One Small Step.....
One Small Step…..
GangaPrasad Rao
gangaprasadmeal@gmail.com
Paris is behind us, and all is well with the world!....... But seriously, and unless a global technology cartel, possessing a zero-emissions, near zero- marginal cost, closed-cycle nuclear technology is blackmailing the peoples of various nations (Wish the bourses could bet on such bizarre possibilities !), our global Commons, our lives, and those of future generations, are at significant risk - 150 heads of state notwithstanding.
Carbon permits are the academically-recommended instrument to inventory, contain and shrink CO2 emissions back to climate sustainability. But in the decades since it was first suggested, buying permits has been entirely the onus of the industry that consumes energy to produce private household goods, intermediate goods, as well as public goods and services. The fact that it is demand from end users - households, businesses, and the Government - that drives the demand for energy, is elementary, but often neglected in policies targeting climate change. One could claim that consumers, broadly defined would share as much, if not more responsibility, for the externality generated in the society they consume, live and vote in. But how would consumers participate in the Permit market to bring about environmental sustainability - beyond directly participating in the permits market?
Now, there exist Inflation-Indexed Bonds, IIBs, that hedge for all inflation - whether of PQ-, environmental unsustainability-, or, monetary origin. Add to this, the Gold- Repo/Reverse Repo market that could be deemed to convert physical Gold - a carrier of unresolved unsustainability, into Gold ETFs at a ‘sustainability multiple’, and which is then traded both ways at the Repo window. If one were to obtain externality-internalizing carbon permits (that were capped at, and priced to a long-run carbon-sustainability goal) and bundle them in equal value with IIBs, the bundled entity would be equivalent a ‘forward-looking, real and full’ financial instrument that could lay claim to be a ‘Sustainability currency’ opposite the nominal, unsustainable currency of the nation. Thus, if households invested in IIBs were issued Carbon permits in equal value their investment, and permitted to redenominate them into a real Sustainability currency (at a Sustainability Exchange, SX), then the economy would have a dual currency - a nominal currency from discounting and monetizing an FV pot, and a real, albeit derivative currency, that effectively substitutes Gold ETFs as a carrier of sustainability. (The SX, operating opposite the FX, reveals the Nominal: Real exchange rate that consumers and producers would apply as a benchmark in their consumption, production and investment decisions).
In the above context, consider a design that offers the public/households ’free’ carbon permits (bought by the SX from the Permits market with an ’IIB Nominal Hedge 2 Bakey’ issued to them by the IIB to atone their impact on the monetary base, if not liquidity.) in amount equal their investment in IIBs. Essentially, the reduction in future volatility experienced by IIBs due enhanced sustainability from use of the Real Currency, obtains a ‘Bakey Volatility FV 100%’ that underwrites the issue of free carbon permits to bond holders. Thus vested, they choose how many IIBs to bundle with equal value carbon permits and convert to the real, full, Sustainable currency. Free to sell carbon permits, or convert to the Sustainability currency, their choice reflects their leaning in the spectrum between the Nominal Right and the Sustainability Left. Endowed with both, the Nominal and the Real Currency, they’d make their consumption decisions based on how goods and services are priced in the two currencies. Their choices would reveal, beyond their consumption preferences, their willingness to pay a sustainability premium for certain carbon externality-intensive goods and services. Those decisions would convey useful information to producers as regards household sensitivity to externalities, and the premium they’d tolerate in the pricing of various products. Concomitantly, firms would have the facility to exchange the Real Currency for unbundled nominal currency and carbon permits, and apply the latter to internalize their carbon externality in production. (The more carbon-intensive the production, the more such firms would discount real product prices so they obtain more permits from exchanging the Real Currency consumers buy the product with) Post the unbundling, the SX favors the IIB market with a ’Real Inflation Oo Bakey’ line that accompany unbundled IIB units redeemed by the firms/producers.
Thus conceived, IIBs would serve, beyond their role as an Inflation-hedge, as a constituent of a parallel real sustainability currency, that signals and reallocates production, and facilitates a transfer of carbon permits across the producer-consumer divide. Crucially, once in operation, such design would subsidize carbon permits to both consumers and producers, while internalizing the carbon externality (and inflation) to the extent sought by the society.
No, not an overnight panacea to climate change….. but, like Armstrong so famously put it, one small step……!
