CC Finance to Combat CC Global Warming !

Ganga Prasad G. Rao

Energy, Environmental and Mineral Economist

gprasadrao@hotmail.com

Disclaimer: The author does not vouch for the purported outcomes of the design proposed herein under. Actual outcomes could vary due economic and financial market dynamics. (Errors, Omissions and Death threats excepted !!!)

The Context

One of the many reasons Global warming strategies have failed at containing CO2 emissions and its cumulative expression as heightened atmospheric concentration is the impact of competitive capitalism on nations that exploit non-renewable resources to achieve as high a nominal rate of economic growth as possible. This incentive to exploit non-renewable resources is particularly strong in nations that are rich in domestic carbon resources, and in nations that must sustain economic expansion, both by expanding exports against multi-lateral trade competition, and to generate sufficient employment for its citizens. The leveraging of lower-priced, environmentally-injurious fossil fuel resources subsidize the nation’s poor and to outbid competing nations in the race for a share of the global macro-pie exacerbates carbon-induced global warming externality exacerbates in the aggregate.

On another front, populist majoritarian politics, combined with a PV-centred economic regime engenders a system that stresses the 'here and now' at the cost of imposing irreparable and unsustainable damages on the economic and environmental future of our society. Policies - such as those necessary to solve irreversible climate change - that pose concentrated costs to the present generation, and that bring about distributed, even extra-jurisdictional benefits to future generations, are difficult to justify politically, economically, or, for that matter, financially for they require multi-lateral economic cooperation. In the contexts of these multi-lateral, extra-jurisdictional externalities, the laziness of individual nations in enacting unilateral policies to combat the risk of irreversible climate change is almost understandable. The consequent exacerbation of global warming externality from the pursuit of national political and economic priorities over global environmental prudence could trip run-away global warming and cause a catastrophic rise in sea-level that imposes huge costs on various societies and economies around the world. Such catastrophic climate change would be as harmful to the interests of the Rich as it would be to the lives of the many poor. The logical question, then, would be whether we economists and policy-makers - the self-proclaimed drivers of national and international policy agenda - have the solutions to resolve what was anticipated by all, but acknowledged by only a few? What policy could we conceive of, that solves a multilateral-global environmental-cum-economic problem – in fact, one with trade-offs that has dangerous and irreversible ramifications for the future of humanity?

The Proposal

It doesn't take the mighty US EPA or a puny Environmental economist to suggest that, given technological advances that enhance energy-efficiency in production and use, and which bring forth additional options to deal with climate change over time, the global environment could be better off if the governments of the world sought a voluntary, pareto, market-driven, inter-temporal substitution of carbon-free and carbon-lean forms of energy for carbon-intensive fuels, specifically coal (that is both abundant and priced lowest among fuels in the energy basket, and a fuel to which the economies of the world gravitate to in their search for competitive advantage originating in lower input costs). The immediate substitution of carbon-free/-lean energy forms for carbon-intensive forms in the supply of energy would interrupt the otherwise inexorable rise in CO2 emissions, give pause to the inertia that might otherwise over-run a CO2 concentration threshold for run-away global warming, and buy us time against rapid sea-level rise that might accompany a warmer atmosphere. Post a few decades, with CO2 concentrations in check - even reversed to manageable levels, in a global economy that is significantly more efficient and endowed with more technological options to deal with climate change, we could release the lien on carbon-intensive forms with greater confidence of managing CO2 concentrations below the threshold for catastrophic global warming. Since CO2 emissions, globally, are concentrated in the power-generation sector – a industry that has expanded globally to supply an essential, even a ‘subsidized right’, and since Coal is the primary fuel for power-generation, it makes eminent sense to consider strategies that reverse the growing dominance of this carbon-intensive fuel to contain CO2 concentrations and avoid a rapid rise of the seas that might accompany runaway global warming.

But how do we pull off this effective, albeit pedestrian strategy? And who will bell the cat? No resource baron, private (or public/sovereign entity), and no matter how wealthy or large, will ever voluntarily accept a proposition to mothball his/its production of fossil fuels without full, inter-temporal compensation. Rhetorically however, would owners of fossil-fuel entities be willing to defer production from non-renewable resources if they were guaranteed a two-way compensation -  compensation for deferring carbon-intensive production to a future period, and compensation for permanently turning in proved reserves? While the first option merely shifts costs, revenues and profits to a later point in time (albeit one characterized by different and less predictable market conditions), and therefore only involves uncertainty-internalized compensation for deferral of profits, the second option recompenses resource-owners for the ‘permanent’ de-classification and de-capitalization of reserves. In both cases, the compensation could be determined competitively in deferral-auctions and reverse auctions involving bids and offers across multiple resource owners and end-users who match their competitive production efficiency/geologic/scale/locational advantage, and their outlook for the future in determining their participation in these auctions.

The immediate upshot of such a draconian proposition is the possible source of such compensation. Would the broader society and the peoples of the various nations have sufficient willingness to pay and carry the burden as overt/implicit carbon taxes? Given limited resources and high personal discount rates and imperfect information concerning an inter-temporal, inter-jurisdictional externality, it'd be bordering on the ridiculous to expect the common man to shell out of his pocket a significant fraction of his pay-check as compensation to fossil-fuel owners. Thus, and in the context of global multilateral economic competition, cost-enlarging taxes - whether personal or corporate - is unlikely to find political favour. Instead, let us consider an unconventional means of bringing about voluntary, inter-temporal exchange of production between two carbon-polar forms of energy. This approach leverages, both, the power of unconventional finance to deal with inter-temporal monetary issues, and the power of FV Cause Bonds – global bonds issued with an explicit, socially-sanctioned goal – to underwrite temporally-zero sum liquidity transfers to various nations that fund the compensations necessary to induce the inter-temporal switch of carbon-lean energy forms for carbon-heavy forms.

