Tuesday, 7 July 2009

The Carbon Standard

"Tout est pour le mieux dans le meilleur des mondes." Candide, Voltaire


I'm pretty convinced that basing a currency on gold as a standard is pretty meaningless when you have a global economy that has grown beyond available reserves of gold. In 17 years, gold is gone, what are we going to do then, rely on existing reserves? Sure enough there is no cap on how far the price of gold can go but there is an issue with the fact that the higher the price of gold, the more difficult it is to share wealth. This insures the powerful who have gold stay in power and creates circumstances ripe for war and civil rebellion. Maybe this is a poor point but I don't like the idea of gold being used as a standard to govern commercial exchanges. The only reason why we use gold is that it is scarce, durable, easily divisible and that we universally agree on its' value.

Money is essentially an abstraction. It is just an idea. But unfortunately, it is also more than that. Essentially, money is what we think has value. It should not be an impediment to human potential and to human development. Yet money always gets in the way. Because money is scarce, we are constrained to purchase less goods than what we might want. Because of this constraint, we tend to be price takers meaning that all things equal, it is natural for us to prefer the cheapest priced goods. Worst, in order to create more value in the economy, we need to renew goods frequently so that people stay employed. This creates more wealth and more disposable income to produce more crap we will eventually end up throwing away.

In our society, the cheapest priced goods are systematically the ones with the highest carbon footprint. To produce cheap, you have to use the freebies from the Earth. What freebies do we have? Take coal for example; coal is abundant, there's at least 150 years of reserves available and it's easy to mine. This makes coal cheap and as a form of energy, it makes it very desirable. In the UK, 33.5% of our electricity comes from coal. This is a disgrace: we're a so called developed economy yet we rely on the most polluting form of energy to meet our needs. For every kilowatt of energy produced from coal, almost a kilo of carbon is emitted. The tragedy is that both nuclear and gas only produce a fraction of the emissions of coal but we chose coal because it's CHEAP. Our society, because of scarcity, has produced an abundance of absurdities and because the environment is not valued, it has lead to its over exploitation and to a tipping point where we risk losing everything we have.

Allow me to bring this point home to you. Suppose a friend of yours spent
£300,000 on a house and then knocked it all down piece by piece until it eventually fell apart. You ask him why he did that and he answers: I wanted to see what it would look like torn apart.
"How are you going to pay your mortgage back?"
"I don't know, I'll worry about it later."

The same friend now plants a large trunk in the ground in the middle of the rubble. Climbing at the top of it, he attaches himself to the trunk in such a way that no one can take him away from it. You stand at the bottom of the trunk and ask your friend "but why have you done that?" To which your friend replies: "I've decided to go on a diet. I'm not going to eat for 10 days."
"Are you suicidal?" you ask. No, the friend replies, I'm too fat.
A little cold in the middle of the night, your friend puts a plastic bag on his head and accidentally suffocates himself to death.

The following morning, you discover your friend dead with a plastic bag around his head and you conclude he was suicidal. A medium comes along and assures you your friend is communicating with her from the grave, he wants to let you know that he had no idea that depriving himself from air would result in his death. What would you say then? Like me, I suppose you would argue your friend was deeply and profoundly disturbed.

Unwittingly, at this point you would have the same point of view as an environmentalist observing the Western way of life. The Western way of life is a collective aberration where we exploit resources to extinction with no consideration for future generations, we pollute without restraint, we pay no attention to the future consequences of draughts, water shortage and climate change and we gradually eliminate our oxygen and food supplies. We're exclusively focused on the short-term and we couldn't care less about long-term planning. As a culture, we've had the arrogance to imagine we were able to transcend the basic limitations of organic existence: the fact that we need food, air and an environment to survive. Like the friend who thought a plastic bag would warm him up and forgot it would suffocate him, we've forgotten that we were organic creatures at the top of the food chain. We take the kind deeds of Nature for granted and since they are not novel, we assign no value to them but we assign value to everything that's of our own making at the expense of Nature. As a result, we must conclude that Western culture is deeply and profoundly insane.

When an economist tried to price the value of Nature's services some years ago, he found that they were roughly equal to twice the global GDP. When your firm discloses its annual turnover, remember that if it weren't for Nature, this turnover wouldn't even exist, never mind the small profit margin. Yet we assign no value whatsoever to Nature's resources, we reproduce with no consideration as to whether the Planet can sustain our astronomic population and we promote our waste and energy intensive way of life abroad as the best model to follow. The worst possible name you could be called in this day and age is communist. If you doubt for one minute the supremacy of capitalism, you're labelled as an idealist and dreamer. And the cynics argue that the only thing that is going to get us to realize the extent of our collective stupidity is a disaster of biblical proportion. Supreme relativists, they are.

When we consider the biggest threat to the sustainability of Nature's services, the first word that comes to mind is carbon. Carbon, as it was put in a pro pollution advert in America is life. They were very right and because carbon is the currency on which all life depends, carbon is far more valuable than Gold.

