How to Pay for Your 2030 Emissions, Now

How to Pay for Your 2030 Emissions, Now

Carbon credits will be the bitcoin of the future.

Not in the sense of making you money. At least, not in the thousands of percent like bitcoin might’ve.

Instead, it’ll be the annoying term you hear everywhere. Online, on TV, on radio and at the pub.

I remember those days for bitcoin well. I was driving from Perth to Brisbane. It took about 10 days.

At most stops, we heard ‘bitcoin’ mentioned by someone or other. Restaurants, hotels and tourist attractions were all buzzing with the word.

The only exception was a truck stop on the edge of the Nullarbor Desert, where they hadn’t figured out how to build true vertical walls yet, let alone cryptocurrencies.

Unlike bitcoin, carbon credits will become unavoidable for you in the future. A part of your daily life. Today, I’m going to take a stab at how that future might look.

Why do you care?

As always, being a few steps ahead can pay off handsomely. In this case, it might make you some money. I’ll show you how.

But, more importantly, if I’m right, what you’re about to read could save you much more money than you could make. And the impact on how you live your life could be immense, too.

It might determine whether or not you get to enjoy your retirement as you had planned. So let’s dig in.

Going green

In your future, you’ll have to offset your pollution. All of it.

Every person will be obligated to estimate their amount of pollution, and prove that they’ve somehow offset it.

Does that sound absurd?

Here in the UK, the departing prime minister recently lobbed a bunch of parting gifts into the legislative fray. One of them is for the country to go emissions-neutral at some point in the future. The question is how. But the goal is now law.

The European Union wants to turn its ginormous European Investment Bank green by using its resources to cut emissions in various ways.

Australia has the added problem of exporting major pollutants. The country’s prosperity is tied to politically incorrect resources. According to Wednesday’s news, BHP and others are so worried about this, they’re trying to be proactive. They know what’s coming down the legislative pipeline.

Perhaps more importantly, the Intergovernmental Panel on Climate Change reckons we’re going to have to reverse our net emissions at some point, not just go neutral, to prevent severe climate change consequences. We need to cut the amount of CO2 out there, let alone reduce emissions.

Whether or not they’re right about the science is irrelevant for figuring out what we should do about the coming government policies. So don’t bother emailing me about it. Instead, tell a Chinese person who publicly doubted the economic efficacy of communism in 1959, if you can find them.

So, how can you offset your pollution? It’s probably not viable or efficient for each of us to start planting trees every time we fly somewhere for a holiday.

The answer is a form of carbon credit.

For now, under the existing EU schemes, only major polluters are targeted in this way. Instead of charging each electricity user, the governments charge the big power stations for electricity production.

But that only shifts the polluting behaviour around.

The market adjusts based on incentives.

This is one reason why Australia abandoned its plan to mimic the European model. After I’d spent countless hours researching the proposals with a leading legal professor involved…

You pollute, you pay

Back to carbon credits and you. Eventually, politicians will target us as individuals. Our pollution will have to be tackled too. But how?

With a carbon credits scheme similar to the EU’s current corporate one, where polluters like us have to cut their pollution, or offset it. You’ll have to buy carbon credits, or something with a similar name, if you pollute.

The first incentive will be to cut our pollution by making different choices, such as taking public transport instead of driving.

But a carbon tax can do that. Carbon credits are more interesting. A bigger opportunity for you to save and make money.

To pay for the pollution you do choose to emit, you’ll have to buy carbon credits in order to pay for the costs of offsetting that pollution. That’s the key — it’s not just a fee for pollution, but a payment to fund offsetting that pollution.

So far, we’ve only considered the pressure on one side of the story. The polluter’s side. The other side is the need to fund the technology to make offsetting efficient.

Offset technology is expensive and the results are mixed, so far. But huge investment is taking place. The question is how to fund it all on a scale that has a major impact on the amount of carbon in the atmosphere. Carbon credits are the solution there too.

The underlying problem of pollution is that nobody owns the consequences. So nobody can charge the polluters for their pollution.

This isn’t true. But it’s what economists assume when they do the misguided research to justify grand schemes to save the world from climate change. Externalities are really just a failure to assign property rights. If you want to protect the whales, sell them.

The carbon credits idea effectively assigns ownership of pollution by making people pay for their pollution. The consequences of pollution are matched up to the polluter via an artificial government program. You pollute, you pay.

Where’s the market efficiency in that?

Well, if the money goes to funding offset technology and actual offsetting, it becomes a trade-off. And if carbon credits become tradeable, with fluctuating prices, then the equilibrium of that trade-off can be found.

What equilibrium? The cheapest and most efficient combination of saving the planet. With the right mix of cutting pollution, cost-efficient carbon offset technologies, and the financial incentives to invest.

That’s the whole point of carbon credits — the free market style incentives through prices. If nobody invests in the technology, then companies can’t offset carbon, making carbon credits rare, causing the price of carbon credits to rise. You, as a polluter, will be forced to buy them at high prices.

Then the incentives kick in. The high prices encourage you to invest in offset technology or cut your pollution and reduce emissions. It’s self-correcting, using market incentives.

Earn credits in technology that doesn’t exist

But there’s an additional way carbon credits will soon make their way into your daily reality. You’ll be able to invest in offset technologies before they’re viable. And if you do, you’ll be eligible to receive free or cheap pollution offsets in the future as your reward. An investment that gives you the right to pollute.

It sounds weird, but that’s only because it rounds a circle which currently has a piece missing.

Let’s say there are two carbon-capture technologies in the world: Carbon capture by ‘filtering’ the air, and greening the oceans to encourage plants to absorb the carbon. But their efficiency is unproven and multiple companies are rolling out each technology.

You can invest in them — in the firms preparing to roll out the technology. And those firms promise their investors carbon credits they can use to offset their pollution in the future.

But here’s the intriguing bit. The amount of carbon credits your investments will entitle you to is based on how successful the technology turns out to be. Thus, it becomes an investment in tech.

It all sounds a little harebrained and dreamt up; completely arbitrary. But it’s what scientists are already proposing. Because all that offset technology has to be funded and paid for somehow. And carbon credits solve that problem, too, by incentivising investment, not just regulating pollution levels.

There are many benefits to this system, if you’re a centrist or right-wing politician. It supposedly harnesses the power of the free market to invest as well as allocate resources efficiently.

How?

Early investors in successful technology will be rewarded with comparatively cheap carbon credits. Instead of dividends from your shares, you might get carbon credits you can offset your own pollution with, bringing your pollution bill to $0. Or you could even sell them on the market to people who didn’t get enough, for a profit.

The net effect of all this?

Never mind the climate. I’m worried about you and your financial future.

You should be an early investor in successful carbon-capture technology, once the program gets underway. Or it could cost you.

Until next time,

Nick Hubble Signature

Nick Hubble,
For The Daily Reckoning Australia