The Reservoir

Toward such a financial mega-strategy, let us start with an initial position that is a reflection of status quo, then envision a future society, to achieve which the nations of the world seek an appropriate monetary-cum-financial design. For the initial state, consider an inward-looking society plagued with inferior technology and PV-based nominal economic and financial policies that ruin the environment, leave a considerable amount of ore/carbon reserves unused for fear of, or upon the advent of, catastrophic environmental unsustainability, and which brings about an Unsustainable 2^nd society – PV world, ie, a society  characterized by 'Nature Bakey Green Ookey – Resource Curse (RC) – Unsustainable 2^nd society PV’. Next, envision a future society in which the 'Nature world' is (Closed Cycle-)limited to just as much as is necessary, ie, 'Green Oo' (thus triggering a pareto 'Nature Half key'). To this add a 'Land FV' - a future in which (CC-) efficiency and -recycling has returned a significant share of discovered, even proved and capitalized reserves back to Nature as unexploited ore and land, and balance the sum against a wealthy, and an environmentally-sustainable ‘1^st FV’ society. In other words, conceive of a 'Nature Half FV-Commons-Green Oo Pareto – Sustainable 1^st Society-RC BV-Land 2 FV – CC 100% -CC Mirror FV- CC Lifestyle Economy'. This idealized future serves as the 'Source-Purpose-FV Pot' for resources to fund an appropriate strategy that takes us from the fractured 2^nd world to the global 1^st society through an efficient, market-based mechanism

Toward such a strategy, and as a first step, consider a formula-based, index-driven, dollar-denominated, 'Environmentally Sustainable -1st Society – CC Economy FV sphere' Sustainable Society-FV (SSFV) global Cause Bonds. These FV Bonds are a socially-sanctioned financial instrument/mechanism to achieve the Cause by supporting programs, policies and investments necessary to achieve the envisioned global 1^st society. Post the elaboration of underlying criteria, the Governments of the world, under the auspices of an international organization such as the IMF, underwrite the SSFV Cause Bonds with the envisioned, socially-sanctioned global future, and appropriate the same to themselves as their ‘Financial Commons’. The creation of the Commons endows upon the ‘Complement Enemy-Group’ a monetary privilege to act in unison against any erring member of the group. These untraded FV Cause Bonds are priced in expected terminal NAV, ie, ‘Futcoin’ prices, at a 'decades-away' terminal date, that serve to reveal the perceived extent to which current policies achieve or fall short of the long-run goal of a 'Sustainable FV 1^st society'.

With the 'Source-Purpose-FV Pot' mirrored in untraded SSFV Cause Bonds, the Government seeks to monetize the FV pot in to liquidity to fund its PV programs directed at attenuating catastrophic global warming. This involves an ‘Exploit-Monetize-Discount’ (EMD) operation on the SSFV Bonds that transform the future line in to PV-liquidity. The EMD operation may be likened to shaving off portions of the surface of an expanding/contracting, but larger FV sphere, to grow the PV-sphere within with liquidity. In this analogy, an Exploit-key results when the FV-sphere expands, a Discount key when it is shrinking (and which funds FV-enlarging IPOs in the opposite of CC Dividends), and a Monetize key when the FV-sphere is stable (which funds PV-to-FV ESH Bonds. These ESH Bonds, through the formulae that drive indices and NAV, capture the various physical linkages in global warming and sea-level changes beyond the environmental impacts of economic activity). It is generally necessary to create a large-enough and 'perpendicular counterweight' (an ‘Opposite Complement’) to cover for EMD-biases due unbalanced liquidity assignments to PV-entities, and to cover PV-entities hurt in the 'shake-out' in the societal future that accompanies the FV-to-PV Monetization operation.

The IPN Opposite Complement – FV-Counterweight

Toward such an ‘Opposite Complement - Perpendicular FV-counterweight’, consider tranches of collateralized International Promissory Notes, IPNs, placed with a friendly foreign nation, that serve as a vehicle to capture the Nation’s RC Bakey as 'Perpendicular Land 2 FV'. IPNs may validly be interpreted as 'RC BV-Monetize Opposite-Perpendicular Land 2 FV'; they represent the FV of all land and unexploited resources in the issuing nation, and hence serve to capture mineral reserves reduced to mere land either due environmental unsustainability (shrinking FV), or, upon the advent of new technology (enlarging FV). Thus, the change in value of IPNs issued abroad correlates with the changes to the FV-potential of existing and incremental land transactions, including the FV-equivalent of de-classified mineral reserves returned as land. The local-currency-denominated IPN is not unlike (very) Long Currency Forwards, of the same term as SSFV Bonds, issued to a friendly foreign nation as part of a bilateral 'Macro-prudential exchange - Monetary Macro-Hedge - Trade Financial cover' agreement that is reciprocated with a $-denominated IPN deposited with the domestic nation. This exchange of IPNs - akin to a swap in large-denomination, very-long Currency Forwards, and which may be monetized and currency-exchanged by the receiving nation, serves to both, 'long-peg' and hedge the exchange rate, and concomitantly, provide a macro-prudential and monetary cover for both nations. The mutual exchange and discounting of IPNs in to their respective local currency, beyond hedging trade monies, reveals sovereign assessments of FX deviations from the long-run exchange rate at which they were issued.

E-M-D ?

