Episode 13: Could a New Global Currency Help Avoid the Climate Crisis? [Full Transcript]

Carbon Currency Part 1

Casey: Hi, this is Casey Pickett. You’re listening to Pricing Nature.

If you’ve been following climate policy with us for the last two years, you’ve probably noticed that no one has found a great policy solution yet that works in practice at the scale we need. Carbon taxes and cap-and-trade systems can be politically challenging. It’s hard to get public support, and even when you have it, prices are usually too low to set us on a path toward the Paris Agreement target of 1.5 degrees Celsius.

If you listened to our last Pricing Nature episode, you heard us talk about another approach to mitigating climate change. Carbon credit systems give parties that reduce or remove carbon from the atmosphere a platform to sell those reductions and removals to those who want to offset their own emissions. Carbon credits  can generate funding for projects that mitigate climate change, and theoretically, this helps us reduce our emissions faster than we could otherwise.  

The biggest issue with carbon credits is whether that’s true.  Do we reduce emissions faster? or not? Carbon credits create a real moral hazard: If you know you can offset your emissions, do you end up spending less time, attention, and money to reduce your own emissions than you would if you didn’t have access to carbon credits? For example, have you ever taken a flight you were borderline on taking, because offsetting your flight gave you confidence in your environmental credentials? 

I have.

So I can’t help wondering, Is there another way to encourage emissions reductions? Something in addition to both carbon offsets and carbon pricing policies, to motivate faster emissions mitigation work?

Something that, unlike carbon taxes, is politically attractive. Something that doesn’t risk the moral hazard created by carbon offsetting?

What if you could just get paid directly for carbon removal or carbon reduction?  You mitigate carbon, you get paid, and you take the recognition. Could that push meaningfully against the fossil-fuel-oriented incentives and infrastructure of the global economy?  Could it flip the economy into sequestering more carbon than it pumps out?

“What?” You say? Crazy idea, I know. Who’s going to pay, right? And how could you get paid “not to emit”? 

Well, some folks in the climate policy space have an idea to create an entirely new currency, which would be paid out to companies and individuals who verifiably mitigate carbon emissions.  

But even if this debatable idea has merit, could we implement it soon enough? It might mean a significant reconfiguration of the global financial system.

If we’ve learned one thing over the past two years, it’s that governments around the world can coordinate in surprising ways. Before COVID and the war in Ukraine, you were on pretty firm footing to say, “the world moves slowly.” But now we’ve seen the global economy shut down in a week, and we’ve seen countries work together to put a global superpower in a kind of economic vice grip. The world can move quickly… when it has to.

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Casey: Welcome to Pricing Nature, a podcast from the Yale Center for Business and the Environment, the Yale Carbon Charge, the Yale Tobin Center for Economic Policy, and the Carbon Pricing Leadership Coalition. 

I’m Casey Pickett, Planetary Solutions Project Director and Director of the Carbon Charge at Yale.

Naomi: I’m Naomi Shimberg, a senior in Yale College. 

Jacob: And I’m Jacob Miller, a recent graduate from Yale College.

Casey: Today, we bring you part one of a two-part episode on the concept of a carbon currency. In this episode, we’ll get our heads around the idea, and we’ll discuss some of the strongest criticisms against it. Today will prepare us for next episode, when we’ll bring you a panel with three very different kinds of thinkers on the economics of climate change. Should we get started?

Naomi: Wait, Casey, tell them who’s on next episode’s panel!

Casey: Ah yes. Next episode we’ll hear from Delton Chen, Australian engineer and originator of the idea of a carbon currency. Kim Stanley Robinson, one of the greatest living science fiction writers. He wrote The Ministry for the Future, the novel that popularized the carbon currency idea. A must read. And finally Kate Raworth, an English economist known for the doughnut economics model, which aims to balance essential human needs and planetary limits. 

But before we get to that episode, let’s prepare. What IS carbon currency?

ACT I: What is carbon currency? 

Casey: So, I first heard about this idea in a strange way. Some Yale alumni inquired if anyone at Yale could review this concept of “payments for carbon reduction in the form of a new currency.” Those alumni ended up chatting with me, as the director of the Yale carbon charge, and I went back and forth a little bit with the idea’s originator, Delton Chen. To be perfectly frank, I checked it out with some Yale faculty and they were nonplussed. And then I’m embarrassed to say, I let it go. 

A year or two later, I read Ministry for the Future, by Kim Stanley Robinson, or “Stan” to his friends and acquaintances. And I was thrilled when I saw the idea of a carbon currency not only working, but also saw the idea’s originator, Delton Chen, get a cameo in the novel. And that rekindled my interest… So we reached out to Delton Chen and Stan Robinson to talk about this idea. 

Naomi: And how is the carbon currency described in Stan Robinson’s novel? 

Casey: Well…let’s see..page 294: a big consortium of all the large central banks would issue together a single new currency: one coin per ton of carbon-dioxide-equivalent sequestered from the atmosphere,” And it’s sequestered, “either by not burning what would have been burned in the ordinary course of things, or by pulling it back out of the air.” It continues, “[The central banks] promised to establish a floor in the value of this carbon coin… and they foretold a rise in the value of the currency over the coming decades. By doing these things they made this investment a sure thing, assuming civilization itself survived.”

Naomi: And before we go any further, let’s just all get on the same page about what a central bank is exactly. Most countries have a central bank. The Bank of Japan. The US Federal Reserve System. Central banks aren’t like commercial banks. None of us can open a checking account there or get a home loan.  They exist to ensure the stability of a country’s financial system by making monetary policy; for example, by setting interest rates. 

Casey: Got it. So returning to the quote from the novel, under this policy, central banks would be backing a “carbon currency” that’s issued in exchange for pulling carbon out of the air?

