The 370ppm CO2 Challenge Makes a Lot of Environmental Sense
Ganga Prasad Rao
Energy, Environmental and Mineral Economist
gprasadrao@hotmail.com
The global CC-OC economy, comprised of Private Capitalists, has adopted the competitive Nominal Open Cycle paradigm to exploit resources in the Commons, ostensibly to maximize, both, sovereign economic growth and PV Lifestyles. Multilateral competition, centered around cost-advantages, has incentivized lower-priced, externality-causing carbon-intensive fuels and related technology over sustainable CC technologies in many third-world nations. Competitive economic growth fuelled by a low-cost, externality-intensive technology has brought us to the precipice of a global environmental calamity, avoiding which requires a sacrifice of prospective growth from those with the largest economic stake - the least developed nations. In this context, whereas the Kyoto agreement focused on curtailing emissions from the developed group of nations, the focus of the Paris convention is on eliciting voluntary reductions in emissions from participating nations to limit global warming to an arbitrary 2*C global average.
The 2*C warming goal, though seemingly innocuous, is a particularly misleading target (I've always suspected it to be a decadal goal, or one applicable to the term of the agreement in force). By focusing on a temperature delta threshold, it distracts from the relationship between emissions growth and its link to ambient concentration, and potentially permits an extended period of uncompensated emissions growth. In fact, a 2*C delta actually permits a further exacerbation of the global externality, and brings us ever closer to the precipice of irreversible warming, loss of polar ice sheets and dangerous rise in sea levels. The 2*C standard, due its simplicity and apparent trivial impact, appeals to popular imagination as a 'livable compromise' and buys the public in to a ‘pyrrhic compromise’ they would not voluntarily subscribe to. In truth, a 2*C global average rise in temperature implies regional impacts that could be several times larger in short intervals. The heat imbalance from such temperature volatility could imply climactically significant phenomena that exacerbate local and regional weather events. The 2*C goal, instead, turns a blind eye to large seasonal and regional (non-temperature climate) anomalies that could wreak havoc to the multitudes while, at all times, permitting policymakers the obfuscation necessary to seem as holy as ever in espousing the cause of the environment. The 2*C warming goal from the Paris Convention is convenient to fossil-fuel rich nations, and indeed, fossil-fuel intensive economies – whether by natural endowment, due geography, political/technological choices, or otherwise. That the goal, despite allusions to ‘INDCs’ and ‘commitments’, is, de facto, voluntary, and mediated by political compulsions and strategies, adds a distinct element of environmental uncertainty. The Green Funding mechanism that the Convention seeks from the group of developed nations to implement the INDCs, puts developing nations between the devil and the deep sea – either tow the line of the Rich and turn in to a technology-slave nations, or lien the collective future of their nations to the whims of Sheikhs, and Barons in Resource-rich, foreign nations. Could the Paris Convention be a conspiracy? - an under-the-table deal that accommodates and seals in to future the disparate motives of the Developed and the Resource-rich nations in a polarized nominal paradigm, albeit at the cost of permanently distancing the populated third-world nations in to a virtual climate hell? Are we buying into a warm world, no thanks to esoteric scientific obfuscation by the IPCC and the political skullduggery of the UNFCCC - a world that dovetails into the plans of the Rich and the ’Resourceful’, infact one that is perfect for manipulation in a globally-coordinated ring of Nominal Political Governments in which every niche, every extreme is staked out for a capital market lumpsum?
If the UNFCCC, across decades of conspiratorial inaction and eventually, dubious double-edged strategies, has ensured the Resource constituency has only dug its heels deeper within the shoulder and leg space of the 2*C warmer world; if Carbon Permits and Taxes will never reduce ambient CO2 concentrations, then is it not time we distance ourselves from this Resource Circus, and seek a different path - a path that, fundamentally, breaks away from the intents and goals, if not the means adopted by the discredited UNFCCC? If the Governments of the World, hand in glove with the Resource constituency, ‘satisfice’ the all-too-credulous bourgeoisie with warm ice-cream while holding back an array of closed-cycle nuclear refrigerators, then and in reaction, shouldn't we, as the misled masses of ignorants, insist upon an alternative that calls the bluff? A non-political alternative that obtains the almost-sustainable orb of yester decades while concomitantly stimulating technological development and economic growth - a world in which ice floes coalesce back in to expansive polar ice caps for the grizzles to grow their family, a world in which the seven seas don’t wreak havoc on islands, coastal real estate or those businesses and communities dependant on the sea everytime there is a hurricane in the neighbourhood - in fact, a world with CO2 at a comfortable 370 ppm. Nothing magical about the target. It could as well be 350 or 400ppm, although the costs and duration associated with the endeavor would vary enormously, even in Trillions of dollars.