Next, and post the two-way 'IPN-Securitization-Monetary Hedge-Trade cover', PV-Exploit-Monetize-Discount the FV-pot underlying the SSFV Bonds to issue upon them incremental liquidity. The 'Exploit-Monetize-Discount' (EMD) operation is essentially the hastening of FV-Futcoins in to PV-liquidity by the various nations through their domestic Insurance FV-PV market in the opposite of FX-volatility in the RC-BV - Land-collateralized pair of IPNs that serve as perpendicular FV-counterweights. Since the EMD obtains domestic PV-liquidity from the global financial commons, non-compliance with SSFV goals by any one nation causes financial externalities upon the rest, that in turn, induce retaliatory pressure from the complement-group of nations in the form of ‘PV-obligations’ transmitted simultaneously through the FX-market. These PV-obligations, by turning non-compliance extremely costly, force a policy course-correction in the erring nation. The creation of PV-Liquidity through the FV-EMD operation results in distinct monetary entities: a) 'Blue Lumpsum – PV-Exploit -2key FV' Opportunity-Reward line that is invested either in Green IPOs, or in its opposite, CC Growth Equities with an 'Exploit Bull-run', b) a two-faced FV-PV zero-sum 'CC Sustainability Blue-Green FV'  Commons-Lifestyle line that is shared between domestic PV-to-FV ESH-Bonds and CC Dividend yield stocks, c) a 'Sustainability BV' -Monetize PV-Working capital’ issued to Insurance firms for their support in EMD operations, and indeed, d) a balancing, residual EMD-derived volatility absorbed by the ‘Domestic Realty-$IPN-FX-RsIPN-Foreign Realty’ sub-market (a design in which volatility not absorbed in Realty sector is transmitted over to the FX). The proportions of these 3+1 portions depends upon whether the FV is enlarging, stable, or shrinking during the EMD operation. An ‘Exploit FV key’ accompanies the lumpsum created from EMD operations upon an expanding FV; it is best leveraged in bull-runs on CC Growth equities and reserve buy-outs. The ‘Discount key’ activated with the EMD upon a shrinking FV – whether for reasons of incipient economic/environmental unsustainability – is channelled to FV-enlarging Green IPOs (and in the opposite of contingent capacity buy-outs). The ‘Monetize key’ that results from PV-hastening a stable FV sphere is directed toward CC Dividends (coal-power production deferrals).

Liquidity issued as 'PV Lumpsum-Blue line-2key FV ' is directed by the SSFV Administrator at Green IPOs, particularly those that bring about an enhancement in the carbon-efficiency of power generation, and in its competition, to support CC Growth Equities that enlarge the penetration of more efficient, new technology to enlarge the ‘1^st FV’ society. Leveraging his position as both, a CC Benefactor and an ESH Cop, and to discharge his obligation toward securing as high an 'RC BV-Land 2key' for the 'FV 1' society, the SSFV Administrator invests, both, a 'CC Growth Hedge Enemy Opposite' line and a 'CC IPO Environmental Hedge Friend Apposite' line – together constituting the CC Sustainability Blue PV-Green FV Line' - in Dividend-yielding CC Equities and ESH Bonds, respectively. The Sustainability BV issued to Insurance firms takes the form new business areas from the engendering of incremental risk due the FV-to-PV EMD operation post the expansion or shrinking of the '1st Society FV'. Any imbalance in the EMD operation results in, and is accommodated as 'Mirrored-2-way volatility' that feeds the Realty-IPN-FX sub-market. Such imbalances result when the SSFV administrator either discounts too much, too less, or chooses to seek a biased investment agenda, causing, respectively, too fast, too slow, or an unbalanced shrinking of the FV-sphere. Post the EMD operation, the volatility abates upon the Realty and FX markets settling to a new equilibrium determined by economic-, environmental- and trade fundamentals and prospects of the SSFV-discounting nation. A properly-conceived EMD operation would fast-forward carbon-saving power-generation technology, and efficiency-enhancing new CC technology, advance the cause of a balanced internalization (abatement, mitigation of CC-externalities, contingent capacity-buyouts), and indeed, bring about an enlargement of CC-Lifestyle, while retaining the Nation's currency at as high a level, the FV-sphere as intact, and Futcoins as much appreciated, as possible.

PV-Lifestyle-seeking Dividend-yielding CC Equities exploit natural resources with existing technology. They correlate negatively with PV-ESH Bonds that seek a future characterized by reduced emissions, control over CO2 emissions, and sustainable CO2 concentrations. CC Growth Equities, on the other hand, rise with successful placement of IPOs reflecting expected benefits from the introduction of new technology IPOs. While the former obtains the SSFV Administrator a harvest opportunity prior to the fall of ESH Bonds that results from over-exploitation of resources with obsolete technology within a dividend-maximizing context, the latter represent a means for the Administrator to aggregate gains that accrue in the broader market from placement of efficiency-enhancing IPOs. While the temporally-zero sum PV-to-FV ESH Bonds intend to achieve the 'Nature Half Nature Oo-Green PV-Commons -Green Pareto FV' criterion set forth in the SSFV Bonds, the CC Blue-Green, Friend-Enemy Hedge lines represent a short-long, FV-PV zero-sum between ESH and CC Dividend-yielding stocks that maximizes the RC BV-Land 2 FV-CC Lifestyle economy (and the Nation's currency via its impact on the IPN), the CC IPOs, issued in competition with CC Growth equities (representing the cross-sectional ZS), raise both, the environmental sustainability of power-generation and the production efficiency of CC economy, and thus obtain the wealthy 'Sustainable society 1^st FV’.

