A mandatory global carbon credit purchase determined by a country's GNH
Executive summary
The urgency and severity of the climate crisis demands rapid global transformation to both reduce emissions and remove atmospheric carbon dioxide. The impacts of a changing climate disproportionately impact communities in developing countries, with those that contribute the least to global emissions suffering the greatest consequences. Globally wealthy countries need to step up to not only reduce their fair share of emissions, but to go over and above to repair the damage they have made to the planet from historical emissions. The best mechanism to motivate global emissions reduction is a universal carbon price for governments. However, taking this one step further and linking this global carbon price to carbon credits will simultaneously motivate emissions reductions and carbon removal at scale. The number of carbon credits that need to be purchased by each government will be proportional to a country's shortfall in emissions reductions of their nationally determined contribution targets to the Paris Agreement. However, due to global climate inequality, the number of carbon credits that need to be purchased should be set not just based on emissions but by a country's Cross Happiness Score. The Gross Happiness score is the best proxy for how ‘wealthy’ a country is, instead of traditional measures like gross domestic product (GDP). Countries that have a high GNH will need to purchase more carbon credits than countries with a low GNH. Aligning these market mechanisms to mandate country-level carbon credit purchases with high-quality carbon credits based on a countries GNH will facilitate far reaching emissions reductions, carbon removal at scale and combat global inequality.
Background
The climate crisis is the greatest challenge of our time. Globally it is the countries and communities that have contributed least to the climate crisis that will face the most severe impacts resulting from our changing climate (1). For example, desertification in Sub-Saharan Africa and flooding in Bangladesh are two devastating climate impacts already being felt by developing communities. New Zeeland for example has a carbon footprint of 7.5 tonnes per person per year (2), nearly double the global average carbon footprint of 4 tonnes per person (3). The urgency of the climate crisis demands the wealthiest countries not only play their part in emissions reductions but also support developing nations to reduce their emissions. Currently, however, the majority of the wealthiest nations are not even meeting their own emissions reduction targets in line with the Paris Agreement which aims to keep warming to 1.5 degrees celsius. New Zealand's policies and actions on climate change are typically seen as progressive and climate-friendly, with the Zero Carbon Act, the world's first net-zero carbon target put into law in 2021 (4). However, New Zealand climate policies and action are currently on track for greater than 4 degrees in warming (5). A massive global collaborative effort is needed to make deep and meaningful cuts in global emissions to prevent catastrophic global climate change.
Incentivizing global emissions reductions
The single greatest motivator for emissions reduction for companies and government is cost. A company or country is likely to reduce its emissions instead of paying the price of emissions if the credits are more expensive than the cost of emission reduction. As soon as an organization must pay for their emissions, they are directly motivated financially beyond goodwill or consumer preferences for emission reduction. Subsequently, there have been many calls globally to put a price on carbon, for example, the International Monetary Fund has said, “Carbon pricing, in one form or another, is likely to be an essential element of mitigation strategies as the world transitions to net zero over the next three decades” (6). Carbon pricing has been implemented as a climate change strategy globally in the form of carbon taxes and various emissions trading schemes. Carbon taxes are a simple ‘polluter pays’ mechanism with a price on emissions. Emissions trading schemes often work in a ‘cap and trade’ manner whereby the government grants allowed levels of emissions and beyond the emissions cap companies have to trade and pay for permits to pollute above this level. In some emissions trading schemes like the New Zealand emissions trading scheme and the Australian emissions reduction fund, they take this one step further and link the price of carbon to a carbon credit. A carbon credit in is a tonne of carbon that has either ‘not been emitted’ or has been newly removed as a result of the carbon credit payment. If we mandated every emitter of a tonne of carbon dioxide to purchase carbon credits we would reach net zero carbon emissions. The approach lets the market pair each unit of emissions with a unit of sequestration to deliver the most efficient outcomes. Purchasing carbon credits from the market will drive many more efficiencies in carbon removal and emission reduction outcomes than government-funded carbon removal and emissions reduction using revenue raised from a simple carbon tax. This approach using carbon crediting to pair emission units with sequestration units does not require any government funding for the emissions reduction or carbon removal, and ultimately aligning these market mechanisms will motivate climate action at scale.
