The Common. From tragedy to triumph.
Commonomics: a monetary framework to address externalities that threaten global prosperity.
By Johan Pretorius, Founder: Toco currency and the Carbon Reserve.
Climate change represents a market failure within our economic model, arising from the negative externality of carbon emissions not being adequately accounted for. This is a classic Tragedy of the Commons dilemma, where shared resources are rapidly depleted due to individual actors prioritising their own benefits over collective well-being. In the case of climate change, economic agents enjoy the benefits of greenhouse gas (GHG) emissions while bearing none of the societal or environmental costs, thus incentivising their overproduction.
In market-based economies, governments intervene to correct such failures. Various solutions have been employed, including direct taxes to account for the associated costs (e.g. taxing tobacco for healthcare expenses) and privatisation to incentivise sustainable resource management (e.g. fishing quota systems). Additionally, cap-and-trade schemes have yielded positive outcomes, as seen in the US Acid Rain program. However, these traditional solutions like carbon taxes or cap-and-trade systems have failed to address climate change due to its global and complex nature. International cooperation and coordination are essential for their success but too challenging to achieve given the differing interests and capabilities among nations. Our institutions are simply not equipped to deal with this new type of global common resource pool dilemma. Instead of “benevolent despot” external to the economy, they act as self-interested agents themselves, effectively exacerbating the tragedy.
To better address these global externalities it is imperative we overhaul our current economic model. Our existing framework prioritises private goals over environmental concerns, resulting in the degradation of our planet’s ecosystems. We need a better model where environmental costs are intrinsic to economic activities, and achieving economic prosperity is intricately linked with preserving our planetary boundaries. This necessitates reimagining our monetary system.
An updated monetary framework, where carbon mitigation outcomes (such as allowances, credit, offsets or removals) serve in part as the foundation for regulating the global money supply, offers a powerful mechanism to balance economic needs with environmental sustainability. A currency backed by carbon mitigation outcomes inherently holds value tied to environmental stewardship – intrinsic value is directly derived from real-world environmental impact. This linkage between environmental preservation and economic growth ensures that as the economy expands, the need for the money supply increases, driving demand for more carbon mitigation.
Instead of mining gold or silver to support the money supply, we “mine” carbon. Carbon mitigation outcomes, such as carbon credits or offsets, share similar properties with gold, historically used as the basis for money. Carbon is scarce, expensive, and challenging to produce, making its supply reasonably inelastic. Moreover, carbon is increasingly gaining cultural value, symbolizing sustainability credentials much like gold once represented wealth and status. This positions carbon well as a new standard for measuring and signaling sustainability, a robust store of value and a suitable foundation of our monetary system.
This approach not only aligns economic incentives with environmental goals but also drives positive outcomes for both the planet and the economy. By integrating environmental sustainability into the financial system, we establish a profound connection between economic activities and enhanced environmental stewardship. We harness the substantial everyday money needs of people and business to transmit fresh demand to carbon markets. Businesses and individuals are incentivised to invest in sustainable practices, as carbon becomes a source of new revenue and a measure of sustainability. Furthermore, nature-based carbon sinks gain value within this monetary framework, serving as assets that yield income and offering an alternative means of exploitation that is planet positive. In this framework the market should naturally seek to reduce its carbon footprint simply to maintain a stable money supply
Central banks can play a pivotal role in this transition by incorporating carbon mitigation targets into their mandates. In addition to their existing dual mandates of price stability and maximising employment, central banks could adopt a third leg focused on carbon mitigation targets aligned with international climate goals. Policy instruments such as establishing a carbon reserve system or setting minimum reserve requirements with commercial banks will encourage significant investments in mitigation and channel capital towards environmentally sustainable activities. By buying and holding carbon credits and allowances as part of the central banks’ balance sheets they can regulate money supply to balance economic and environmental needs.
This presents a unique and innovative approach to optimally manage the global common we depend on. By harnessing the power of monetary policy, we can drive a transition towards a more sustainable economy turning tragedy into triumph.