Jacob: Yes, and it would also be issued to those who “don’t burn what would have been burned in the ordinary course of things.” That sounds an awful lot like we’re getting into counterfactual territory…

Casey: Ah yes, counterfactual, what would have happened if not for some intervention.

Jacob: Yeah.  And it also sounds a lot like carbon credits or offsets.  How is this different from carbon offsets?

Casey: That’s a solid and difficult-to-answer question.  But it is a bit different.  It will become clearer as we unwrap the idea.  Stay with us.

Naomi: So the idea is to give one unit of carbon currency for a ton of CO2 removed from the atmosphere (so, sequestration), or in exchange for not creating the ton of CO2 in the first place.

And though this carbon currency idea came into the public consciousness through Stan’s novel, it’s not just some wild SciFi concept. The more we researched this episode, the more we realized just how important something like this could be, and that there is a growing body of work supporting it.

Casey: Tell us more, Naomi.

Naomi: Well, to start, we spoke with Vanessa Fajans-Turner, the Executive Director of Bank Forward and current candidate for Congress in New York:

Vanessa Fajans-Turner: How do you appropriately value the preservation of nature? What if there was a way we could fund the climate transition by creating a new global currency.

Casey: Create a new global currency? Sounds like a tall order! 

But then again, it happens all the time… Bitcoin is a new digital currency! And Ethereum, Litecoin, Dogecoin… 

Jacob: Sounds like a joke but did you know Dogecoin is legit? The Dallas Mavericks accept it as a payment for tickets and merchandise. 

Casey: Really living up to their name…

Jacob: Yeah—Mavericks. 

Casey: The history of alternative, or what we call “complementary,” currencies actually stretches back to before digital currencies. One of the best examples is the Swiss Wir, which was created in the 1930s and is still in circulation today. Ithaca, NY and the Berkshire region of Massachusetts have their own currencies. And the IMF has its own invented asset type that operates a bit like a currency. 

Naomi: Ok, so we’d make a new currency. Anyone could earn one unit of the currency by removing one ton of CO2 from the atmosphere, or preventing it from going up in the first place. And by doing so, Vanessa is saying we value the preservation of nature.

Casey: But doesn’t carbon pricing value the preservation of nature already? Carbon pricing says, doing good work is free, and if you do bad stuff, you gotta pay! In my mind, rewarding people who don’t pollute seems much more complicated than just taxing the people who do.

Naomi: That’s a good point Casey, but it might not be so simple. Vanessa notes that there are important differences between paying someone to do good work and charging them for doing harmful work.

Vanessa Fajans-Turner: Doing no harm is different than doing good. When we face a real global crisis, we don't simply have time to be neutral on the issue.

Jacob: Casey, to your question: people respond differently to what are called “carrot” and “stick” policies.  Carrots are policies that reward good behavior, and sticks punish bad behavior. A carbon tax is a policy stick. But a carbon currency for good climate activity… Now that’s a big fat carrot.  And Vanessa’s argument is: we can’t have a coherent suite of policies with only sticks and no carrots. 

Naomi: Exactly. We need both carrots and sticks, but we especially need carrots to incentivize good action such as carbon sequestration and carbon removal. 

Casey: And why is that?

Jacob: Well, it’s pretty clear from climate and economic models that it won’t be enough to steadily reduce the amount of CO2 we emit until we hit zero. Once that CO2 is in the atmosphere, it sticks around for a while, continually heating up the planet, so we need to come up with methods for pulling that CO2 directly out of the air. 

Casey: For example?

Naomi: Well, things like direct air capture, carbon mineralization, and improved soil management can actually suck carbon from the atmosphere. Unfortunately, carbon taxes and cap-and-trade systems don't incentivize those projects explicitly. A carbon currency would provide the necessary incentive for carbon removal projects.  

Casey: Is that true? A carbon tax policy pretty easily COULD be written to provide tax credits for carbon sequestration, or to accept removal offsets as tax liability reduction.

Jacob: You mean like a carbon tax that can flip direction? Paying out as well as charging?

Casey: yeah.

Jacob: Seems workable. Some carbon tax proposals in the U.S. have included rebates for sequestered carbon, basically a negative carbon tax. But to adequately fund the amount of carbon reductions and removal that we need to stay under 1.5 or 2 degrees celsius of warming, the world needs to spend a few trillion dollars every year. And in order to generate that kind of money, we probably couldn’t rely on carbon tax revenues alone. 

Naomi: Yeah, to put that into perspective, if we wanted to fund carbon removals with the revenue from a carbon tax, we would need a tax that covers all of the world’s emissions at about $50/ton. The global average carbon price is just over $4/ton. So we probably need a mechanism that will fund carbon removals at a larger scale than a carbon tax feasibly could.

Jacob: That’s a great point, Naomi, but I think we’re still missing the bigger picture. Carbon currency isn’t just about fixing an economics problem like not having enough money to fund decarbonization.

Naomi: Oh okay, say more.

Jacob: I think the best way to answer Casey’s question, “Is a carbon currency any better than a carbon tax?” is to think about the climate crisis as a social problem. And to solve it, we need a social movement. We need widespread engagement. Lots of people, doing things a little differently.

A carbon currency provides a way for people and companies to engage with a climate solution in a direct, visible way. 

Casey: Okay, paint me a picture…what does this look like?

Jacob: Hmm, well let’s say, in a world with carbon currency, there’s a farmer who starts spreading carbon-adsorbing rock dust onto their fields. They apply for, and are issued, carbon currency for all the carbon they sequester in their field. And then Mahindra (that’s one of the companies we spoke with for our internal carbon pricing episode) makes an announcement -- they’ll accept payment for their tractors in the form of carbon currency.

Casey: Sounds cool, okay. 

Jacob: And then two years later, they announce that employee bonuses can be issued in either cash or carbon currency. And then John Deere does the same. 

