In spite of Cop21 being heralded as successful in motivating all participating countries to take concrete steps to reduce carbon emissions, the price of 1000 Tons of carbon at the European ETS market (the largest in the world) has fallen more than 40% in the subsequent two months, to €5.

Price of Carbon Permits on ETS

It is a classic case of “Buy the rumours, sell the facts”, and I am a buyer at these levels, but the drop in price shows that the largest carbon market in the world is not exercising its price discovery function.

The reason to have a market in carbon is to internalise the externalities produced by the burning of fossil fuels, and thus create a level playing field for other technologies such as renewables and carbon capture. But at the moment

• a large proportion of the carbon permits are given free to polluters
• many industries are not covered by the scheme.

The market is broken, but there is enormous political capital in making it work. In the past twelve months the call for a global market has come from several quarters:

• Angela Merkel (Bloomberg News)
• Europe’s biggest oil companies (Daily Telegraph)
• BHP (Financial Review)
• UK Parliament’s Energy and Climate Change Committee (Business Green)

The proposed path is linking the regional markets. The hope is that Industry will no longer be able to make the Carbon Leakage argument, i.e. that making energy production more expensive in one region will simply push polluters to cheaper regions. However, it is doubtful whether linking several flawed exchanges, will guarantee the ugly duckling perform its intended function.

I propose a much bolder approach; a solution that is fairer, much more likely to succeed in its intent, and with many favourable consequences. The advent of blockchain technologies gives us an opportunity to have an independent ledger of the permits to emit Earth’s allowance of greenhouse gases.

How it will work

• Yearly carbon budget agreed by an international scientific committee. Say 20 billion tons per annum (To many analysts, the total budget at our disposal is 1000bn tons). Permits (each representing one tonne of CO2) created and attached to a public blockchain.
• 10 to 20% of yearly budget auctioned at beginning of the year, or at quarterly auctions. Revenues (estimated at €60-150bn) to be used for administering the market, supporting R&D and catastrophe relief for poorest countries.
• Remaining 80-90% distributed equally to all human beings on Earth, with a minimum age threshold. Everyone is issued a Wallet, and one’s allowance is transferred into it by the International Issuing Authority.
• One global market, carbon price traded in bitcoins; when people sell their permits, they receive bitcoins. In countries where bitcoin is not used extensively, Governments will be encouraged to accept bitcoins for payments for taxes and public services.
• Carbon emissions from all sources included.

Advantages

• Fair - permits given free not to polluters but equally shared among humanity
• Universal - Climate change is a global problem, and it requires a solution that goes above national rivalries and interests
• Neutral - By using blockchain technology, no nation is advantaged
• Inspiring - All people on earth joined in a market to solve an existential problem for humankind.

Main Challenges

• How does one reach the 1bn people who don’t have any access to the Internet? Can one provide paper alternatives?
• How and who certifies IDs?
• What do people do with bitcoins? States to accept bitcoins for public services
• Platform - At present Bitcoin blockchain is too slow to accept such a massive coin-drop. However blocksize should increase tenfold soon; alternatively other platforms, such as Ethereum can accommodate size.

The above challenges are technical and surmountable; there is however a large obstacle: the nature of international politics places overwhelming power in the hands of sovereign states, with politicians corrupted by lobbies rather than being concerned about the future of humanity. Indeed in Paris, the concept of a Global Carbon Budget has been rejected as a starting point for policy, because it compels politicians to put national interests below a global imperative. So they fudged and came up with the Intended Nationally Determined Contributions (INDCS), i.e. independent national targets of carbon reductions, without any idea whether the sum of the targets are sufficient to reach the ambitious (and crucial) target of 1.5°C warming. (COP21 has asked the IPCC (Intergovernmental Panel on Climate Change) to draw a similar chart within two years - a preposterously long time, which will make the reduction exercise even harder to achieve).

This chart by David Hone, Climate Change Advisor for Shell, shows a possible path of our Global Budget, given a target of 1.5°C warming (y-axis is billion of tons of CO2) .

 Path of our Global Carbon Budget, given a target of 1.5°C warming

Negative emissions are achieved by Carbon Capture and Storage (CCS). But also the pre-2055 trajectory assumes heavy reliance on CCS; this will only happen if the price of carbon is 8-10 times the present price; and the present half-baked plans of linking dysfunctional markets will not achieve that.

Therefore and paradoxically the good reception of Cop21 (because it wasn’t the disaster of Copenhagen) endangers the creation of a global carbon market. How can we move away from this very sub-optimal equilibrium? I believe that pressure on National Governments has to come from Corporations and NGOs. The former desire the clear compass point of a global price, determined by forecastable and hedgeable supply and demand. NGOs have traditionally been lukewarm about using market mechanisms to solve climate change, but the scheme proposed here has many favourable features that should make them strong supporters.