But would it be practical to pursue the 370ppm CO2 target without relying on the Resource-supported governments and capital markets of the world – a question of not who, but how’d we bell the cat. Surely, one cannot rely on those who haven’t yet dusted the cake crumbs off their lapel to guide and secure our future? Couldn't we seek the auspices of global financial commons instead? It could well be true, that the Resource constituency has pervaded the global society, and the capital markets are no exception to its influence. But perhaps, just perhaps, one could conceive of a financial design that anticipates the recalcitrant Resource group and buys them into a design that weds the science and technology of global warming with Bond-generated enforces and capital market incentives, to set the Bond agenda. In fact, a multi-decadal global, Cause Bond, specifically, the 370ppm Challenge Bond.
The 370-ppm CO2 Cause Bond
The 370ppm Ambient Concentration Cause Bond, sponsored by a global association of Bond Issuers and Bankers – entities which cover their investors and depositors with a Gold collateral that is simultaneously shared with the Cause Bond, seek a target consistent with frontier-technology, say, 370ppm, upon the completion of its multi-decadal tenure1. The Challenge as structured in to the 370ppm CO2 Cause Bond is novel, for it'd enforce the discipline, the flexibility, and the reach of Cause Bonds upon an ambient Concentration target that could be achieved through a multitude of means. Adopting a Concentration target opens up many avenues to resolution beyond limiting emissions or curtailing economic activity. It permits technologies that act upon the concentration of gases – sequestration by forests, enhanced marine dissolution or chemical precipitation of ambient CO2, or even replicating, tightening and hastening the natural carbon cycle, beyond those that seek to abate emissions or manage economic activity. To this end, the Cause Bond Administrator accepts a) Cause Members – Long ESH protagonists, and those entities within the primary Resource constituency, who due their market niche, or large fixed assets, must buy in to, or, are required to subscribe to the Sustainability Cause, b) Cause Supporters – those economic agents, including associations that represent firms in downstream industries, for whom the Cause is secondary, but who stand to gain from it, and c) Cause Recalcitrants2 – those other Resource, Technology, Political or Social entities who have a real, or nominal interest in opposing the goal, but who nonetheless, are bought in to the Bond to acknowledge dissent, and force an internal ‘cost of Cause capital’. Post a bidding-based process, the Administrator assigns Bond units to all investors – Members3, Supporters, and Recalcitrants, and initiates trading around verifiable progress toward the concentration goal, and speculation concerning its future4.
Bond-Pricing and Trading
Choosing a target endpoint concentration, ie, 370 ppm CO2 concentration, over a temporal path, permits the Bond (its participants, and supporters) abundant freedom to explore technological, political, economic and social trade-offs in the intervening years. Further, and if the various SESHE5-endpoints associated with global warming could all be traced to the ambient concentration of atmospheric CO26, and if we could, additionally, quantitatively estimate (and predict) the Bond-defined CO2 concentration for the immediately-preceding (and following) month(s), then, one could, logically, design a goal-directed Bond, a 370ppm Cause Bond, that formulaically rewarded Bondholders for incrementally achieving the 370ppm concentration goal.
In the context of the long and distant nature of the goal, it'd be prudent to ensure that current actions do not materially deny the long objectives of the Bond. Thus, it'd be prudent to incentivize current actions that are target-conformable. This incentive could be imbued in to the Bond as a formula that links the Bond NAV exponentially to both current ambient concentration, Conct, and ambient concentration at end of Bond term, ConcT. That is,
Trading in the Bond, unlike the formulaically-determined benchmark NAV, would be influenced by many market factors, and implicitly price the probability of achieving the Cause goal in the target year. Should that probability, as ascertained and evaluated by the internal Bond Investor community from past readings and alternative predictions of the future, enlarge, the NAV would rise non-linearly to reflect the same; should the evaluation differ materially across bondholders and predictions, the Bond would suffer volatility. As concerns Volatility in the Bond trading, the same would reflect such factors as Reserves within, and without the Bond, and the market/expert-determined enlarging or shrinking probability of achieving the Cause, ProbCauseAchieve:
Cause Bond Volatility f(Reserves within Bond, Reserves outside Bond, ProbCauseAchieve)
Bond Volatility could be generated by permitting ‘administrative trades’ in which the Collateral Administrator, relying on information from external experts, squares off opposite the Bond Administrator who prefers an expectation sensed from internal trades. Between the formula-driven benchmark NAV, and differing expectations of the future, the Bond experiences fundamentals-driven appreciation/depreciation and Volatility, and permits traders from different niches to stake their positions in the market, in the process generating signals and driving the Cause forward.