Casey: And then Elon Musk feels left out, so he starts building tractors and decides to accept carbon currency as payment for Tesla and SpaceX. 

Jacob: Exactly. And then the Dallas Mavericks, who are at the head of every social movement, decide to get on board.

Casey: Yeah okay I see it.

Naomi: You guys have mentioned Elon Musk, the Dallas Mavericks, and dogecoin all in the past 30 seconds….can we please tone down the crypto-bro energy a bit here?

Jacob: *react* Sorry Naomi, can’t help it. Diamond hands.

Casey: Jacob “diamond hands” Miller

Jacob: Okay, okay, my point is that we’ve gotta change individual behavior, and corporate behavior, and then political behavior… we’ve gotta slow our consumption, and support good conservation work. And a carbon currency has the potential to create a social domino effect. I think the carbon currency sort of works backwards: it starts with a vision of a world where people are exchanging goods for this currency that represents good work to preserve the planet.

Casey: Right, okay...

Jacob: Now, an important clarification is that carbon currency isn’t designed to be used this way at first. Before the carbon currency could be used as a medium of exchange, some person or company would need to step forward and say, “I will offer my goods and services in exchange for carbon currency.”

Naomi: Right. And as more organizations step forward to accept carbon currency, and as public trust grows around it, it could eventually be accepted as a universal form of payment. That’s the long term vision, anyway. 

Casey: Okay, so, I wouldn’t be able to take my carbon currency to the store and buy my groceries with it? 

Naomi: No, you couldn’t. At least at first. *pause* Economists talk about money as having three central purposes: unit of account, store of value, and medium of exchange. Initially, the carbon currency would function as a unit of account and a store of value, but it wouldn’t be a medium of exchange to begin with.

Casey: And how would it eventually be accepted as a medium of exchange?

Jacob: Well, a currency can be used as a medium of exchange whenever two entities agree to it! I mean, a la dogecoin and the Dallas Mavericks for example. In The Ministry for the Future, carbon currency is accepted as the most credible form of currency after the global economy goes into a tailspin with runaway climate change and all that. 

Casey: I remember that. 

Jacob: But yeah, at least at first, Delton Chen (the originator of the carbon currency idea), proposes that a carbon currency should function as a unit of account and store of value, but not as a medium of exchange.

Casey: Unit of account, meaning a form of measurement. We measure value in economic terms using money. We denote prices with money. We track who owes how much to whom with money. That’s how we use money as a unit of account.

Jacob: Yeah.

Casey: And store of value, meaning it maintains its worth over time. I put $100 in the bank, or under my mattress (not advised) and a year or ten years later, it’s still worth the same amount, adjusted for inflation.

Jacob: That’s right.

Casey: Ok, so now I want to know: (1) how would the carbon currency be a standardized unit of account, and (2) how would it derive its value?

Naomi: Well, Casey, your first question gets back to the idea of verification, which we talked about in detail last episode. With Stan Robinson’s carbon coin concept, third-party organizations track and certify that carbon is sequestered or reduced. In this episode, we won’t focus on the verification process, but it’s important to note that a verification system that tracks CO2 reductions and removals accurately is no small ask. But for today, we’ll suspend our disbelief and assume that the verification process could be worked out in the future.

Casey: Ah yes, assume a miracle. 

Naomi: We’ll be doing that a lot today.

Casey. To hear more about the complexities of certifying emissions reductions and removals, check out our last episode on carbon offsetting. 

Anyway— the verification process is what makes carbon currency a unit of account. What about the second characteristic of money… how would the carbon currency derive its value?

Jacob: Well, the idea we’re focusing on today is that the world’s central banks agree to back the carbon coin to guarantee its value. This idea is the one conceptualized by Delton Chen and popularized by Stan Robinson.

Casey: Ok, and rewinding a second, what does it mean for a central bank to back a currency?

Jacob: Basically agreeing to buy it back at increasing rates so that people can use it as an investment tool. 

Casey: Got it.

Jacob: The central banks’ backing establishes a foundation for trust in the currency. If we all suddenly decided that US dollars were just slips of green paper, and stopped accepting them as a form of payment, they’d lose all their worth! And for Stan Robinson’s Carbon Coin, that trust is largely built on a coordinated effort by central banks around the world. 

Casey: Remind us: what does that coordinated effort look like in the book?

Jacob: The central banks agree to buy back these coins at a steadily increasing price in standard currencies, like Dollars, Pesos, Euros, Yuan, so that the coins have a guaranteed value over the long term. They become a low-risk asset amid the uncertainty caused by the climate crisis. 

Casey: Ok, let me see if I’ve got this idea down: central banks issue the currency to individuals and institutions for their decarbonization efforts and promise to buy back the currency, which creates trust in its value.

Jacob: Yes…that’s the super pared-down version. Next week our guests will get into some  funky details.

Casey: I’m excited, but I also have a lot of questions. [rhetorically] Why would central banks back this? Would buying back the carbon coin with traditional currencies essentially create more money in the world?  And would that cause inflation?

Jacob: You’re asking all the right questions, Casey:

 I think it’s time for:

ACT II: What possibly could go wrong?

Naomi: Well, Casey, you’re not alone in having questions. The economists we spoke with about the idea of a carbon currency were quite suspicious. But..you know...I think one of my top five favorite things about economics is all the skepticism. 

Casey: Do you really have a list of the top five things you love about economics?

Naomi: Well, not a physical list, but I mean—

Casey: —Naomi how far down does your list go?

Naomi: Not important, not important. My point is that the economists we spoke with were dubious, and I appreciated that. Here’s Suzi Kerr, Chief Economist at the Environmental Defense Fund.

Suzi Kerr: So the economists that I spoke to were very skeptical about it. I should admit that they were all microeconomists. And frankly, they all think it's slightly magical thinking. 

