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 for managing systemic risks, and proposes a novel policy solution: the carbon reward. Central to this reframing is a matrix-based classification of market outcomes, encompassing climate damages, systemic risks to the carbon cycle, and market policies.

The policy instrument — the carbon reward (XCR) — would function both as a positive financial incentive and as an investable asset with long-term price certainty, underpinned by central bank guarantees. XCR would be provided as conditional grants to fund GHG removal, emissions reductions, and emissions avoidance, including the strategic early retirement of fossil energy assets and their substitution with clean energy. The policy would require an international authority and a central bank alliance to guarantee a price floor for the XCR. Operationally, it would finance projects at scale and attract private capital without imposing direct fiscal costs on governments, or direct costs on firms or households; these costs are instead diffused across the global financial system through the crowding‑out of non‑XCR assets and moderate monetary inflation — avoiding annual appropriation cycles and sovereign debt creation.

Further advantages of the policy include the avoidance of carbon offsetting, the valorisation of stranded assets, debt relief for developing nations, and co-benefits for communities, ecosystems, and industries. A pre-feasibility estimate suggests that this policy-induced monetary inflation would be moderate, particularly if private-sector demand for XCR remains sufficiently strong to limit central bank purchases of XCR when defending the price floor.