Banks need to manage carbon dioxide emissions in the same way they do our money, according to a group of experts who believe the banking model could be the answer to reducing global warming.
By mid-century, we will have accumulated such a substantial amount of carbon dioxide (CO2) in the atmosphere that merely striving for net-zero emissions may no longer suffice. They say to secure the long-term goals of the Paris Agreement, we must ensure that, after 2050, we are actively removing more CO2 from the atmosphere than we emit.
The carbon budget for limiting global warming to 1.5°C is rapidly depleting, requiring immediate and innovative solutions. We are rapidly approaching a phase where, for every tonne of CO2 emitted, at least one tonne must be removed later on to avert catastrophic climate consequences.
In their paper: Beyond emissions trading to a negative carbon economy: a proposed carbon removal obligation and its implementation the authors argue that only with the application of the Polluter Pays Principle can we effectively address the monumental challenge ahead of us. This approach would entail two crucial aspects.
- Emitters' accountability: Emitters of CO2 today would remain liable for its removal in the future.
- Paying for storage: CO2 temporarily stored in the atmosphere is not neutral; it contributes to climate impacts and increases the likelihood of tipping points. Hence, emitters must pay a fee for the risks caused by this temporary storage.
Professor Michael Obersteiner, Director of the Environmental Change Institute, and one of the co-authors, said:
By treating carbon dioxide emissions in the same way we do private banking practices we could see a huge drop in CO2 and meet our global warming commitments.”
The researchers have developed a policy framework based on ‘carbon removal obligations’ (CROs) for which they have now provided a legal blueprint.
The authors suggest mechanisms akin to private financial borrowing and interest-bearing financial debt. An emission would be similar to a loan, requiring repayment through removals at maturity. The costs associated with atmospheric carbon storage are akin to interest payments on this "carbon debt."
Importantly, this model does not replace current emission reduction efforts; rather, it ensures that CDR occurs in addition to emission reductions. Moreover, it operates independently from Emission Trading Schemes, which would need to be phased out once the carbon budget is depleted.
Johannes Bednar, the first author and an Oxford DPhil student, highlights the significance of the CRO pricing instrument, stating:
The beauty of the CRO pricing instrument is that we do not only address issues of intergenerational equity (where emitters pay for damages), but the instrument can also be utilized by regulators to steer emissions and removals pathways and their associated price levels independently.”
Professor Obersteiner added:
Our update suggests that markets for CDR under the CRO framework should operate independently from markets for emission reductions. We have proposed a blueprint where CROs are integrated akin to private financial borrowing and debt mechanisms. By aligning CROs with established financial systems will help seamlessly integrate climate mitigation into the core economy."
The key insights from their research:
- The proposal applies the polluter pays principle to the costs of carbon removal from the atmosphere, whilst providing legal guarantees that the removals will materialise.
- By placing climate change mitigation pricing levers in the hands of the traditional managers of financial stability, that is, central banks, better account is taken of the externality of carbon emissions as part of core economic and financial management, with the natural consequence that climate change mitigation response management is better integrated into the economic mainstream.
- Establishing a standard for the creation of removal units by CDR projects facilitates a more efficient market by reducing transaction costs and enhancing price discovery.
- Early action by government to put in place legislative measures indicating the direction of policy, and a timetable for introducing CROs, would enhance private sector confidence and engagement in the CDR project sector.
The proposed CRO policy framework sets out a demand side (carbon debt) and a supply side (CO2 removal units), thereby intimating the creation of a CDR market. In so doing, it points to a way in which the CDR sector can be scaled up to the degree necessary if the limits on global warming targeted by Paris Agreement Parties are to be achieved.
The researchers all agree the primary initiative must come from government putting in place policies and legal instruments to generate confidence that a robust CDR market is in place before carbon debt and removal obligations take effect.