Naomi: And then there was Sam Kortum, an economist here at Yale known for his work on international trade.

Sam Kortum: My initial reaction was a little skeptical, I mean, I'd say even before I read anything. So I just want to say that. I was thinking of the Larry David commercial for cryptocurrency, I guess I'm being like Larry David… I guess I’m being a little negative.

Naomi: And then finally Bill English, a professor of practice at Yale and former member of the Fed’s Board of Governors.

Bill English: I think this would be a really big increment to inflation and probably a pretty inefficient way to raise a whole lot of revenue.

Casey: Wow, a wholehearted endorsement across the board!

Naomi: Yeah, but at least these economists are taking this idea seriously enough to reflect on it. We have to critique the idea in order to get it right.

Casey: That seems like a rose-colored interpretation, but okay. True—and Delton Chen, is the first to say that the idea is in the early stages, with the practical kinks still being worked out. He’s calling for a pilot study of the idea to test it. 

Naomi: Right. So with an appreciation for the value of the novelty and potential viability of the carbon currency, let’s get into its various critiques. Suzi Kerr, Sam Kortum, and Bill English offered four critiques, each sort of depending on the previous one being answered: 

Casey: Lay them on me!

Naomi: So first: How is carbon currency any better than a carbon tax? Second: Would central banks ever sign on to this idea? Third: How would we avoid runaway inflation? And Fourth: How do we avoid free-riding? 

Casey: Got it. Now this first critique goes back to what I was saying earlier today: what would a carbon currency give us that a carbon tax wouldn’t? I’m curious what the economists said.

Naomi: Bill English said carbon taxes avoid measurement problems we might see under a carbon currency. 

Bill English: A carbon tax seems to be pretty simple: we tax what we don't like if people don't produce it, they don't pay the tax. And you, you kind of get in all the cracks in some sense, at least if you get around the measurement problem, right. A subsidy regime seems harder to me to get right. 

Casey: Yeah, that makes sense to me. With a carbon tax, you’re taxing the carbon itself when it comes out of the ground in the form of a fossil fuel, or when it enters the economy. You don’t have to worry about its emissions in the same way. But with a carbon currency, you’re focusing the intervention at the other end of the carbon’s life cycle, at the emissions stage, which is much harder to measure.

So, just to reiterate: the carbon currency would definitely go to entities that remove carbon from the atmosphere—that’s pretty easy to measure because the carbon will be there in physical form—But in this proposal, the currency would also go to entities that reduce their emissions (that is, emit less than they would have otherwise, which is harder to measure). 

Naomi: Exactly—with carbon reduction we run into an issue called additionality, which means the difference between what happened with an intervention and what would have happened under normal circumstances. Sam Kortum gave a really useful analogy here:

Sam Kortum: Let's start from the situation where we're not creating any carbon emissions. And then the tax is paid on how much the actions that you take generate carbon emissions, and then you pay a tax on that.  

You take your business class flight, which has more carbon emissions. Okay. Now you have a tax. Now, you don't go business class anymore cause that got priced out, and so instead you just go economy. You reacted to the carbon tax by lowering your carbon emissions. 

With the carrot, it's sort of ill-defined what the base is, because you could just say, oh, I want to go business class, so give me some money so I can go economy class. Well, who says you should have gone business class to begin with, how do we even define what that baseline is? Or a business could develop and say, You know, oh, we're going to get into this business. It's super dirty, but now we're going to do it in a cleaner way. Well, who says it was right that they should have been thinking about getting in that business to begin with?

Casey: Interesting. You could get around this issue by only giving out carbon currency for carbon removals, which are easier to measure. But Delton Chen and Stan Robinson’s proposals give carbon currency for both removals and reductions, so we have to be wary of this pitfall. So to take Sam’s analogy, which to be clear, I can’t imagine we would ever actually do -- we would never actually give someone credit for going economy class when they would have gone business class. But, it’s a useful, extreme example to make the point. In his example, we have to know if you would’ve gone business class to begin with, which is pretty hard to prove.

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Naomi: So, backing up, let’s suppose this problem with additionality was figured out—

Casey: —Or, if it can’t be figured out, that the policy is focused purely on carbon removal, where the baselines are clear, no carbon is removed, and measurement is straightforward-–you can measure physically collected carbon. 

Naomi: Okay.. so suppose we had a solid carbon currency policy proposal. Who would fund it? That leads us to the second concern: convincing central banks to back the idea. When we asked Bill English, who used to serve on the Board of Governors of the Fed, about this challenge, he laid out two possible ways central banks could take action around climate:

Bill English: So I think when it comes to central banks thinking about what they might do in response to climate change, they're kind of two sorts of actions central banks could take. And one is not all that controversial. (I mean, everything is controversial for economists, but not that controversial)  And one, one is more controversial. So the not controversial one is that the central bank should use its supervisory and regulatory authority to ensure that banks are appropriately measuring and managing their climate risks. The more controversial one is that central banks should use their authorities to somehow encourage reduced carbon emissions.

Casey: Ok—let’s start with this first, less controversial action. What does he mean when he says appropriately measuring and managing “climate risks”? 

Naomi: Good question. Here’s one way to think about it—central banks are key in determining financing on loans. Bill English gave the example of residential mortgage loans in coastal Florida. The Fed shouldn’t grant loans to a bank that uses data from the past 50 years to make predictions about the next 50 years, which will probably look a lot different because of increased climate risk.

Casey: Yeah, climate change is likely to make the future look very different from the past. And now tell me about this more controversial policy—specifically encouraging climate action? Why is this more controversial?

Naomi: Well, it would require many central banks to change their mandates.

Casey: And, remind us what a central bank mandate is? 