Consider now a 'Catastrophe-averting No Regrets, Zero-Sum' Climate Change policy that seeks to interrupt the on-going sea-level rise by funding a reversible, inter-temporal switch between Carbon-polar forms of energy. The essence of the strategy involves offering owners of carbon-intensive forms of energy, specifically, Coal, a market-negotiated financial deal to reduce its presence in the power-generation sector. The magnitudes are determined through SSFV Offers and/or Generator/Resource-owner Bids in the EX market and in quasi-competitive auction markets for capacity liens and the permanent buy-out of reserves. The finances for such gargantuan compensation is obtained, as elaborated above, by leveraging a zero-sum strategy on Nature, Reserves, Innovation and the CC Lifestyle economy that fast-forwards future resources to the present, and creates as much in FV by bringing about voluntary/induced enhancements to technology, in resource use, and environmental sustainability, beyond an increase in land value.

M2Dot Criteria and the 'Truth Table'

To repeat, the strategy boils down, first, to the creation of temporally- and cross-sectionally zero-sum PV Liquidity-M2Dot from 'FV-to-PV EMD' operations, and directing the monetary resources – Lumpsums and the CC lines - so created to issue tranches of PV-to-FV ESH Bonds to remedy damages caused by the CC economy, fund new carbon-saving power-generation technology in the IPO market, contingently buy-out coal-power capacity, offer compensation in the EX market to defer coal-fired power generation and/or damages to resource owners for turning in coal reserves, and support efficiency & sustainability in the CC economy. Let us focus upon one of the largest contributors to atmospheric CO2 emissions – coal-fired power generation - and evaluate the type of liquidity-infusion and policy remediation necessary to reverse the on-going rise in CO2 emissions by focusing upon two critical variables: CO2 emissions from power generation (representing CC Externalities and ESH-risk), and, power prices (representative of costs in the CC manufacturing economy, and of inflation in essential-consumables). The following table indicates the four cases, the SSFV Administrator's actions and indeed, the decision rule concerning fossil fuels. 

The 'Truth Table'

Carbon Emission (Externalities)	Power prices (Inflation)	Economic Regime/Cycle	Capital Market Action	Administrator Decision Rule
Increase	Increase	Environmentally -inefficient, inflating economy FV-Shrinking	Issue Wet ESH Bonds Sponsor Wet Renewable IPOs	Apply Discount key in 'Blue Lumpsum – PV-Exploit -2key FV ' to sponsor Renewable IPOs; Apply 'CC Sustainability Blue-Green Line' to issue ESH Bonds; Short CC Gr equities and hold gains; Short CC DivYld equities and apply gains to issue ESH Bonds and defer coal-fired generation.
Increase	Decrease	Deflating, ‘coal-seeking’ environmentally-unsustainable economy; FV-Shrinking	Issue Wet ESH Bonds Sponsor Dry Renewable IPOs	Apply 'CC Sustainability Blue-Green Line' to support ESH Bonds and defer coal-power-generation; Combine  Discount key in ‘Blue Lumpsum – PV-Exploit -2key FV' with held-over gains from shorting CC Gr equities to buy-out quarterly coal-fired generation capacity; Short CC DivYld Equities and apply gains to defer coal-fired generation.
Decrease	Increase	Inflating, but environmentally sustainable economy FV-Stable	Sponsor Wet Renewable IPOs Issue Dry ESH Bonds	Split Monetize key in 'Blue Lumpsum – PV-Exploit -2key FV' to sponsor coal-power deferrals; Apply 'CC Sustainability Line' to invest in CC Dividend-yielding equities; Short CC Gr Equities and hold gains.
Decrease	Decrease	Environmentally and economically sustainable economy FV-Expanding	Issue Dry Renewable IPOs Issue Dry ESH-Bonds	Apply the 'CC Sustainability Line' to CC Div. Yld Equities and Growth equities; Apply held-over gains from shorting CC Gr equities to buy-out coal reserves; Bank 'SSFV Bond Futcoin gains -IPN imbalance' in CC Realty stocks (opposite FX); Apply Exploit key in 'Blue Lumpsum – PV-Exploit -2key FV' to CC Growth Stocks and reserve-buyouts.

The logic behind the 'Truth table' above is simple. ‘Wet’ sponsorship implies issue of IPOs and ESH Bonds with concomitant liquidity infusion in to the larger or sub-market. The liquidity infusion reduces the threshold-cost of capital necessary to engage in environmental remediation. ‘Dry’ issuals lack the liquidity infusion and hence are a means to ensure candidate IPOs are extra-efficient and extra-sustainable beyond soaking up excess, inflation-causing liquidity. Rising carbon emissions are symptomatic of environmental unsustainability that shrink the FV; they are met with by investing in Wet ESH Bonds that reduce the cost of environmental capital and fund the deferral of coal-fired generation. Rising power prices, on the other hand, imply a constraint on power generation capacity and an inflating economy. Green IPOs that add to power generation capacity and reduce power prices while also curbing CO2 emissions are an obvious solution. It is opportune to short CC Growth stocks in periods of rising input costs and inflation.

PV Lumpsums with an Exploit key from EMDs in periods of FV-expansion find their way to fund bull-runs in Growth equities or reserve buy-outs; those obtained with a Monetize key from EMDs associated with a stable FV sphere are directed at IPOs and coal-power deferrals while Discount-key-endowed PV lumpsums from periods of shrinking FV favours FV-enhancing Renewable IPOs and premature and permanent capacity shutdowns. CC Sustainability Line may be applied to Dividend yield equities in periods of falling emissions, diverted to issue ESH-Bonds, or fund the deferral of coal-fired generation. To its obverse, resources from shorting CC Growth equities in periods of shrinking FV could fund the buy-out of quarterly coal-fired generation capacity. Coal reserves are best bought out with an Exploit key or in periods of falling power prices when its shadow value in power generation is on the decline. Coal-fired generation is best interrupted in periods of rising emissions and falling inflation by interrupting the CC Dividend Yield economy. These general principles when combined for the 4 economic-environmental scenarios obtain the Truth Table above, which along with EMD-guidelines, determine the SSFV Administrator’s decisions, actions and allocations.