Cause Insurance and Incentives
Beyond signalling investors with benchmark NAV prices, how'd one trigger specific, anticipatory, target-seeking actions through the mechanism of a Cause Bond? More to the point, how'd the Bond anticipate a shortchange in its long-goal to force pre-emptive and prudent actions upon its Cause Participants in the present? Toward a potential resolution, consider the Design Terminal Value, DTV of the 370ppm Cause Bond, that'd rise non-linearly to 100 in the event of a ‘Cause Achieve’ as defined by ambient CO2 concentration falling to 370 ppm at time, T. Should the Expected Terminal Value, ETV, at any time, t, as sensed internally in Bond Trading, and externally from an Expert Group, fall significantly short of DTV for an extended period, the Cause Insurance Premium, ie, the PV Premium charged periodically and mandatorily by the 'Cause Bond Collateral Gold Administrator' to Cause Participants for covering Bond Default from deemed failure to achieve Cause, would rise exponentially in the Cause Bond Annex market. The Cause Collateral Gold Administrator, as an entity that covers for, and settles residuals post Bond default, seeks a normal closure for the Bond, so he may sell a ‘Gold Collateral 100% FV’, leveraging the Cause Achieve, on his Gold stores. To obtain that FV, the Collateral Administrator, partners the Bond Administrator, re-directs the 'Hedge Charge-Insurance Premium' proceeds, that are mirrored with Cause Funds from the Bond Administrator, to fund various Cause-conducive programs in the broader society, albeit through reverse auctions conducted in the Cause Supporter group, and by the magnitude of consequent impact upon insurance premiums. The activities so bidded include such carbon-abatement programs as a Regional Permit scheme, funding of R&D activities, or, the purchase of patents in frontier sequestration technology - to name a few. This strategy offers an instrument to cover for, and induce apposite, pre-emptive and corrective resolutions in the broader society upon being informed of a possible Cause failure in the future. Upon its implementation, the strategy significantly enhances the probability of achieving the Bond Cause. Simultaneously, the Collateral Administrator also hedges for the possibility the Cause Bond fails despite well-meaning efforts. The Administrator leverages the BV-and EV-fractals that emanate from Collateral Gold, to distribute, attenuate and compensate unresolved unsustainabilities that arise due Bond failure, through various Aural social and non-financial channels.
Cause Participation by Resource Firms
The Resource constituency, in a Nominal paradigm, would normally seek to distance itself from a Bond inimical to its private cause. It is, hence, necessary to induce or incentivize their Cause participation. To this end, consider Resource firms that must explore, evaluate, document, and enlarge proven reserves, and publicly report the same, to compete for appreciation of its equity stock in the capital market. If unbridled resource exploitation by entities outside the 370 ppm Bond causes it to fail, such firms would be accosted by a ‘Gold Collateral Risk Concentrate Fractal’ – an aural mechanism originating from the aggregated Gold Collateral employed by all FD and Bond investors (and which is shared by the 370ppm Cause Bond), that aggregates and projects all its investors’ rancor upon that market entity which is, marginally, the most unsustainable in the market. The Resource entity, faced with a concentrated, inimical, global challenge, would either ‘Play’ its ruse over the enemy, ‘Adjust’ to its diktats, or suffer the risk of a ‘Ride roughshod-ZS Subsume’. Should the Resource entity win the Play, the Bond Administrator would offer it ‘free entry’ in to Cause Membership by endowing it with Cause Bonds at no cost– a substantial prospective pay-off despite the obligation to pay Unsustainability penalties8. Should it prefer an ‘Adjust’, the Bond Administrator would require it to participate in the Cause, and buy Bond units at a ‘discounted’ price. Conversely, should the Resource entity lose the Play, it’d be liable to buy Cause membership at the prevalent market price. Such firms would be allocated (a fresh tranche of) Bonds in proportion the declared, or imputed value of their proven and probable resources. No matter which category9, Resource-firms, that seek to expand their market share by exploring and adding to their proven/probable reserves, may only do so while paying unsustainability penalties under the protection of the Cause Bond. The 'Collateral Challenge' repeats everytime the probability of achieving the Cause shrinks significantly, until all Resource entities have been accounted for. The Unsustainability Charge they'd pay toward the Insurance Hedge would be computed pro-rata on their Bond holdings, thus internalizing future externalities associated with the exploitation of their Proven/Probable resources. Implicitly, reserve additions (even re-classifications in to Proven category) would be appraised their 'externality insurance-hedge charge' within the Bond. Resource-firms that seek to expand their market share by exploring and adding to their proven/probable reserves, may only do so while paying unsustainability penalties under the protection of the Cause Bond10. Aggregated across Resource firms over time, this Insurance Premium/Hedge Charge/Externality Pot resolves/hedges/distributes/attenuates/compensates for anticipated Bond failure, and obtains a solution between the extremes of Bond success, and Bond failure. In this design, Resource firms have a choice between subscribing to the Bond to 'sustainably' increment their reserves and add to their market valuation, or exit the Bond with a lumpsum, and turn in to a Dividend Yield entity that merely exhausts its Proven and probable resources. Conforming with the 370 ppm target, if in expectations, would confer upon firms in the Resource sector the PV benefits of an enhanced longevity and prospects of equity appreciation in the CC Capital market11 whereas exiting the Bond as a Dividend Yield firm forces the additional penalty of a lower PE multiple on its equity stocks in the market.