Naomi: It’s their main objective. In the U.S. for example, the Fed has a financial stability mandate and a monetary policy mandate (that is stable prices, high employment, and moderate interest rates). Nothing in there explicitly about averting a climate catastrophe. 

Casey: But couldn't averting a climate catastrophe fit within a broad interpretation of the Fed's mandate? How high can we expect employment to be, and how stable the prices, in a 3-4 degrees C warming scenario? As crops fail, people retreat from coastlines, and climate migration destabilizes markets, and then reactionary forces destabilize governments, how good is the economic outlook?

Naomi: Yeah, you’re right to say that under a broad interpretation. But, as Bill English reminded us, the Fed takes a very narrow interpretation of its mandate:

Bill English: So the Fed's mandate: there's kind of a financial stability for supervision, we talked about that, and then there is the monetary policy mandate, which is price stability, maximum employment, and moderate long-term interest rates. And it just isn't clear that allows the Fed to take action on climate change beyond those supervisory things.

Naomi: Now, while the Fed has a pretty narrow mandate, the European Central Bank, or ECB, has a much broader mandate. 

Bill English: I saw an interesting speech at the American economic association meetings in January by Isabel Schnabel who's on the governing council of the ECB. And she said, “Gee, the ECB has two mandates. The primary mandate is low and stable inflation, as you expect. The secondary mandate is as long as you've got the first mandate satisfied, take other steps to support the economic policies of the European union.” 

Naomi: Bill told us that this is why the European Central Bank is able to support the European Union’s climate policies.

Bill: The European Union has economic policies aimed at climate change and addressing climate change, so the ECB has a fairly straightforward argument that they are taking steps to support the use policies in that area that's within their mandate. And so they should do that. The problem is for some central banks, including the Fed, their mandate is narrower.

Casey: So the European Central Bank has a broader mandate than the US Fed. Now bring us back to carbon currency. How would the Fed go about changing its mandate to back the idea if it wanted to?

Naomi: Well, in the U.S., the Fed would have to get permission from Congress. Bill English argues that changing the Fed’s mandate would be just as hard (if not much harder) than just addressing climate change with carbon taxes and climate investments through Congress.

Bill English: So I think for the Fed to take a bigger step in this area, you'd have to go to Congress and say, we want a change in our mandate so that we can address these important issues. And, Congress may or may not want to provide such a mandate at the moment. Probably not, but, but you know, over time you would hope that might change. But Congress could ask the Fed to take action in this area. It also could just do it itself right by providing taxes and transfers to, to implement a policy that would help a lot on climate change. And those seem like more powerful tools than something the Fed could do, but, but I think it sounds some level this is in the hands of the Congress in the U.S.

Casey: I see. His point is why take this inevitably controversial route of changing the Fed’s mandate in Congress when you have to pass climate policy through Congress anyway.

Naomi: Right. And if Congress isn’t passing much simpler climate policies right now, why in the world would they support a policy that is 1) more unusual, 2) requires changing a fundamental American institution, and 3) a more roundabout way to address carbon emissions?

Bill English: It would be tough for the Fed chair to go to Congress. You know, he's got to do his monetary policy testimony twice a year. So he goes up to the hill and he says, “Okay, we've taken these steps. These are steps that Congress has not chosen to take itself because Congress is not sold on the idea that this is an important enough problem to address, but we are going to address it ourselves, despite the fact that our mandate on this isn't entirely clear.” I think that that would be a very, very tough case to make politically.

Casey: Well it seems like there would be a more compelling way to frame the argument in the Fed chair’s speech, but I take Bill’s point. It’s more of a feasibility argument than a normative one. Even if he thought changing the Fed’s mandate was a good idea, he’s saying it’s politically very difficult.

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Naomi: Okay but for the sake of argument, let’s imagine that problem is solved: the central banks either found a way to fit this policy into their existing mandates like the ECB, or they expanded their mandates to support a carbon currency policy. 

Casey: Yeah yeah Naomi, just assume away all our problems. I’m totally with you. 

Naomi: Yep I mean that how economics a lot of economics happens. So. What happens next?  Let’s consider the third major concern: inflation.

Casey: Inflation! I was waiting for you to get here, because this is the most obvious concern to me. What are the economists saying about inflation?

Naomi: Well, here’s Suzi Kerr and Bill English:

Suzi Kerr: And so when, when faced with these sorts of ideas, particularly in macroeconomics, I always find that it's really useful to go right back to sort of the fundamentals. So what we're talking about is funding a transition to low emissions. That requires real resources. It requires people, it requires minerals. It requires equipment. And so ignoring anything to do with cryptocurrencies or carbon coins or monetary policy, you have to think, where are those real things actually coming from? 

And here’s Bill English:

Bill English: Under the plan, several trillion dollars per year of carbon rewards are likely to be needed. That's a lot of money to generate through inflation. US currency is about $2 trillion. So you can't really generate an amount like that. Now we're talking about all central banks around the world as part of the plan, but it would still require a whole lot of inflation, I think, to generate the revenue that might be required.

Naomi: So I think this is a good starting place, but there’s a bit more nuance to explore here.

Casey: Do tell.

Naomi: Well, under very certain circumstances, like a recession or a lockdown, the government can create those real resources that Suzi was talking about without feeling inflationary consequences.

Casey: Right, we saw a lot of this kind of thinking in 2009 given the financial crisis and 2020 during the start of the pandemic. 

Naomi: But the whole notion that the government can print money to solve problems can’t be applied to just any problem at any time. I mean, massive government spending in the US over the past two years didn’t exactly insulate us from the inflation we have today

This kind of activist policy—printing money to solve problems, for example—is known as Keynesian policy, and most economists say it should only be applied to the short-term. When we asked Sam Kortum about inflation under a carbon currency, he argued that the proposal is basically asking us to apply short-run thinking to the long run, is a big no-no.