Overcoming climate inequality
The Intergovernmental Panel on Climate Change has said we need to cut emissions by over 7% per year to stay within the boundaries of a safe climate (7). Therefore we should have a global mandate for countries to buy carbon credits for any shortfall in their emissions reduction targets of 7% per year. This emissions reduction is based on a country's annual emissions as counted under their Nationally Determined Contribution (NDC), which countries are currently required to report on under the Paris Agreement. This will create a global market price for carbon credits, meaning each country will pay for the emissions proportionately. At face value it could seem fair that given developing countries will pay less as their emissions are lower, this should appropriately address inequality in our climate change response. However, this does not consider historical climate change disparities as developing countries are dealing with the impact of the developed world's historical emissions. For this reason, the number of carbon credits purchased by each country should not just be set by their emissions shortfall but also should be weighted by the country’s Gross National Happiness score (GNH), with countries having a higher GNH purchasing a portion of credits on behalf of those with a lower GNH.
This approach overcomes climate inequality in two ways.
1. Global emissions reductions to keep below 1.5 degrees of warming are guaranteed to be met. Limiting climate change to the safest possible levels is the best way to reduce climate inequalities by ensuring developing countries face less sever impacts from the climate crisis.
2. The cost of action is proportionate to the wealth of a nation, in this case measured by their GNH.
The GNH is an index used to measure the collective happiness and well-being of a population. It is a holistic approach to measuring how well a country is performing or their wealth. The GNH is an alternative to Gross Domestic Product (GDP) which purely measures the economic output of a country and is well-known to not appropriately account for other key indicators of society like health and education. It will not necessarily be countries that have a high GNH that pay the most on behalf of other countries, but rather a ratio of a country's emissions reductions to their GNH. Equation 1 will be used to determine the number of credits required to be purchased by each country that falls short of its emissions reduction targets. Equation 2 should be used by countries that surpass their emissions reduction targets because countries with a high GNH would have their carbon credit eligibility increased under Equation 1 and vice versa. High GNH countries should be eligible for fewer credits if they surpass their emission reduction targets than low GNH countries.
Equation 1.
No. of required credit purchase = (Country A emissions x 0.07) – (NDC baseline year –emissions reporting year) x (Country A GNH/ Global average GNH)
For example: New Zealand would need to purchase 150,7021 credits to sell to other countries given their required credit purchase for 2020 would be (58,582,000 (8) x 0.07) – (57,242,000-55,465,000 (9)) x (8.13/5.57) = 150,7021
Equation 2.
No. of required credit purchase = (Country A emissions x 0.07) – (NDC baseline year –emissions reporting year) / (Country A GNH/ Global average GNH)
Alternative weighting mechanism
Instead of using the GNH to determine at what proportion a country should contribute to emissions reduction and subsequent carbon credit purchases under this scheme, one could argue to determine how much a country should contribute based on their historical contributions to emissions. For example, see Equation 3. However, the disadvantage of this approach is there is much debate over in which jurisdiction the emissions burden for a country should fall. For example, China which produces many products used by developing nations registers the emissions from producing these products for wealthier countries. There is a moral dilemma about who should bear the responsibility for emissions. Similarly, global shipping faces a problem in determining where emissions should be registered, the port of departure, or arrival or where the company is registered. For this reason, to avoid a moral hazard in emissions allocations GNH is a far more appropriate measure to determine the necessarily required relative global contributions to emissions reductions.
Equation 3.
No. of required credit purchase = (Country A emissions x 0.07) – (NDC baseline year –emissions reporting year) / (Country A 100-year contribution to global emissions per person / Global average 100 year contribution to global emissions per person.
Meeting emission reduction targets
This mandate of purchasing carbon credits for the shortfall in emissions reduction is needed as carbon sequestration is the vitally important second half of our climate budget ledger that needs scale to complement rapid emissions reductions. The carbon credit price for this approach will be set by the market rate for high-quality nature or community-based carbon credits. Ultimately, this will facilitate a net zero society with no perverse outcomes for sequestration projects if carbon credit projects are appropriately vetted.
For countries that reduce emissions greater than their NDC, they can use these as carbon credits to sell to other countries in a similar way to a cap and trade system. If needed, more ambitious emissions reductions could be set, for example, 8% etc. Over time increasingly ambitious targets will be needed and eventually beyond 2050 when the world must be net zero, countries can be mandated under this same system to purchase carbon removal credits to address historical emissions. This will be deeply needed given the amount of carbon we have already put into the atmosphere.
Implementation
Governments will be the ones paying for these credits, in a similar way that some governments currently buy carbon credits from other countries. It will be up to the government to raise the funds by for example setting national carbon prices to cover the cost of their national carbon credit purchase. Making this purchase at a national level is needed to reduce the administrative burden of having all companies globally trading credits. In cases where governments pass on this cost to companies, they will pass on the carbon price to consumers. This will increase the cost of living pressure. However, this will be felt proportionately based on the GNH, with developing countries paying less. Ultimately the world must be prepared for a higher price of emission-intensive goods, fuel and electricity in the coming decades.