With liquidity allocations as detailed in the Truth table, it is expedient to recap the strategy, which involves expressly creating an FV-pot around a high-priority, socially-sanctioned goal and leveraging the same by re-arranging monetary sums across time and space to funding innovation, averting, mitigating and compensating activity that hold-back an impending environmental disaster. The re-arrangement consists of a cross-sectional zero-sum, an FV-PV zero-sum, and an inter-temporal zero-sum. The cross-sectional zero-sum is evident in the assignment of freshly-created liquidity between IPOs and CC Growth stocks. The 'FV-PV zero-sum' decomposes SSFV Bonds into a zero-sum across PV-ESH Bonds, CC Dividend yield stocks and the two-way volatility in IPNs (FX) and Realty stocks. The inter-temporal monetary zero-sum, envisaged in the FV-EMD strategy (and which transforms the 'Nature Bakey-Green Ookey – Resource Curse (RC) – Unsustainable CC Economy-2^nd Society-PV Economy ' to 'Nature Half FV-Commons-Green Half Oo Pareto – Sustainable 1^st Society-RC BV-Land 2 FV – CC 100% -CC Mirror FV- CC Lifestyle Economy' is obtained by a) offering a 'Green Oo Bakey' - presumed equal the 'Green Half Oo' - back to Nature (the 'CC Nature Half' as measured by the imputed value of Environmental Commons sustained by the PV-ESH Bond series), b) by the increase in 'RC-BV Land 2 FV' that accompanies the de-capitalization of RC Reserves following both ESH-internalization and efficiency-enhancing IPOs, and c) exacting a 'CC Nature Penalty' by usurping a 'CC FV Mirror-CC 100% Capital appreciation' upon the PV-IPOs issued to close the holders of SSFV- and PV-ESH bonds upon achievement of their FV-purpose, with a 'CC Terminal Bonus'. In monetary terms, and upon achievement of the 1^st FV society, the IMF issues as much liquidity necessary to monetize the SSFV Bonds/Futcoins (taking cognizance of the rise in networth of PV-to-FV ESH Bonds, Land, and the CC Economy). Viewed from a different perspective, the expansion of the SSFV Bonds (due enhancement of economic efficiency and environmental sustainability), and the IPN (due enlargement of reserve-decapitalization triggered 'Land 2 FV'), discharges the FV-debt triggered upon issual of PV-liquidity for funding ESH Bonds, IPOs and the various CC lines.

This monetary-cum-finance strategy, by re-arranging resource exploitation temporally, and funding a 'carrot and stick' economic-environmental policy with a defensible, liquidity-creating FV-EMD strategy, achieves the express goal of abruptly interrupting the rise in CO2 emissions and helps avert the concentration threshold at which multiple, non-linear reinforcements trigger run-away global warming and catastrophic sea-level rise.        

Carbon Repurchase Strategies for the Power-sector

The EX may be conceived of as comprised of the Spot market for power, the ‘Day-ahead’ market, and the long-run market for quarterly/annual (merchant) power-generation capacity. The Spot market allocates real-time power supply offers and demand bids to balance the residuary excesses and shortfalls from the 'Day-ahead' contracts, while the long-term, quarterly/annual market for capacity is comprised of power generators - fossil-fuel-fired or otherwise, some of whom are also owners of fossil-fuel resources. The SSFV Administrator, by design a significant participant in the EX, takes on the role of a wholesale 'green' power consumer who seeks to defer coal-power production in the Day-ahead market, even as he hunts for fossil-fuel-fired power-generation capacity in the EX Quarterly (Merchant) market, and independently, seeks offers for permanent turn-in of fossil-fuel resources at the reverse-reserve-buyback auctions.   

Having elucidated a plausible monetary-cum-financial strategy to resolve environmental and economic unsustainability in the power sector, let us now elaborate upon the mechanism required to induce fossil-fuel users & owners, coal in particular, to avoid/turn-in those resources. The task would be to design an anticipatory system that compensated participating fossil-fuel producing entities in a competitive power market subject to the vagaries of demand and supply-side perturbations. It is necessary, in this context, to devise a three-pronged strategy – one that compensates participating owners of fossil-fuel-fired generating-capacity for deferring such power production (while holding on to coal reserves) on a 'pay-as-you-go' basis based on their actual bid in the ‘Day ahead’ market, or, an option for coal-fired (Merchant) capacity owners to bid in their quarterly capacity either temporarily or for premature-mothballing to the Administrator, or, an ex-ante, reverse-auction-determined compensation for permanently turning-in proved, 3D-delineated, and market-capitalized reserves.  