Sam Kortum: In recent years we've had the great recession that we had the COVID recession, and we've kind of developed new monetary policy instruments, which gives the sense of getting something for nothing. And you might get something from nothing from a Keynesian, macroeconomic view. That's not, not to be a long run idea like climate policy. That's kind of a short run idea that has some relevance right after the great recession or when we're all kind of in lockdown. But I think it's taking that idea and saying, oh, well the Fed can just kind of print money, it hasn't created any problems recently. And so why don't we do that to provide this carrot, but is going to be inflationary over the long run. That's something you can do in dire situations, and then you sort of back off from that as the economy starts to recover. So I don't like this kind of mixing with: the Fed seems to be able to do this something-for-nothing policy, and now we can apply that to carbon policy, to provide funds. 

Casey: Oh, interesting. Let me see if I can analogize. Addressing the climate crisis with monetary policy (like interest rates and printing new money) is like running a marathon. Sam Kortum is saying that, as a tool for addressing climate change, creating money is like sprinting. You can do it for a short period of time, but then you’ve gotta catch your breath. And you definitely wouldn’t want to sprint a marathon. You’d run out of steam pretty fast and collapse into a weary pile of…in this case, severe inflation. 

[music]

Naomi: Ok, but now let’s assume that we are able to print more money and it wouldn’t cause rampant inflation. 

Casey: Gosh, Naomi, all this “assuming away problems” we’re doing reminds of the Sidney Harris cartoon where two scientists are standing in front of a blackboard…The first scientist has written an equation on the board, and right in the middle of the equation it says “a miracle happens here.” And the second scientist says “I think you should be more specific in this second step”

Naomi: Yes, Casey, it reminds me of that too, but you know, we’re engaged in a thought-experiment. And I suppose that the Fed will fund carbon currency without inflationary consequences. 

Casey: And I suppose you can suppose anything you want.

Naomi: Suppose we move to the economist’s fourth main concern: free-riding. Suzi Kerr explains.

Suzi Kerr: In some cases you can print money, which is kind of what this is. And by doing that, you can put those people and resources back into work and then you're creating more things and those could in theory, be used to do the low emissions transition, but there's a real limit to that. It assumes that you're in recession, that there are unemployed people and resources. It doesn't worry about the minerals that are required. So it has limits. 

Casey: Okay, so here she's reiterating what Sam Kortum just mentioned. 

Suzi Kerr: And even if it did work and reserve banks were able to just print money without causing more inflation (looking at current inflation seems a little dubious.) Then why would the politicians in their country allow them to use that ability, which is surely limited to help other countries with a clean energy transition rather than using those resources in their own country? So you’re back to the fundamental problem of free riding yet again….So you always have to think where the real resources are, if this sounds magical, it probably is.

Casey: I see. So she’s saying why would a country volunteer their limited resources to fund the global clean energy transition when other countries are not necessarily doing the same thing?

Naomi: Exactly. 

Casey: Ok, so to recap, the economists four main critiques were 1) the policy would be inefficient compared to a carbon tax, 2) it’s politically challenging to change a central bank’s mandate, 3) it would cause inflation, and 4) it lacks protections to avoid free-riding. 

Naomi: Yep, you got it.

Casey: You said earlier that there are some alternative ideas for how to construct the carbon currency. Do any of those ideas get around some of these critiques?

Naomi: Maybe.  And, I can’t believe I’m saying this, but what if crypto were part of the answer?

Casey:  Ah, I can’t believe you just said that.  I think it’s time for….Act III

ACT III: Why don’t we just dogecoin this popsicle stand?

Naomi: Ok, Casey, we’re going to explore two alternative ideas on how to make carbon currency work that might get around some of the critiques we just explored.

Casey: Great. Can you walk us through the first one?

Naomi: Yes. So this first idea comes from Frank Van Gansbeke, a professor of practice at Middlebury College. His idea is similar to Delton Chen’s, but instead of various countries’ central banks backing the carbon currency, he proposes that the International Monetary Fund, or IMF, backs it. 

Casey: And how would that work?

Naomi: So, the IMF would support the carbon currency using an asset called Special Drawing Rights, which are not a traditional currency, but hold real monetary value and can be exchanged for currency or used to repay loans.

Casey: And why does Frank Van Gansbeke suggest that the IMF back the carbon currency, rather than central banks?

Naomi: Well, a couple reasons. First, Frank points out that it might be hard to get a large number of central banks to coordinate. To take just one example, they might disagree on the verification process that’s necessary for guaranteeing the value of carbon currency.

Casey: Sure, that’s easy to see -- that’s a complex process, lots of areas ripe for disagreement.

Frank Van Gansbeke: If you do it at the individual central bank level, you might lose that on the much or the high need for standardization. Right? So what if Finland is going to take it and Chile and China, to what extent are you in ensuring you have a standardized set of greenhouse gas offsetting procedures, right?

Casey: Ok, I can see that. But the IMF doesn’t exactly have the trust of the masses… Doesn’t using the IMF to back the carbon currency create its own set of problems?

Naomi: …Which is why he suggests we recharter the IMF to address issues like equity and environmental standards, two areas where the IMF is often criticized. He also proposes a re-imagining of the whole Bretton Woods financial system to work within planetary constraints, but we won’t get into that right now.

Casey: OK Ok. If I buy that the IMF could be rechartered, and that a central part of its new charter would be backing a special currency meant to help the global economy get off of fossil fuels and get carbon out of the atmosphere, my next question is where would they get the money?

Naomi: Special Drawing Rights!

Casey: Problem solved. We all know what those are. Let’s move on!