This will require a nuanced approach to carbon crediting. The current global voluntary carbon markets, for the majority, are emissions avoidance/ reduction credits. Such as purchasing cookstoves for low-income families in developing countries that lower emissions, and avoided deforestation. However, ultimately we should aspire to have strong legislation protecting against deforestation in developing countries and carbon credits from developing countries should increasingly be from afforestation rather than avoided deforestation. In addition, as the percentage of global emissions that are cancelled against carbon credits increases, credits from carbon removal projects instead will be increasingly needed as the supply of carbon removal credits will be limited as emissions reduce.
Carbon credit integrity
A key component of this idea is the rejection of carbon offsetting for granting a right to pollute. This narrative must be replaced by carbon crediting, the process of pairing high-quality nature or community-based carbon removals and emissions reductions. The most common criticism of carbon credits/offsets is that ‘they are an excuse for polluters to keep emitting and not actually reduce carbon emissions, essentially ‘greenwashing’. This is because the absolute number one priority in our climate change response must be to cut emissions as far and fast as possible. In some cases, businesses are just using carbon credits as an excuse to not reduce emissions or reduce them slower. However, no matter how fast we cut emissions, we will not be able to get them to zero in many sectors in the short term, we should remove the remaining hard-to-abate residual emissions as far as possible. To say carbon removals invoke complacency and therefore we shouldn’t use them would mean that we should also not use many other types of environmental solutions that only go part way to fixing the problem. For example, the great Pacific garbage patch. Should we not clean up the great Pacific garbage patch because it means we are more likely to keep polluting plastic? Absolutely not, we need to clean up the great Pacific garbage patch and stop plastic waste. We should not let the fear of offsetting invoked emissions reduction complacency stop us from scaling up carbon removal.
It is equally important to have high-integrity carbon credits only used for this scheme. Many carbon credits are now having a huge portion of their value taken up on consulting and different levels of verification. This is the trade-off between ‘greenwashing’ low-quality carbon credits and the efficacy of carbon credits (the percentage of funds actually going to impact). This can lead to an efficacy of carbon credits of 30% or lower. It is important that there are high levels of impact and a balance between making sure funds are going to a highly credible cause, and ensuring all the funds aren’t going to consultants and verification. Accelerated action is required in this next critical decade and a more pragmatic transparent approach to carbon crediting is needed.
Carbon credits for this scheme should all meet the core carbon principles set by the Integrity Council for the Voluntary Carbon Market (10). The increasing global demand for voluntary carbon credits will motivate the development of technology, both natural and artificial, for novel carbon removals projects such as direct air capture, enhanced weathering, soil carbon, and Blue Carbon. The system that approves carbon credits needs to be able to quickly recognise and approve valid carbon credit projects at a low cost and speed, balancing the need for impact and integrity. Companies should also be able to buy these same credits that are used to cancel emissions under nationally determined contributions for company-level net zero claims.
Carbon crediting in a New Zealand context
In New Zealand, there would be an opportunity to export high-quality voluntary carbon credits from Native Forests to other wealthy countries that will need to buy credits. New Zealand currently has a large balance of payment deficit for voluntary carbon credits as we largely import emissions avoidance credits such as cook stove and renewable energy carbon credits from developing countries overseas. Exporting voluntary carbon credits will bring money into Kiwi farms, it will also be good for our balance of payments and restoration of NZ native forests, a triple win. Carbon credits in New Zealand should be awarded for example for all recent carbon sequestration in native forests in New Zealand. Restoration of native forests is sorely needed in New Zealand to address the biodiversity crisis we are also facing. There is currently no national reward or incentive to restore native forests in New Zealand, therefore paying for carbon sequestration in native forests has significant potential for carbon removal at scale under this proposed scheme.
Drawbacks of this approach
There are five key drawbacks to this approach
1. This will require a massive global collaborative effort, with all countries globally agreeing to purchase credits for their shortfall in emissions reductions and on the GNH as the benchmark measure used to alleviate inequality. However, it could be done using current systems of trading regulatory and voluntary carbon credits amongst countries. Additionally, the scale of the climate crisis will require no more than a massive global collaborative effort to cut emissions, no approach will not face this challenge.
2. This approach doesn’t account for methane, nitrous oxide and other greenhouse gas emissions. This is because IPCC has recommended that these gases aren’t traded as carbon dioxide equivalent credits due to the nature of their respective impact on atmospheric chemistry. Therefore, taxes on other greenhouse gases will be needed to account for these emissions.
