Carbon Reward Policy: An Economic Framework for Responding to Climate Damages & Systemic Risks

The Paris Agreement’s climate goals remain stalled by unpriced greenhouse gas (GHG) emissions, a multi-trillion-dollar finance gap, and disputes over cost-sharing. This working paper reframes the market failure in GHGs with new economic concepts and proposes a novel policy solution: the carbon reward. Included is a comprehensive new matrix-based classification of market outcomes, encompassing damages, systemic risks, and market policies.

The carbon reward policy is designed to address systemic risks to the carbon cycle. The reward instrument would function both as a positive financial incentive and as an investable asset with long-term price certainty, underpinned by central bank guarantees. Rewards would be provided as conditional grants to fund GHG removal, emission reductions, and avoidance, including the strategic early retirement of fossil energy assets and their substitution with clean energy.

The carbon reward requires the establishment of an international authority and central bank alliance. Operationally, it would finance projects at scale, attract private capital, and establish price certainty. Other policy advantages include the avoidance of carbon offsetting, valorisation of stranded assets, provision of debt relief, and support for co-benefits for communities, ecosystems, and industries. A preliminary assessment suggests that the policy-induced monetary inflation would be moderate if the policy is implemented as designed.