GangaPrasad Rao
gangaprasadmeal@gmail.com
Paris is behind us, and all is well with the world!....... But seriously, and unless a global technology cartel, possessing a zero-emissions, near zero- marginal cost, closed-cycle nuclear technology is blackmailing the peoples of various nations (Wish the bourses could bet on such bizarre possibilities !), our global Commons, our lives, and those of future generations, are at significant risk - 150 heads of state notwithstanding.
Carbon permits are the academically-recommended instrument to inventory, contain and shrink CO2 emissions back to climate sustainability. But in the decades since it was first suggested, buying permits has been entirely the onus of the industry that consumes energy to produce private household goods, intermediate goods, as well as public goods and services. The fact that it is demand from end users - households, businesses, and the Government - that drives the demand for energy, is elementary, but often neglected in policies targeting climate change. One could claim that consumers, broadly defined would share as much, if not more responsibility, for the externality generated in the society they consume, live and vote in. But how would consumers participate in the Permit market to bring about environmental sustainability - beyond directly participating in the permits market?
Now, there exist Inflation-Indexed Bonds, IIBs, that hedge for all inflation - whether of PQ-, environmental unsustainability-, or, monetary origin. Add to this, the Gold- Repo/Reverse Repo market that could be deemed to convert physical Gold - a carrier of unresolved unsustainability, into Gold ETFs at a ‘sustainability multiple’, and which is then traded both ways at the Repo window. If one were to obtain externality-internalizing carbon permits (that were capped at, and priced to a long-run carbon-sustainability goal) and bundle them in equal value with IIBs, the bundled entity would be equivalent a ‘forward-looking, real and full’ financial instrument that could lay claim to be a ‘Sustainability currency’ opposite the nominal, unsustainable currency of the nation. Thus, if households invested in IIBs were issued Carbon permits in equal value their investment, and permitted to redenominate them into a real Sustainability currency (at a Sustainability Exchange, SX), then the economy would have a dual currency - a nominal currency from discounting and monetizing an FV pot, and a real, albeit derivative currency, that effectively substitutes Gold ETFs as a carrier of sustainability. (The SX, operating opposite the FX, reveals the Nominal: Real exchange rate that consumers and producers would apply as a benchmark in their consumption, production and investment decisions).
In the above context, consider a design that offers the public/households ’free’ carbon permits (bought by the SX from the Permits market with an ’IIB Nominal Hedge 2 Bakey’ issued to them by the IIB to atone their impact on the monetary base, if not liquidity.) in amount equal their investment in IIBs. Essentially, the reduction in future volatility experienced by IIBs due enhanced sustainability from use of the Real Currency, obtains a ‘Bakey Volatility FV 100%’ that underwrites the issue of free carbon permits to bond holders. Thus vested, they choose how many IIBs to bundle with equal value carbon permits and convert to the real, full, Sustainable currency. Free to sell carbon permits, or convert to the Sustainability currency, their choice reflects their leaning in the spectrum between the Nominal Right and the Sustainability Left. Endowed with both, the Nominal and the Real Currency, they’d make their consumption decisions based on how goods and services are priced in the two currencies. Their choices would reveal, beyond their consumption preferences, their willingness to pay a sustainability premium for certain carbon externality-intensive goods and services. Those decisions would convey useful information to producers as regards household sensitivity to externalities, and the premium they’d tolerate in the pricing of various products. Concomitantly, firms would have the facility to exchange the Real Currency for unbundled nominal currency and carbon permits, and apply the latter to internalize their carbon externality in production. (The more carbon-intensive the production, the more such firms would discount real product prices so they obtain more permits from exchanging the Real Currency consumers buy the product with) Post the unbundling, the SX favors the IIB market with a ’Real Inflation Oo Bakey’ line that accompany unbundled IIB units redeemed by the firms/producers.
Thus conceived, IIBs would serve, beyond their role as an Inflation-hedge, as a constituent of a parallel real sustainability currency, that signals and reallocates production, and facilitates a transfer of carbon permits across the producer-consumer divide. Crucially, once in operation, such design would subsidize carbon permits to both consumers and producers, while internalizing the carbon externality (and inflation) to the extent sought by the society.
No, not an overnight panacea to climate change….. but, like Armstrong so famously put it, one small step……!
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