A Bonded Re-Cap
Decades of political obfuscation and nominal subterfuge have brought the Earth to the brink of an environmental disaster. To complicate matters, the Nominal has exploited the income- and price-induced rebound effect from incremental efficiency associated with new technologies, to enlarge its sphere of activity and nudge the world ever closer to the tipping point. Indeed, many nano- and IT technologies have reduced costs for Open Cycle technologies, permitting them to expand unsustainably against the environment. Against this bacground, the failure of the Kyoto agreement and the intrigue surrounding the Paris Convention lend credence to a fundamentally different means of achieving climate sustainability. The Real Cause Finance-based 370ppm CO2 Cause-Bond is a marked departure from the largely infructious, negotiated agreements that have characterized carbon abatement globally. Given an initial pot of financial resources, and a Cause-committed group, the mechanism of Cause Bond, and the design outline above, would induce anticipatory, prudent and pre-emptive mechanisms that either target the long outcomes and achieve it, or substantially ameliorate its impacts. A concentration-based Cause Bond subsumes many risks and strategies. It is unlimited in the scope and number of solutions that address either emissions or ambient concentration. It is particularly appropriate for a techologically-advanced world that is exploding in scientific and technology patents. A Concentration-targeting Cause Bond, if participated in by investors and economic agents globally, has the potential to obtain inter-temporal and cross-sectional efficiency by flexibly re-allocating economic activities, re-categorizing errant Resource firms, and re-pacing environmental- and economic innovation, to inter-temporally smooth out the path to the concentration target. For all these reasons, the 370 ppm Cause Bond, as designed and proposed in this blog, is an over-arching, efficient and flexible, non-governmental alternative to the Paris Convention. It is deserving of immediate, serious consideration.
Docx copy of this blog
Docx copy of this blog
..............................
1 Unlike emissions that could be reduced even completely with renewable technologies, reduction of ambient concentrations to levels below current levels require sequestration technologies beyond help from the natural carbon cycle. This implies a Bond tenure of several decades.
2 The ‘Cause Recalcitrants-Cause OB’ would be comprised of those who do not believe in technological answers to the externality, and would rather be compensated by Insurance-funded ‘Aural Social Compensate fractals’.
3 Notably, Resource entities required to mandatorily participate as Cause members in the 370ppm Cause Bond are assigned incremental Cause units gratis, and in proportion the imputed worth of their resources, but are liable to pay the Hedge Charge-Insurance Premium on it.
4 A longer draft ‘CauseBond2613.docx’ explains the various nuances around the design, and operation of Cause Bonds.
5 Social, Environmental, Safety, Health and Economic
6 The exact concentration measure is subject to alternative interpretations. Perhaps the concentration measure could be an amalgam of seasonal snapshots of Polar CO2 concentrations and Equatorial sea-level CO2 readings that, post an aggregative transformation, determine the publicly-revealed NAV. That aggregative transformation would have as its weights the annual rolling changes to the area of the polar ice cap, and the change in sea-level. This strategy would weight CO2 readings taken at the poles relatively more by as much as the polar ice caps shrinks faster than the rise in sea-level.
7 The expectation on ambient concentration at end of Bond term, ConcT. could be elicited from the Bond Gold Collateral Administrator, the arbiter in matters Hedge Charge-Insurance Premium charged to Resource entities in the Cause Participant group. The Collateral Administrator would monitor the expectation both in internal trades, and externally through his links with the scientific community of experts.
8 The Resource firm that wins the Play, may choose to accept the offer terms, cash out of the Bonds immediately, or choose to remain an OB.
9 bar, the Resource entity that wins the Play and chooses to stay an OB
10 These Resource entities may choose to time their exit from the Bond, and step down in to Dividend Yield stocks when they do not anticipate further additions to their reserves. Such firms trade-off their exit lumpsum, obtained from redeeming their Bond allocation, against the unsustainability charges they'd pay over the period of reserve accretion while remaining a Participant under the Bond.
11 See GP Evernote: Longevity-Patent Monetize-Survival Bonds
Comments
Post a Comment
Email us at director@altkuznetsadvisors.com