Climate mitigation policy as a system solution: addressing the risk cost of carbon

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Date of Publication: May 4, 2017

Year of Publication: 2017

Publisher: Taylor & Francis Online

Author(s): Delton B Chen, Joel can der Beek, Jonathon Cloud

Journal: Journal of Sustainable Finance & Investment

Volume: 7: 3

Pages: 233-274

Categories: , ,

How can climate finance could be most effectively mobilized in response to the goal of limiting global warming to 1.5–2°C? Authors Chen, van der Beek, and Cloud propose a new policy involving a “global reward for mitigation services, and a price signal based on risk assessments.”

ABSTRACT: Global 4C is a new international climate mitigation policy that adopts a risk management framework. Global 4C offers a financial reward for mitigation and aims to internalise a Risk Cost of Carbon (RCC) into the economy. Carbon taxes (i.e. carbon prices) are essential for internalising the Social Cost of Carbon (SCC), however a SCC-RCC duality is inferred with an epistemological method and is supported with a new hypothesis, called the Holistic Market Hypothesis. Based on the inferred SCC-RCC duality, a system of complementary market pricing is proposed as an effective response to emerging climate systemic risk and fat-tailed probability distributions for the Earth’s climate sensitivity. The recommended policy instrument is a currency, called Complementary Currencies for Climate Change (4C). 4C should be priced in foreign exchange currency markets (Forex) to mirror the RCC and to incentivise a spectrum of mitigation services, including clean renewable energy and carbon sequestration. A public broadcast message for climate systemic risk should be made each year, in the form of a ‘100-year advance 4C price alert’, which is an assurance of reward prices for carbon mitigation (i.e. the 4C exchange rate) under a Carbon Exchange Standard (CES). The CES is a macro-prudential protocol for central banks to provide collective insurability against climate catastrophe and incentives for socio-ecological co-benefits.

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