There is a market-based solution for the linked global problems of climate change and worsening inequality.
By valuing and monetizing sustainability, based on the displacement of carbon dioxide emissions by renewables and efficiency, we can do both good and well. We can help resolve challenges facing diverse market systems globally facing questions of ecology and social justice. This is relevant not only to the OECD, but crucially to China and India and the developing world.
Sustainability can become the new gold by monetizing the ecological value of displacing carbon dioxide by renewables and efficiency. The tool we can use to turn ecological value to money is a new regulatory asset, a Sustainability Credit (SC). The U.S. National Academy of Sciences (NAS) determined that the ecological value of displacing of one metric ton of carbon dioxide is $100 USD.
Each gigaton (billion tons) of carbon dioxide displaced by renewables has a yearly value of $100 billion USD. Globally we can effectively mine carbon dioxide resources to create a potential yearly maximum value of $3.7 trillion dollars monetized on the books of banks as paid-in-capital and as cash used for more investment in renewables and ecological change. The ordinary magic of investment banking turns a million dollar in its own assets to nine or ten million in loans. $3.7 trillion become $37 trillion USD invested.
Thus, in principle, the many trillions required for transformative ecological investment is within our grasp through the use of SCs for productive investment in our sustainable and prosperous ecological future.
IFRS (International Financing standards) and FASB U.S. accounting standards should be appropriately tweaked to value SCs on balance sheets valuing sustainability in a new asset category treated similarly to non-material good will or intellectual property.
Our economy can become much larger by valuing ecology through SCs investments and by adopting new ecological market rules for the price system while radically reducing carbon pollution and slashing pollution, depletion, and ecological damage in the necessary context of pursuing social and ecological justice while investing trillions in ecological improvements.
Sustainability Credits (SCs): a new regulatory asset to monetize sustainability
Sustainability Credits (SCs) are a new regulatory asset to be established by legislation or regulation. SCs differ fundamentally from familiar Solar Renewable Energy Credits (SRECs). SRECs are required by regulators to be purchased by competitive electric energy suppliers in mandated quantities at set prices to help subsidize renewable energy. SRECS will, unfortunately, raise market prices for consumers. Sustainability Credits, in contrast, reflect the creation of real ecological value by displacing carbon dioxide emissions and monetized on the books of banks to be used for further renewable energy investment. This will progressively continue to drive down renewable energy capital costs and prices and produce more and more SCs.
SCs will be created on the basis of metered and certified renewable energy carbon dioxide displacement. The capital created on bank balance sheets will become part of Federal Reserve or other central bank regulatory systems subject to usual monetary supply and credit controls. SCs are not helicopter money. They are fundamentally for productive investment in further renewables and other transformative ecological measures.
SCs can be created both by large solar and wind farms and by owners of single PV panels, by the poor and renters as members of community-based organizations and cooperatives. Globally. SCs are a venue for building equity and for energy users to own substantial portions of the new global renewable energy systems. SC bank finance can also be for Town, cooperative and community-based renewable development and for financing purchase of renewable and require limited cash down.
For example, if I build a five-megawatt AC solar project in MA, the system will produce conservatively about 6 million kWh in the first year sold into the utility grid. This will displace 1.13 pounds of carbon dioxide per kWh in the U.S. or 3,076 metric tons valued at $307,600 on the books of an investment bank and leveraged for $3,000,000 in more renewable loans.
Pricing investment in renewable energy transformation
Morgan Stanley estimated in 2019 that reducing net carbon emission to zero would, in detail, mean a $50 trillion USD investment from 2020 to 2050 in five key areas. These include 80% of global power from renewables, up from 37% today, for $14 trillion. Electrical vehicle and battery development for $11 trillion. Carbon capture and storage for $2.5 trillion. Green hydrogen for $20 trillion from solar and wind-powered electrolyzers fed into existing natural gas networks or for hydrogen-fueled combustion turbines for peak power grid balancing. Bio-fuels for trucks and aircraft $2.7 trillion.
IRENA (International Renewable Energy Agency) estimated in 2019 Global Energy Transformation: A Road Map to 2050 that to meet the Paris accords climate change goal of well below a maximum 2-degree centigrade temperature rise through renewable energy and energy efficiency improvements would “provide over 90% of the energy-related CO2 emission reductions” and be accomplished using “technologies that are safe, reliable, affordable and widely available”. Annual savings from pollution, health, ecological damage would amount to $1.7 trillion USD annually by 2050. The cumulative GDP gain by 2050 was $52 trillion USD. The transformation to renewables creating 19 million new jobs while eliminating 7.4 million fossil fuel jobs.
In general, the context of renewable investment is replacing fossil fuel with zero fuel cost renewables with rapidly declining capital costs. PV costs are dropping at a spectacular historic rate of 18% annually. As a renewable developer, capital costs for commercial-scale solar have dropped from $3.50 a watt in 2016 to $1.50 today. In September 2020, for example, we swapped 340 watt PV panels for 400-watt dual facing panels sold at the same price. Dual-sided panels collect indirect sun on the backside, and with higher albedo light-colored rock on the ground increase solar PV output by 20%.
Costs continue to drop monthly and efficiency continues to improve with new chemistries and designs such as using a single perovskite layer can increase efficiency to 33% and can achieve 40% efficiency or more from low-cost thin-film PV panels.
