An international team of researchers, including Artem Baklanov, Research Fellow of the International Laboratory of Game Theory and Decision Making, HSE University, has proposed treating greenhouse gas emissions as financial debt in a new research article published in Nature. This approach could provide immediate economic incentives for enterprises to begin mitigating the harmful effects of their business activities.
One of the aims of the Paris Agreement is to reach zero carbon emissions by 2050. Some countries have already begun taxing greenhouse gas emissions, with more nations expected to follow in the future. Although this tax incentivizes efforts to reduce emissions, special economic policy instruments are needed to guarantee net carbon dioxide removal (CDR) and ensure the viability of ambitious climate targets.
Under the Paris Agreement, the European Union, the United States, and the United Kingdom have pledged to reach net zero carbon emissions by 2050 and to strive to limit global warming to 1.5°C this century. The term ‘net-zero emissions’ means not only reducing the amount of greenhouse gases generated, but also removing harmful emissions from the atmosphere using natural and manmade sinks. While efficient, widely available CDR technologies have yet to materialize, they will undoubtedly be required in order to meet the goals of the agreement by 2050.
In a February 2021 report, the UN warned that the international community is currently not on track to meet its targets. Earth’s so-called ‘carbon budget’—an estimate of the maximum amount of greenhouse gases that can be released into the atmosphere over time—will be depleted within the next decade. Meanwhile, the number of extreme weather events is growing and there is mounting evidence that even slight climate warming could have catastrophic consequences. There is currently a fundamental economic problem in how methods of mitigating the effects of climate change are assessed. Existing economic policy instruments for controlling greenhouse gas emissions are not sufficient to incentivize a global transition to a negative carbon balance
A number of nations already impose taxes on enterprises that release carbon emissions into the atmosphere in an effort to achieve a net negative carbon economy. In addition to incentivizing emissions reductions, such taxes are used to raise funds which can be partially preserved and passed down from generation to generation to pay for carbon dioxide removal. This system works like a public welfare fund or a nuclear facility decommissioning fund. However, it is hard to objectively evaluate whether the accumulated tax will be enough to support future atmosphere purification technologies, as the amount of tax may change over time and the funds raised may be used for other purposes. At the same time, global warming is slowly but steadily leading to environmental catastrophe, irrespective of the world’s economic model. Therefore, this approach is unlikely to change the situation.
The authors of the research—which was conducted by an international team that includes Artem Baklanov, Research Fellow of the International Laboratory of Game Theory and Decision Making at HSE University—propose a mechanism for controlling greenhouse gas emissions inspired by the financial market.
The researchers suggest treating greenhouse gas generation as a financial debt. Any company that releases carbon dioxide into the atmosphere incurs a carbon debt and must commit to removing its emissions. This commitment is called a ‘Carbon Removal Obligation (CRO)’, and carbon debtors must pay interest until their debts are cleared. The money raised could cover the default risks of the CROs and the potential environmental damage caused by such ‘borrowing’. This reflects the fact that carbon borrowing can lead to short-term increases in the carbon budget target temperatures of 1.5°C to 2°C—targets considered reasonably safe by the researcher community. Manufacturers who generate greenhouse gases can decide how much of their CO2 emissions to compensate for now, and how much carbon debt they will either pay off in the future or settle by removing emissions from the atmosphere by technological means
Enterprises are still responsible for meeting deadlines and ensuring net negative emissions. This allows them to balance current and future emissions reduction based on their own expectations of developments such as potential technological breakthroughs.
The researchers demonstrate that due to the rapidly depleting global carbon budget, their proposed financial approach to carbon debt is essential to any reliable system for mitigating climate change. It allows widespread decarbonization solutions to be implemented faster and more smoothly at a time when climate-related disasters could be triggered earlier than anticipated. The current generation has a lot to contribute to the fight against global warming without shifting the responsibility onto future generations—but only if we start paying off our debts right away.
Operationalizing the net-negative carbon economy
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