carbon, pay taxes; sequester carbon, get paid.

The NGFS is not the only organization of central banks studying this problem. There are also the gatherings of the central banks of the G20 and the G7. These groups are talking about the greening of money, and since these are the banks of major carbon emitters, if they were to alter monetary policy in their own economies, the rest of the world would benefit.

Carbon quantitative easing pursued at a substantial level, say $5 trillion a year, would decarbonize our civilization at the speed we must bring to the task. Cutting our carbon burn in half by 2030 would make the following decades immensely easier for subsequent success. Spending $5 trillion per year on decarbonization would leverage much more money in private investment, and what John Maynard Keynes called the multiplier effect would also come into play — creating something like full employment, which would be a powerful tool for eradicating poverty and creating a more just society.

But if a carbon coin is paid for sucking down a ton of CO2 from the atmosphere, then what if you have a ton of CO2 already in the ground, which you own but don’t burn? Wouldn’t that represent a kind of decarbonizing — preemptive in this case, but still worthy of some kind of carbon coin equivalent? It seems like there is some logic to this train of thought. The petro-states will have to be compensated, or they will become desperate and turn into such a force of disruption that efforts to avoid a mass extinction event will fail.

This part of the plan may sound to some people like giving in to an extortionist who is saying, “Pay me or I’ll blow up the world.” But practically everyone on Earth has used fossil fuels in their lives by eating, traveling, using the internet and so on. It has to be admitted: We’re all in the same boat. The Earth is a tiny boat in a vast endless sea, and we have nowhere else to go. We need to employ a kind of eco-realpolitik that refrains from too much righteous judgment, acknowledging that all nation-states are obliged to keep their citizens free from disruption, unemployment and starvation.

All forms of quantitative easing, including the idea of a carbon coin, are versions of Keynesian

political economy. Keynesianism has a track record of working when applied — and of disaster following when it wasn’t applied. Keynes’s key point was this: When economies crash, governments have to create jobs by spending new money. Governments control the economy. They make and enforce laws, so they can regulate how businesses operate, direct money to certain work, tax people progressively to pay for their expenditures and create new money from scratch.

What distinguished the neoliberal era of the last four decades is that governments gave over much of their decision-making to the market, thinking it was the best decision-making apparatus. But the market is inadequate to meet the realities of economic and ecological crisis. It is no longer a place where people meet to trade things — that’s an anachronistic use of the word. Now, “the market” is a name for a simplistic algorithm to create profit. The last 40 years demonstrate that the consequences of using it as the exclusive method for making decisions include gross inequality among humans and the wrecking of the health of the biosphere.

The market is a fool. Now that that has become clear, it has to be seized by government in a Keynesian fashion and redirected toward justice, sustainability and survival. A classic example of this kind of seizure of the market happened in World War II, when the British treasury took over the Bank of England, telling it, “We’re now making the decisions as to how to spend money, and we’ll make them on the basis of doing what we need to win this war.”

That was easier then than it will be now. When bombs are falling on your home and you need to fight for your life, it’s easier for government to seize the financial system and put it to use to pay people to make that existential defense. Though climate disasters will be as bad as World War II if we let things go — sea level potentially many feet higher, millions dead in fatal heat waves — these consequences will play out over the coming decades. We are better at dealing with present dangers.

Even if we see the danger, the effort needed is not the same as in a war. It’s a matter of the world community replacing its previous technologies, which accidentally threw us into great danger. This is quite vague compared to the visceral reality of bombs falling on your city and other people actively trying to kill you. Climate change does not focus the mind like the prospect of immediate death.

But it is absolutely the case that this is a struggle for the health of the Earth, and therefore for all of Earth’s creatures. In this struggle, all of humanity should be understood as being on the same side. To dodge this present danger, the governments of the world are going to have to act in a coordinated response. They’re going to have to agree to direct their private industries and their markets and aim them at the common good.

This is, of course, a message that raises eyebrows. It’s a case that’s going to have to be made and fought for. And compensating the petro-states, in some prorated, discounted, amortized way, is going to have to be part of this project. We are also going to have to reform the existing political economy to the present need, so that we can cope with a biospheric existential emergency. This means we are, by necessity, going to be engaged in a multivariant, unconstrained experiment over the next three decades at least.

During that time, if something like $5 trillion per year is created and paid to workers worldwide — to swap out our energy and transport systems, create new ones in places that never had them, change agriculture and land use to protect wildlife, and compensate the petro-states for keeping their carbon in the ground — then we may achieve a stabilized, just and sustainable world.