Naomi: Haha yeah this idea of using Special Drawing Rights is confusing. Special Drawing Rights are an asset held by the International Monetary Fund that have real monetary value. And right now, the IMF holds more than $30 billion dollars worth of Special Drawing Rights. Frank Van Gansbeke suggests that the Special Drawing Rights be used to back the carbon currency. $30 billion dollars wouldn’t be enough on its own, but the IMF could also draw from some of the $400 billion dollars it holds in traditional currency to support the initiative.

Frank proposes that backing the carbon currency with these existing assets would be better than having central banks back the currency, because central banks would have to create money from thin air. 

Casey: Ah so an IMF-backed carbon currency could reduce the risk of inflation?

Naomi: Exactly. And that’s the second reason Frank proposes having the IMF support the currency. But it’s  still a fairly intricate idea. It would take a lot of change, and a similar level of global coordination to the central bank-backed carbon currency idea..

Casey: To sum up that idea, we back the carbon currency with IMF special drawing rights, instead of a purchase guarantee from the central banks. Less risk of inflation, but still a complicated policy. 

What’s the second alternative to Delton Chen and Stan Robinson’s carbon currency proposal?

Jacob:We dogecoin this popsicle stand. Allow me to explain this idea. 

Casey: If you’d deign to.

Jacob: What if carbon currency wasn’t linked to central banks or the IMF at all? What if it was just a new digital currency like bitcoin, issued by an organization that verifies sequestered or reduced carbon emissions. The company Nori is already trying something like this, with their NORI token. We’ve linked to info about the NORI token on our website, pricingnature.substack.com. 

Casey: Okay, I’m intrigued. Seems like a digital currency that isn’t directly backed by a big financial institution could be subject to considerable price volatility, just like we’re seeing with bitcoin. But it could also be more politically viable, fewer hurdles… Does this digital currency approach get us around any of the four critiques we just discussed?

Jacob: Well, to answer that question, we spoke with Diana Cárdenas, an economist with the Qoin foundation (that is, Q-O-I-N). QOIN is an organization that supports the development of complementary currencies, which are currencies that operate alongside traditional currencies like dollars and yen. Diana Cardenas spent time working at the central bank of Ecuador, and is uncertain whether central banks are the right kind of entity to be developing a carbon currency.

Diana Cárdenas: I'm not sure if central banks are the right actor. [insert] I think this needs to be explored more. It definitely needs to have big actors, especially actors that generate confidence because it's very difficult to have a complementary currency project running if you don't have people really engaged and believing in the purpose and really having this appropriation of the currency.

Jacob: Diana notes that the most important thing about a complementary currency is that there’s confidence in the currency. Central bank and IMF backing are two ways to provide that confidence, and there are others. But let’s take the Dallas Mavericks and Dogecoin example that we talked about earlier. It sounds like a joke, but if you’re trying to buy a Luka Doncic jersey, do you really care if you’re paying in USD or with a bunch of 1s and 0s and a jpeg of a shiba inu? 

Casey: But doesn’t that depend on the fact that I have a jpeg of a shiba inu? Or that I know what a shiba inu is?

Jacob: Casey you’re really showing your cards here. A shiba inu is like the mascot of dogecoin… 

Casey: Ok diamond hands…

Jacob: *laugh*  

Casey: *Whispered* such a crypto bro.

Jacob: Anyways, doesn’t matter, the Dallas Mavericks are gonna give you the jersey whether you pay for it in dollars or dogecoin. If a major institution or company says that a new currency has value, and the people believe them, then it has value. 

Casey: So you’re saying, support from private companies can give a new currency value?

Jacob: Exactly. 

Casey: What do we lose if the carbon currency is built on private adoption first, rather than a coordinated effort by central banks? 

Jacob: Well, in the version of the carbon currency that Delton Chen and Stan Robinson explore, the central banks are able to assign a stable value to the currency by promising to buy it back at a price that rises over time. The currency becomes a low-risk, slow-growth asset, like a bond. …But , under the dogecoin-style approach, you would no longer have that guaranteed growth. Instead, the value of the currency would be defined by speculation, making the price a lot more volatile.

Casey: And speculation is where private investors buy or sell an asset because they think it’s going to increase or decrease in value over time? And in doing so, they drive the price up, or down? On the upside, you’re fine paying more for something as long as you think someone else is going to pay you more than you paid.

Jacob: Yeah, it’s a feedback loop of sorts. A lot like what we saw happen to Bitcoin in the late 20-teens. But as we’re seeing now, in mid-2022, speculation leads to a lot of volatility. 

Casey: Yeah, as of this recording, Bitcoin value has dropped dramatically in the last several months. It’s lost more than half of its value since it peaked in fall of 2021. 

Jacob: There’s a lot of risk in a system built on speculation—you have a bubble that can pop. You have a positive feedback loop of investors buying in, can quickly turn into a negative feedback loop of investors selling it off because they think it’s going to drop in value. 

But Diana points out that, in the case of the carbon currency, speculation may not be quite as risky, because the creation of carbon currency would be linked to the creation of value to the public, in the form of carbon sequestration: 

Diana Cárdenas: The carbon coin… could potentially become a speculative tool, so there can be speculation around it. That happens with many different assets, it happens with bonds. It happens in carbon markets, so that can happen. It's part of my personal criticism to Bitcoin and many other of the cryptocurrency we have right now, they're just speculative tools, that's it. So you play with them and either you win or you lose it all and that's it, but what changed? Nothing changed in that world. 

Now if you have a carbon coin, that actually is created for a good purpose, for a good action, then you already accomplished the purpose, even if afterwards, it's just kept in the pockets of some people.

Jacob: Even if the carbon currency becomes a purely speculative tool, a token that people are betting will increase in value, at least it’s doing some good work. Every unit of carbon currency would represent reduced or removed carbon dioxide. So there’s no harm in letting people play with the speculative tool. Plus, the long-term hope is, while the carbon coin might start as a speculative tool, if companies and institutions started to accept it as payment, that could stabilize its value in the long-term. 