Let me explain how the Gold-backed currency is in fact an illusion. Prior to the Second World War, most of the World's stockpile of Gold was owned by European nations. As they fought one another, most of the Gold was spent on warfare and transferred to the United States. At the end of the Second World War, the US was effectively the wealthiest nation on Earth in terms of Gold. All the State's Gold was detained in the legendary Fort Knox. In the 70s, the US debased its currency meaning it was no longer indexed on Gold. Since the Second World War, the US has become the most indebted Nation in the World and that was before the credit crunch. Since the era of Eisenower (1953), not a single independent auditor has been allowed to verify the Gold Reserves in Fort Knox (Source). Even if there was still gold left in the most secure facility in the world does it even belong to the US? The fact that no one has been allowed to check the Gold in Fort Knox for more than 50 years speaks volume. What speaks even more volumes is that when France and Switzerland, concerned about the cost of the Vietnam war, attempted to redeem their dollar holdings for gold, the US bought an end to the Gold standard. Since the 70s, the dollar is effectively a currency based on paper. The fact the US is the biggest military power in the world, the fact that it supposedly has $137 billion in gold reserves and that petrol is only quoted in dollars (Saddam wanted it quoted in Euros, but they made sure that didn't happen) has been enough to insure the dollar was the strongest currency in the world and 35 years of unparalleled growth.

You now understand that the strongest and most emblematic currency in the world is defacto worthless yet if you check its current value against other currencies, you will be surprised by the fact that there has not been any kind of major run on the dollar for the past 50 years. So long as no one officially knows that there is no Gold in Fort Knox, the deception can continue. This deception has not in any way prevented the US from becoming the richest country in the world. This lends credit to my assertion that money is just an idea, although keeping it that way requires a lot of political engineering.

It is thus not so far fetched to propose that currencies be based on thin air. Since the dollar is just paper, what's to stop us from assigning an imaginary value to it? So long as everyone agrees on it, trade can continue.

What I propose next is a little complicated and it assumes no manipulations which is unlikely but let's assume for a minute we can get a grip over politician's trickery. The Carbon Standard would be based on the carbon levels necessary to keep temperatures below two degrees ie less than 400ppm. Each tonne of carbon could be assigned a nominal value and the currency would be based on that.

Ever heard the expression money rules the world? What if money was an illusion, what rules the world then? Whatever we want it to be. Now let me sell you on the Carbon Standard.

Carbon is easily dividable, durable (it lasts more than 1000 years in the atmosphere) and it is scarce. Those who argue that carbon is not scarce need to understand there are two kinds of carbon: there's the carbon that keeps us alive, the carbon that has enabled us to evolve to where we are now, the carbon that allows a natural greenhouse effect and then there's the excess carbon, the additional 30% we've added to the atmosphere since pre- industrial levels. This carbon comes directly from stored sunlight. Over the past 60 million years, plants and vegetation on earth have been absorbing sunlight. As time has passed, this vegetation has died and thanks to some wonderful natural processes that happened over millions of years, we now have reserves of coal, gas and oil. This is all stored sunlight and this is precisely what our economies rely on worldwide to function. If we continue burning it just because it's free and still abundant, we're going to kill ourselves. Stored sunlight is carbon; the climate and the planet are only stable and facilitating life because there is just the right mix of carbon in the atmosphere and just the right ecosystems in place to regenerate the Planet. There is an active Yin and Yang process on this Planet that is just stable enough to enable life.

Since the Natural imperative is survival of the species and since we've been gifted by Nature with intelligence, we should use this to our advantage. Intelligence, and for that matter common sense dictate that we should do what we can to sustain life. How?

The Carbon Standard is a currency that we would use to overturn the negative effects from excessive carbon emissions to curb their growth.

If goods are priced in terms of carbon value as well as economic value, the environmental cost of production is reflected in the price. The outcome is a non-subsidized price that assigns a value to what we take away from Nature and what we add to it. This is the best way to insure that, through market forces, the price of every product accurately takes into account its environmental cost. Note that this is going a step further than the normal function we assign to currency which is exchange. In the process of exchanging we assume that the only thing that matters is the value of the good produced. In the Carbon Standard, that's taken into account but another dimension that is taken into account is the goods' ability to preserve or destroy life through the amount of carbon emissions it generates. And we know that above 400ppm, there's a 75% chance of irreversible climate change. This is the clever bit so pay attention: 400ppm is the scarcity target assigned to carbon, once reached, carbon is defacto no longer acceptable: you can either have goods and services that produce zero carbon or goods and services that produce carbon but that offset the production. AND THIS IS HOW YOU SWITCH TO A ZERO CARBON ECONOMY WITHOUT ANY AGGRAVATION, because carbon is automatically priced in everything. You don't need it traded on an exchange, you don't need all the wasted money on corporate lobbying, you don't need the bureaucracy of permits, you don't need the full weight of the legislation, carbon is plainly and simply priced in everything.

Implementing this should result in products with a high environmental impact being highly priced in comparison to products with a low environmental impact or both being priced the same or a narrow price gap between them.
As Chris Goodall notes: in a modern economy in which competition is working actively, no company can chose to make decisions that raise its cost compared to its peers. But Paul Hawken adds that competition should not be based between a company trashing the environment and one trying to save it. Since one is subsidized by Nature's freebies and the other isn't, the competition just isn't fair. In fact, I am surprised that, to my knowledge, no polluter has been sued under the unfair competition legislation by a company supplying the same product at a higher cost because it took into account its environmental impact. Maybe environmentally friendly companies have a duty of care towards nature to sue the competitors who are trashing it.

Note that the whole point of pricing carbon into everything is to provide a price incentive for carbon intensive products and services to be priced out of the market in favour of products with low environmental footprints, much the same as in the carbon permits system. If carbon intensive products aren't priced out of the market through the first incentive, you need a second incentive of the type "rob Paul to pay Peter". You add in a tax penalty for carbon intensive products and you use the proceeds to subsidize products environmentally friendly products. The final outcome is a shift from a dirty to a clean economy where polluters either go broke or adapt.

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