The $50 trillion USD investment for renewables projected by Morgan Chase is just the start. Similar or even larger investments would be needed for conversion to sustainable agriculture and aquaculture that will sequester many gigatons of carbon dioxide in soil and biomass, and for the conversion of our factories to an industrial ecology aiming at zero emissions and zero pollution where all outputs become process inputs not waste to be disposed or pollution. SCs are a major global tool for financing the global ecological transformation to meet sustainable ecological norms throughout the global economy.
The new “normal”: we must act
Flood, drought, fire tornadoes, mega storms are the new normal as temperature rises and climate becomes increasingly chaotic. At the same time, the rich get richer in the midst of a pandemic as the stock market soars even as ten of millions of jobs disappear and unemployment climbs. Amazon stock was $3,204 a share in late October, up from a low of $1,600 in mid-March during the first wave of the pandemic. Jeff Bezos the CEO’s net worth in late October was $188.6 billion USD.
There is a fundamental disconnect emerging between Main Street and Wall Street. In the short run, the profitability of many companies and their soaring market valuations can continue as tens of millions are unemployed. Tens of millions facing personal ruin are now dependent on uncertain levels of public support during the pandemic. In the long run, a world economy with a handful of billionaires with more wealth than the poorest half of the world’s almost eight billion can not long endure in an era of deepening ecological crisis and worsening inequality.
A Brookings Report in May on 20 rich countries with 660 million workers found 38 million workers or 5.7% of the total filed for unemployment insurance in the pandemic. Canada, Israel, Ireland, and the United States with 13% unemployment were the only countries with double-digit unemployment. Twelve countries, mostly in Europe, prevented large layoffs so far by wage support payments to employers. And now another wave of the pandemic is upon us globally.
A fundamental flaw in market economics from Adam Smith to the latest DGSE (Dynamic Stochastic General Equilibrium) Models is the facts of rampant ecological externalities as well as the social consequences of market failure. There are, of course, many social democratic measures to respond to inequality. But the reality is hyper-competitive market globalization, automation, and increasing wage competition from industrializing nations that undermines the ability to maintain strong public welfare systems. This is still driving a race to the bottom.
It’s not just industrial workers, but service workers who have to compete will both high and low tech competition half a world away. Meanwhile, the rich and professional classes thrive. The ultimate cure is for a global convergence on sustainable norms for all in the context of ecological global growth.
Valuing sustainability and perfecting the price system
Valuing Sustainability Credits is necessary but, by itself, insufficient to make the price system and markets properly address economic, social and ecological needs. Ecological taxation is a good way to make sustainable goods and services cost less, gain market share, and become more profitable to be reflected in balance sheets and shape the nature of profit-seeking business.
An ecological value added tax (EVAT) to replace some or all of income taxation particularly for the bottom 75% to 90% of earners is a good tool for sustainable market signals to make polluters pay. The less sustainable a good or service the higher the EVAT tax rate. An EVAT can be gradually imposed, providing sufficient time for polluters to seek non-polluting means. Under GATT-WTO rules tariffs can be placed on imports that fail to meet national standards “for the protection of the environment.” But unfortunately, general fair labor standards are still excluded from WTO rules and relegated to the ILO.
Over time, the economic effect of an EVAT will push most goods and services to become sustainable, thus flattening an EVAT tax rate. A consumption tax is by its nature regressive since the poor and middle-income groups spend all or almost all of their funds while the rich do not. A negative income tax or Basic Income Grant in some form should hold the working and middle classes harmless from EVAT tax increases. The ultimate aim is for a global convergence on sustainable norms for all in the context of ecological global growth.
On the legal side, a redefinition of fiduciary responsibility is key. By law, the pursuit of economic growth must be redefined to make clear that a fiduciary seeking economic profit also must pursue ecological improvement and the restoration of natural capital and further the pursuit of social and ecological justice.
We can build a global ecological civilization step by step through the pursuit of ecological economic growth that leads to a global convergence on a decent and sustainable life for all as a common global norm. Sustainability Credits (SCs) are a key tool to help finance global investment in building an ecological future based on monetizing sustainable ecological value. Building a prosperous, ecological, and just future must become the basis for and consonant with profit-seeking enterprise within a framework of new ecological market rules, laws, and norms. Ecological economic growth that means ecological improvement within the context of social and ecological justice must become the path to profit taught by business schools and the guide for action by fiduciaries, investors, legislators and consumers.
Blue Sky model. One kilowatt-hour creates 1.13 pounds of carbon dioxide.
Sergei Klebnikov. Stopping Global Warming Will Cost $50 Trillion: Morgan Stanley Report. Forbes October 24, 2019.
IRENA. Global Renewables Outlook: Energy transformation 2050.
Jeff Bezos Real Time Net Worth, Forbes, 2020.
Jonathan Rothell, The Effects of Covid-19 On International Labor Markets: An Update. Brookings Institution, May 27, 2020.
Kelly Levin and Katie Lebling, CO2 Emissions Climb to an All-Time High (Again) in 2019: 6 Takeaways from the Latest Climate Data.
World Resources Institute. December 3, 2019.
National standards for protecting the environment.