Introduction
In the city of Monterey, California, water is scarce, as it is elsewhere in California. In Monterey, the local regulatory environment is innovative and unique. Homes and businesses are required to “find” water whenever they develop an additional need for it. If I want to build a new house in Monterey where none exists, I must find the water. This might mean reaching out to other home owners and actually paying for the purchase and installation of low flow toilets in their homes, until the community collectively “finds” enough water to replace one household’s useage.
Let’s do the same for climate and add incentives. If Corporate America must go it alone because Congress can’t pass Cap and Trade without 60 Democrats, this could be a valid strategy, but to work, this must be a calibrated compulsory regulatory regime with environmentally assertive pricing. A voluntary or self-regulated system likely won’t be environmentally effective at all, but we may get desperate enough to try. Here’s the proposal.
Level Emissions from New Development. If I build or create a new home or business entity, I must “find” the Greenhouse Gases from other businesses and homes in the community, by investing in their low-carbon practices and technologies. To make this cap more effective, encourage local investments. Allow businesses and households to pay it forward by banking these community investments if they can for future quarters of development. Put a significant interest rate on temporary failures to keep up and punish long term non-compliance with the cap as heavily as possible, and refuse to permit such development. Note that the transient emissions impact of the building process itself is accounted for in the following paragraphs.
Make Profit the Engine of Emissions Reductions. For every dollar in profit that I earn as a corporation, make me spend a dollar in carbon scrip and set a tiered exchange rate by Scope. If I earn a quarterly profit of $1 million dollars, I am on the hook for that monetary value in physical Greenhouse Gas emissions reductions as scrip, and I can achieve them almost however I want, as long as they can be physically or financially verified according to rigorous regulatory standards. To use a pricing example that leads to big reductions, if Greenhouse Gas emissions reductions are worth $10 in profit scrip per ton, then I must reduce 100,000 tons of Greenhouse Gas in that quarter to make up my $1 million in actual quarterly profit, or face a punitive tax or fine on my actual emissions that is expensive enough to hurt me significantly, making me want to avoid it. I can “find” those emissions by investing in my local community if needed. Let the profit incentive itself be the engine of Greenhouse Gas emissions reductions.
Create a Tiered System. Create a tiered pricing structure that can be controlled by an objective economic authority such as the Federal Reserve and assign regulators to make sure that no more than one economic entity is claiming credit for a given reduction in emissions. Don’t allow companies to cheat by using outsourcing or other financial or structural sleights of hand to move emissions from tier to tier. The following allowances are conceptual illustrations, not actual policy suggestions, and they represent fictional money, not real trades or actual financial prices on carbon. That’s reserved for markets.
Reduce Scope 1, the operational emissions for which a corporation is directly responsible: my fleet fuel usage; the VOCs that my paints emit in the factory; my backup diesel generator emissions; the coal that my power plant burns; and my use of biomass combustion are all examples. Put the highest price on any reductions that I can achieve in Scope 1 to make it well worth my trouble, both to design new behaviors and engineering processes, and to document them to auditable standards using an environmental record. Sniff my smokestack if necessary or allow me to do it myself if I am combusting fuels or releasing fumes from a factory. For Scope 1 emissions, allow $1,000 profit per ton of emissions reduced. If can reduce my Scope 1 emissions by 100 tons of Greenhouse Gas in a quarter at $1,000 profit per ton, then I’m 10% there.
Reduce Scope 2, which is largely my electricity, heat, and steam usage by allowing $75 profit per ton equivalent. If I need to spend another $300,000 in Scope 2 scrip to meet my obligations, then I’ve reduced another 4,000 tons in emissions that quarter over the previous quarter of operations and investment.
Reduce Scope 3 at $50 profit per ton if I turn to my Value Chain to meet more of my obligations. Employee commute emissions reductions may also be priced as Scope 3 emissions reductions. The actual metabolism of my sector or industry or even my business is not as important as the incentive, and regulators can dial up a more assertive pricing structure as companies get leaner.
Reduce Scope 4, my corporation’s downstream product use emissions, by designing for efficiency, conservation, and lifecycle benefits at a price that regulators choose for policy effectiveness. Since these emissions reductions in Scope 4 are highly desirable, they need not necessarily be cheap.
Beyond scopes, if I invest in the surrounding community in order to achieve the reductions I need instead of taking ownership myself, let that price be much cheaper at say $5 profit per ton. And lastly, if I resort to commodity trading on the open market to get the reductions I need, let me account for that carbon at $1 profit per ton, so that I must reduce 1,000,000 tons per quarter at the real market price if this is my only strategy. Keep in mind that if the U.S. commodity markets are actually moving at $4 real per ton, I’m paying $4,000,000 in real money for the reductions that I didn’t invest in using carbon scrip, but I only made $1,000,000 in profits. Perhaps this should be my punitive fine for a failure to reduce my real emissions at the exchange rates that regulators have set between scrip and real money, by Scope. For this business, if the quarterly $1,000,000 is representative of long-term performance, then $4,000,000 alone represents a year of earnings. That’s a significant return-period loss event that threatens the viability of my business, just because I traded rather than reducing or investing in community or ecosystem emissions reductions. That shell game gets expensive.
Segregate the Commodity Markets. If the commodity markets absolutely must be the primary mechanism of reduction, then create tiered or pooled commodity markets, with separate pools for each tier or Scope. Don’t allow entities to trade emissions they don’t own for a premium, but rather ensure that it be done cheaply. Emissions that trade at the highest premium must be transactions between Scope 1 owners and Scope 1 owners, to ensure that such traders maintain adequate skin in the climate trading game rather than a dangerous climate trading bubble that would fuel a sustainability melt-down. Make these electronic transactions rather than OTC transactions to ensure transparency, but insist on ownership as well.
As I see it, the proposal is effective and free of negative incentives or moral hazard. The complexity and the cost of measuring, proving, documenting, or auditing emissions reductions are incented by the high premium placed on those emissions reductions as Scope 1 reductions. The easier and cheaper the proof, the more worthless the climate scrip that I must use, the more sheer tonnage of emissions reductions I must create in order to to make up for that.
Prediction and control are clearly going to be perceived as an issue here. Policy makers want reliability, but in my opinion they’re unlikely to find it under any regime. Cap and Trade alone might get us 5% over time or 10% at best in my opinion. To achieve 20% in the current political climate in Washington is just impossible, and Congress’ efforts are likely to be incompetent to the extent that they are watered down in the Senate. So while Cap and Trade seems to give us a reliable emissions target so that we know what we’re achieving, it’s not going to work that way. A Carbon Tax will also be difficult to calibrate to a specific emissions target, at least at first, before we know how the economy will respond. In contract, this proposal guarantees carbon neutral development and guarantees a bend in the emissions curve that is constructively encouraged by the profit motive. No, the policy doesn’t tell us how steep the bend would be or what target would be achieved and when, but it reliably and aggressively reduces emissions in a way that aligns with economic performance. It’s a worthy proposal.
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