3. The supply of carbon credits may be limited which could lead to a high price of credits initially. For example, if globally this system was introduced and emissions did not decrease, roughly 2.5 billion carbon credits would need to be purchased per year at 7% of global emissions (11). Carbon credit prices have a huge range from less than $1 to $100’s, at a medium carbon price of $20 USD, this would cost $ 50 billion USD. While the current global combined regulatory and voluntary carbon credit supply is difficult to estimate, this is likely far more than the current global supply of carbon credits. However, given an appropriate lead time for the system, projects globally would start to register in anticipation of the revenue from projects based on a high predicted price for credits.
4. The administrative burden of carbon credit project registration may be complex and will need to be funded by the applicant of the carbon credits. However, there is no way to get around the fact that we need appropriate checks and balances for our global scaling of carbon removal and emission reduction projects.
5.Countries with a high GNH will be less motivated to reduce emissions beyond their NDC targets because they will receive fewer carbon credits for surpassing this milestone (See Equation 2). However, this motivation will still exist, albeit reduced, and these countries will be very rare given almost no countries are currently achieving their NDC, most countries will be net purchasers of carbon credits.
Conclusion
Ultimately we need to cut emissions as far and fast as possible. Globally climate change could incur costs of up to 18% of global GDP and could only cost 2% if we act now (12). Therefore paying the price for emissions in the short term is the absolute best course of action. Using a reasonably high carbon price with high-quality carbon credits for remaining emissions is our best tool in the climate fight. By mandating 7% global annual emissions reductions using carbon credits we can scale climate action. Using the GNH and emissions reductions in conjunction to determine how much a country needs to contribute to carbon credit purchases is the best way to determine an equitable climate change response globally. Wartime effort on a scale never seen before is required to align global market incentives in policy to appropriately address climate change. A mandatory global carbon credit purchase for any shortfall in emission reduction weighted by a country's GNH is the most pragmatic impact-led solution to solving the climate crisis and global climate inequality.
Citations
(1) Intergovernmental Panel on Climate Change. AR6. Synthesis report. Accessed on 14/04/2023 from - https://www.ipcc.ch/report/ar6/syr/
(2) Ministry for the Environment. New Zealand’s Greenhouse Gas Inventory 1990-2019 Snapshot. Accessed on 14/04/2023 from - https://environment.govt.nz/publications/new-zealands-greenhouse-gas-inventory-1990-2019-snapshot/how-new-zealand-compares-to-other-countries/
(3) The Nature Conservancy. How to calculate your carbon footprint. Accessed on 14/04/2023 from - https://www.nature.org/en-us/get-involved/how-to-help/carbon-footprint-calculator
(4) Beehive.govt. Press release 13 April 2021. NZ becomes first in the world for climate reporting. Accessed on 14/04/2023 from - https://www.beehive.govt.nz/release/nz-becomes-first-world-climate-reporting
(5) Climate Action Tracker. New Zealand. Accessed on 14/04/2023 from - https://climateactiontracker.org/countries/new-zealand/
(6) International Monetary fund. Blog 21 July 2022. Simon Black, Ian Parry, Karlygash Zhunussova Accessed on 14/04/2023 from - https://www.imf.org/en/Blogs/Articles/2022/07/21/blog-more-countries-are-pricing-carbon-but-emissions-are-still-too-cheap
(7) United Nations Climate Change. UN Climate press release 26 October 2022. Accessed on 14/04/2023 from - https://unfccc.int/news/climate-plans-remain-insufficient-more-ambitious-action-needed-now
(8) Accessed on 14/04/2023 from - https://www.stats.govt.nz/indicators/new-zealands-greenhouse-gas-emissions
(9) Stats NZ. New Zealand’s Greenhouse gas emissions. 27 October 2022. Accessed on 14/04/2023 from - https://www.stats.govt.nz/indicators/new-zealands-greenhouse-gas-emissions
(10) The Integrity Council for the voluntary carbon market. The Core Carbon Principles. Accessed on 14/04/2023 from - https://icvcm.org
(11) Our World in Data. CO₂ emissions. Hannah Ritchie and Max Roser. Accessed on 14/04/2023 from - https://ourworldindata.org/co2-emissions
The World Economic Forum. Future of the Environment. This is how climate change could impact the global economy. 28 June 2021. Natalie Marchant. Accessed on 14/04/2023 from -https://www.weforum.org/agenda/2021/06/impact-climate-change-global-gdp/