The EX and the 'Pay, Yesss! We go' Tradition

The EX Regulator at the Day-ahead market compiles the offers from power producers of various hues – Hydro, nuclear, wind, coal and gas, and ranks them by increasing marginal cost to form a Day-ahead supply curve. It is this supply curve that the spot market trades around when accommodating real-time power excesses and deficiencies. The SSFV Administrator leverages the 'Day ahead' EX market to obtain immediate reductions in CO2 emissions, signal his moves and intentions in the quarterly market for merchant, coal-fired generation capacity, and for the buyback of reserves in the Long-term fossil-fuel reserve market. To achieve his goals, and to develop a suitable criterion to guide his intervention, the SSFV Administrator adopts a simple identity for aggregate CO2 emissions from power generation: 

CO2tons = EmCoeff*Kwh = EmCoeff *EnIn*Y = Pelec/Pcpermit * EnIn*Y

where EmCoeff represents the emission coefficient of the particular power production technology in CO2/Kwh, Pelec, the price of electricity, is measured in Rs/Kwh, Pcpermit, the shadow price of carbon emissions in Rs/CO2 ton, and EnIn, the aggregate energy-intensity of output, Y measured in Kwh/Y. While EmCoeff is determined both by fuel-type and generation technology, Pelec is set in the market (or bid strategically by participating generator-firms), EnIn is influenced by the nation's share of manufacturing technology in aggregate output Y – itself a variable determined by macro-economic policies. Given the bidded pelec may vary by firm within the aggregate, the expression is applicable at various sub-aggregates - by fuel-type, and indeed by firm within any fuel type.  

In the context of volatile electricity prices, the SSFV Administrator’s strategy boils down to setting a benchmark-threshold for the shadow value of CO2 emissions, Pcpermit, for the various terms: Day-ahead, Quarterly, Annual and beyond. Realizing each power-generator has a different emissions-coefficient, fuel- and capital/operating costs, and therefore exhibits a different shadow price of carbon, and further, bids differently for the Day-ahead supply schedule, the SSFV Administrator employs a uniform Pcpermit threshold to all coal-fired generation to separate them in to compliant and non-compliant categories. Thus, the Administrator adopts the following decision rule:  

IF Pcpermit_firm (=Pelec/EmCoeff)_firm  <  SSFV Pcpermit Threshold

                                                                      THEN Buy away the bidded coal-fired generation  

The logic underlying the decision-rule is that it is beneficial to buy-away all coal-fired generation with a shadow price of CO2 less than the Administrator's, ie, power-generation that is either more CO2-intensive, is less-remunerative, or both relative the SSFV threshold. He requires participating generator-firms reveal, in their day-ahead offers, their emissions coefficient (denominated in grams CO2/Kwh) contingent upon the quality of coal consumed, and obtains their supply bids for the day (in Rs/Kwh) from the interim supply schedule put together by the EX Regulator. The Administrator then intervenes in the 'interim Day-ahead supply schedule' and buys away non-compliant coal-fired generation, which in turn, permits re-evaluation of supply bids by the EX Regulator before issue of the 'final day-ahead supply schedule'.   

Post intervention by the SSFV Administrator, the EX Regulator re-computes the supply-curve for the day-ahead generation, and re-assigns power generation across the remaining competitors. The SSFV Administrator then enforces a shut-down of the bought-out plants/capacities for the day-ahead (with the aid of CEMS). This strategy effectively shifts the supply curve of coal-fired generation to the left (as in Figure) and obtains significant and immediate reduction in CO2 emissions relative the 'no intervention' baseline. In the general case, the supply-shift induces an enlargement of cleaner, gas-fired capacity at the expense of lower-priced, coal-fired generation (without necessarily reducing competition significantly, or inducing increases in power prices), and thus contributes to an immediate reduction in emissions from the more CO2-intensive power generation.   

Given power-prices (and coal-quality) could vary with day-to-day supply and demand variations, the SSFV Administrator varies the threshold dynamically from day-to-day, and over longer periods, to accommodate the Fund Allocation 'Truth table', and his plans in the capacity lien, and reserve buy-back reverse auctions ('The Lie' Table). These thresholds, reflecting the urgency to stave off climate thresholds, could at the discretion of the SSFV Administrator, be stringent in the immediate and short-run, relative the long run. Notably, this design is EX market-conformable and treats domestic and imported coal on par - a significant advantage in a market characterized by large international trade flows in coal for power generation.   

Beyond the immediate reduction in emissions, the SSFV Administrator, by varying his threshold-dictated intervention in the EX, simultaneously signals to fossil-fuel-fired generators and to owners of fossil-fuel reserves with his short-, long- and very long-run target for the threshold, that he is open to the deferral of future daily production, the buy-out of fossil-fuel-fired generating capacity on a quarterly basis, and to the buy-out of permanently-surrendered coal reserves. The actual decisions made by the various coal-fired power generators would depend upon their firm-specific technologies, fuel choices (and reserves), and locational influences. Should the expected shadow price of CO2 from power generated by a firm be less than the SSFV Administrator's shadow price in the immediate-run only – implying the power generator intends to successfully bid with higher prices in the future, and/or that his emissions-coefficient might fall for switch to cleaner technology or fuel – then, the firm only participates in the daily-deferrals. However, should that shadow value be less than the SSFV Administrator's tightened benchmark (numerically larger shadow price) for the intermediate- and long-run, the firm might consider, respectively, parking its quarterly/annual capacity, or even the permanent surrender of its coal reserves. This expectation is firm-specific and involves economic, technological, strategic and environmental factors.  

Merchandizing Capacity  

In the context of seasonal variation in power-demand and supply, and given coal-generating plants belong to different vintages, there could be a constituency amongst them who might not be averse to either a temporary lease of generation capacity, or to a premature permanent mothballing of capacity given the right monetary incentives. Such temporary lien/lease/buy-out of generation capacity could be of potential interest to the SSFV Administrator as well in periods characterized by rising emissions and shrinking FV. The inclusion of such an option adds to the set of alternatives available to the Administrator and further enhances environmental competition. Thus, an opportunity exists to apply EMD resources to such capacity lien/lease/mothball options simultaneously with the options to defer Day-ahead coal-power and permanent reserve buy-outs.   