Casey: But wait a second, what if speculation drove the value of carbon currency way down? Without central bank or IMF-backing, there’d be no way to set a floor for the value of the currency. If the price crashed, would it be like when grain prices crash and farmers are unable to sell their grain for a profit? I’m picturing carbon farmers unable to cover their costs selling their stored carbon. And then, when others see that, they’ll be less likely to go into the carbon farming business.

Jacob: [thinking] hmm, that’s a good point. 

Casey: Maybe this is a good place to say…we’re a bit out of our depth here. I’m not sure if the physical stability of currency—that is, it being directly linked to the removal or reduction of one ton of carbon dioxide—would guarantee additional protection against speculation.

Jacob: But Diana also reminds us that it’s early to predict the effects that a carbon currency could have. 

Casey: You could say that right now… we’re just speculating?

Jacob: Actually, yes. 

Diana Cárdenas: There's so many questions and we can only, I think in this case, given the urgency, learn by doing. So just to mention right now, we have been doing quite a bit of research on this and we're trying to create actually a working group or connect to more actors that are working on this… it would be very interesting to connect and to try to find a way to start this…

Since COP26, there have been so many coalitions of this and that, from companies, pension funds, et cetera. So I think we have momentum for this and it could work if we do it in the proper way. And given the urgency, we'll just have to go ahead and pilot  because there's really no time.

Jacob: I really like how Diana puts it—given the urgency, it’s time to learn by doing. 

Naomi: And Jacob, that makes me think of this troubling idea that Delton Chen writes about in the context of his carbon currency idea. That is, the idea of the Green Paradox. Chen hypothesizes that by the time the impacts of climate change are so visible that central banks have to take radical action, it will already be too late.

Jacob: So you’re saying, maybe we need a solution that can be implemented today through a grassroots initiative? Letting public trust in a carbon currency build from the bottom up as companies and institutions agree to accept it as a currency, you know, Dogecoin this popsicle stand?

Naomi: True, Jacob. But I think another very fair response to this idea of the Green Paradox is, well, to challenge it. As Suzi Kerr said, we’re never past the point of being able to act on climate. 

Suzi Kerr: I'd like to challenge the idea of too late and it's never too late, as long as we're still around, we can still act. I always say 1.5 degrees, much better than 2, but 2 is really a lot better than 3 and 3 is really a lot better than 4 degrees Celsius. Yeah, I think thinking about “too late” is dangerous because it risks us giving up when it all seems too hard and it is hard.

Casey: Next week we’ll hear more responses to the four criticisms of carbon currency we brought up today, which come from the framework of mainstream, traditional economics. I mean, newsflash right: the world’s economy and institutions aren’t set up to minimize carbon emissions. It shouldn’t be a surprise to us that these ideas don’t mesh with the way the world is currently set up.

Yet something about the carbon currency idea feels right. And I genuinely don’t know if, in this case, common sense and intuition are aligned with reality. 

Jacob: What do you mean?

Casey: To avert the worst effects of a changing climate, we need to reverse the direction of the fuel source of the global economy. We have to switch from moving carbon from underground to the sky, to now pulling it from the sky and locking it up in soil, trees, oceans, underground, etc. It’s really hard to do. It’s not how our economy and energy system are constructed.  So here comes an idea to create new money to pay for that transition. But when most economists hear this idea, it seems to strike them as a form of magical thinking.

Jacob: Right. They’re pretty skeptical.

Casey: Plus, it raises a whole host of other questions. One of the most emotionally difficult of which is: should fossil fuel companies and national economies built on fossil fuel extraction be paid to leave their fossil fuels in the ground or capture CO2 and pump it back underground. It may seem morally repugnant to pay the people and companies who created this problem. But it might be one of the most high-impact ideas out there. Our guests next episode had conflicting perspectives on this question. 

I don’t want to put too much stock in the carbon currency idea. There are lots of possible climate change solutions.  But carbon pricing hasn’t proven politically viable enough yet to make a big difference.  International climate negotiations are going slowly, with no signs of speeding up. Renewable energy is working pretty well, but substantial barriers remain to achieve the scale we need. Negative carbon emissions technologies are finally gaining grudging acceptance, but the technology has a long long way to go.  

Naomi: You’re saying, we’re not in a position to be throwing away any interesting ideas.

Casey: Exactly. If a new idea for paying people to solve climate change doesn’t work with our economy, we may want to ask, what kind of economy are we running here? Are our current institutions up to the task?  How can they be reimagined for a better future?

From the interviews on this and next episode, it’s hard to tell if entertaining the carbon currency idea is a form of naivete or forward thinking. We heard a few skeptics today. The thinkers we’ll speak with next week suggest it’s forward thinking:

Kate Raworth: I think finance should be in service to a real economy that is in service to life. And as we know right now, life is massively transgressing, the life support systems of our planet. So if we can create jobs in the world that create good work of restoring the living world of drawing down carbon so that we reconnect with the carbon cycle; that we restore and rewild lands and bring back the richness of the ecosystem. But if that can be turned into good well-paid work. I'm all in.

Casey: Thank you for listening, and stay tuned for a very special next episode. 

This episode was written by Naomi Shimberg and Jacob Miller, with help from Casey Pickett. Sound engineering by Jacob Miller.  Original music by Katie Sawicki. Thank you to all of our guests, and to Richard Schorske and Steve Waygood, for their guidance. Thanks to Naomi’s roommate, Numi Katz, for making a good enough impression on Bill English that he agreed to speak with us. And thanks to Josh Rines for his feedback. Finally, special thanks to the Carbon Pricing Leadership Coalition and the Tobin Center for Economic Policy for their partnership, and to Ryan McEvoy, Stuart DeCew and Heather Fitzgerald for making this episode possible.