Reading the Resource Tea Leaves – Buyback Strategies  

Non-renewable resources, particularly fossil-fuel resources are quality-differentiated, the quality variation affecting its value in use as well as transportation, environmental discharges, disposal and indeed, its price. The price-differential is determined by many factors, but in particular, by the geological distribution of resource quality, international trade in primary resources, by the stringency of environmental regulations, and above all, the state of extraction, processing and end-use technology. Simultaneously, fossil-fuel resources are traded in spot, in futures/forwards of various terms, and indeed, long-term multi-year contracts tied, as in the case of coal, to EX Power Purchase Agreement, PPAs. It is insightful, in the context of the reserve buy-out reverse auctions, to examine the nature of interaction of expected resource quality-differential with the contract term-differentials. Larger price-differentials, ie, larger quality-premiums, are generally evidence of inelasticity of resource-quality in use, and imply – given the incentive to minimize input costs - either a high premium on product quality (that derives from raw material quality), an inferior technology, stringent environmental regulations, or some/all of the above. Larger term-differentials, on the other hand, could involve rising premiums or enlarging discounts with longer terms. Rising premiums imply larger supply-uncertainty, while enlarging discounts are indicative of expectations of over-supply and/or a fall in economic activity. Restricting ourselves to polar term-differentials – Spot and Long PPA-linked contract prices, and polar resource qualities - it is informative to think through the implications for various combinations from their interaction. These are indicated in the table below, along with the suggested course of action for the SSFV Administrator to follow at the reserve-buy-back reverse-auctions:  

'The Lie' Table

	Enlarging term-differential (Plong-Pspot)	Shrinking term-differential (Plong-Pspot)
Enlarging Quality differential DPqtn > DPqto	Tightening future supply; High quality resources sought preferentially over time ===> Buyback Low-quality reserves: Accept only the lowest bids.	Abundant future supply; High quality resources sought preferentially over time ====> Await extra-low offers from owners of low-quality reserves, or, defer reverse-auction to next period;
Shrinking Quality differential DPqtn < DPqto	Tightening future supply; future demand is quality-insensitive ====> Seek and buyback Low-quality reserves (Now).	Abundant future supply; future demand is quality-insensitive ====> Buyback all  low-quality reserves on offer.

Quality differential is measured as the premium of high quality coal commands over low-quality coal.

Term differentials are ideally measured for the same coal quality.

In the context of the Lie Table above, a critical input to the success of the above strategy, would be the increment to the networth of shares of power-coal-producing firms listed in the capital market. Given resource firms are evaluated on additional criteria beyond the regular set of criteria, in particular, the extent of reserves and their cost-characterization, such information rationally feeds in to the prices their shares command in the capital market. For the SSFV Administrator, information on how incremental reserves translate to market capitalization for resource firms is critical to his evaluation of resource buy-back offers as are trends in long-term coal prices obtained from long-term coal contracts and long-term PPAs. These contracts, which sometimes have a 'spot' component, are likely followed at, and obtainable from the EX. With capital market data on the shadow-value of incremental reserves, the SSFV Administrator may peruse the history of coal-contracts and PPA tariffs, and consult, both, the Truth Table and the Lie Table, before making offers to Power/Coal firms for the buy-back of coal reserves. Since emissions and power-prices, that underlie the Truth Table, are likely to correlate with periods of economic expansion anticipated in fuel quality price- and term-differentials, the decision-rules in the Lie Table must be interpreted in temporal-conformance with decision rules in the Truth Table.

The SSFV Administrator, cognizant of resource-quality and other geologic/economic strategies as well as resource- and power-market dynamics, and constrained by the decision rules in the Truth Table, the quantum of the various lines, and the buyback-guidelines above, chooses reserve turn-in bids incrementally in each period and has the reserves de-classified from both firm reserve holdings and national resource accounts. They remain so until the SSFV Bonds achieve the '1^st FV society', when the state of the environment and technology permit a potential re-classification and re-capitalization of the bought-out reserves back as proved reserves (post a reserve auction to potentially new owners).

More of the Mundane

The actual allocation of liquidity (from the Truth Table) and the decisions made by power generating firms as regards the deferral of fossil-fuel-fired production, the buy-out of quarterly merchant coal-power capacity, or the permanent buy-out of fuel reserves would potentially be influenced by many factors. On the side of SSFV, liquidity allocation would proceed on a marginal basis, seeking the largest gain in SSFV Futcoins across the various alternatives available – PV ESH Bonds, Green IPOs, temporary capacity liens, mothballing aging coal-fired capacity, deferral of coal-fired generation and the buy-out of reserves. The aggregate liquidity available for allocation would depend upon the implicit discount rate at which the FV-sphere is EMD-operated upon (the lower the social discount rate, the larger the liquidity one may sustainably infuse, but the more exacting the future that the SSFV Bonds must achieve), the technological and environmental state of the economy, and the pace of innovation.

In deciding their bids, power-generating firms would evaluate a three-way marginal comparison across deferred production, annual capacity buy-out and the permanent sale of reserves. A firm participating in the deferral of coal-fired power production would merely compare the benefits of deferring production in the present (essentially compensation for the opportunity cost of deferred profits, plus the benefits of delaying variable input costs) against costs engendered to hedge uncertainties that would characterize production, costs and profits in the deferred-to period. Generally, shorter the deferral period, the smaller the uncertainty, and the more likely the participation by coal-fired power generators.

Participation in the quarterly capacity buy-out would involve various additional factors such as the costs of interruption of long-term power and fuel-contracts, capacity costs, technology upgradation opportunities, recovery of market-share post the lien period, and modifications to labour-contract. Other factors, such as the current-period and future-period capital and operating costs, current-period and future-period cost of mining and fuel-quality, status of fuel-inventories, scheduled maintenance and expectations of exogenous, supply- and demand-side ‘shocks’ affecting the power market too would influence the decision. Premature mothballing decisions have been well-researched and even implemented. They involve such considerations as remaining useful life, expected operating costs, the resolution of long-term agreements and contracts – whether labour, raw material or power-output, terminal costs and pay-offs and indeed, alternative opportunities for the released capital.

Issues involved in the 'permanent' surrender of coal reserves would extend from the nation’s projected economic and environmental strategies and constraints, expectations of long-run prices in the coal market and in EX market, the geological and mining factors that affect future costs including exploration plans, the ease of securing similar resources (or fuel-contracts) in the market, and the imputed current and expected shadow value of reserves in the capital market.

Caveats

That there are any number of caveats, assumptions and contingencies to the applicability of this proposal is self-evident. Financial markets, not to mention the macro-economy, are replete with multiple biases and inefficiencies that could obstruct, even pervert the intended outcomes of the design. However, the proposal elaborated above is designed around holistic, real finance that is both closed-cycle and mirrored, and for that reason, is likely to stand the shifting sands and buffeting winds of the financial markets. On a tangent, Bonds are only as good at achieving their goals as their diligences. It is the comprehensiveness of the science behind global warming and the environmental characterization of the production process, beyond financial diligences, that determines the exactitude of PV-to-ESH Bond criteria and goals. These are instrumental in the triggering of ‘PV-obligations’ that are enforced upon any erring nation by the Complement group of nations. Similarly, it is the degree of financial- and ethical-balance in Insurance markets, and the comprehensiveness in the FV-counterweight that facilitate superior EMD operations.

The temporary liens on merchant coal-power capacity and even the mothballing of premature capacity are strategies that might be exploited by the industry to ‘undeserved/unethical’ gains. It is for the SSFV Administrator to anticipate competitive effects, substitution risks, as well as business and commercial strategies, and internalize the same in his decisions. Critically, the proposal assumes coal resources are 3D-delineated by quality and mining costs, and further that reserves are capitalized in publicly-listed firms in competitive capital markets. Though the proposal applies generally to all fossil-fuels, the above elucidation consciously focusses upon Coal and coal-fired power-generation. Extension of this strategy beyond coal is fraught with additional complications. Coal-fired power generation is presumed to be equipped with Continuous Emissions Monitoring Systems (CEMS) that endows the SSFV Administrator with authority to monitor generation and emissions.

Just a few final words !

The singular feature of the proposal is the potential resolution of catastrophic global warming with the aid of a cross-sectionally and temporally zero-sum macro-financial strategy. This strategy overcomes the various handicaps posed climate-change policy-makers who do not have the resources to fund global-scale policies to bring about an environmentally-sustainable, global economy. The creation of a Financial Commons that can be tapped in to by various nations at various points in time to create nation-specific EMD lines of liquidity encourages participation and competition to exploit the FV pot and jointly achieve the global 1^st society. The advantage of such closed-cycle finance is that resources are raised on a future to which all participating nations are obligated, and which creates globally-enforced ‘PV-obligations’ to act toward achieving the group FV-goals.

The advantages of adopting a market-based mechanism to achieve climate-sustainability is that it brings about the same through by voluntary participation, and further, one that is potentially consistent with existing climate-change programs and policies. A market-based approach ensures investments follow market logic as concerns competition, risk-evaluation, and pricing, thus avoiding the corruption and inefficiencies that beset regulations and policies that dictate technology-choices. The market-based proposal brings about healthy competition across the various alternative means to achieve an environmentally-sustainable future society. Such competition creates credible alternatives and reduces the risk of exploitation of the FV-pot. The proposed design also ensures that interventions in the market for coal reserves, coal-fired generation capacity and deferral of coal-fired power-generation, are obtained efficiently without unduly disturbing existing institutional-, market- and policy-frameworks. Further the costs of returning the society to an environmentally sustainable path are shared and hence reduced for concomitantly pursuing other worthy goals such as funding innovation, underwriting the CC-equity market, and indeed the CC Lifestyle economy.

From a resource-perspective, the proposal seeks to provide a two-way solution out of the dilemma that now besets nations stuck with huge reserves of environmentally-unsustainable fossil-fuels. It offers resource-owners and end-users a choice between deferring use to facilitate immediate environmental gain, holding back capacity for negotiated periods, prematurely mothballing their aging plants, and the temporary/permanent sale of reserves at market-determined prices until the development of more efficient technology. Such choices ensures resource-owners and end-users face an environmentally level-playing field that incentivizes efficiency in production as well. The availability of such credible alternatives, pre-empts corrupt political moves by resource-owners, and facilitates a faster resolution toward a global solution to climate change.     

By exploiting the multiple-criteria based, goal-seeking FV-Cause Bonds, the power of EMD operations to create liquidity to pursue those goals, and adopting a two-pronged ‘carrot and stick’ strategy that, on one hand, stimulates efficiency-enhancing and environment-sustaining innovation, and ESH-externality internalization on the other, and inter-leaving it with pro-active intervention in the fossil-fuel resource and end-use markets in the opposition of FV-enhancing Growth-, BV-monetizing Realty- and Lifestyle-expanding Dividend-yielding stocks, the SSFV Administrator averts an impending environmental catastrophe. Thus strategized, the Nation obtains integrated, yet focused control of the environment and emissions markets, power generation market, as well as liquidity and inflation within the context of a stable global monetary system, and a multi-laterally cooperative, yet competitive environmental context.