TOULOUSE — The question posed to us by climate change is no longer "what do we do?" — Reduce carbon emissions is what! — but "how do we do it?"

The inflation of carbon (CO2), which warms up climate, isn't all that different from monetary inflation. And to keep it from spiraling out of control, we need coordination and constraints.

With that in mind, Christian Gollier (Toulouse School of Economics) and I — in an article by our new think tank, Asterion — call for the creation, in Europe, of a Central Bank for Carbon (BCC). Just as central banks are vital to curbing monetary inflation, a BCC is needed, we argue, to keep CO2 emissions in check.

Currently, the climate fight is undergoing a "tragedy of the commons." That's because the climate, a global public good, is affected by a myriad of individual actions without any coordinated efforts for sustainable practices. And when people do try to help the climate, they cover 100% of the costs of their efforts while deriving only the tiniest of benefits.

Our idea for a Central Bank of Carbon is to set a single price for CO2 throughout the European Union

Without collective coordination, the climate fight is both ineffective and insufficient. And yet, that's precisely the situation we currently face. There's little coordination between generations and between countries.

Carbon reduction in only one country is futile. France, for example, accounts for just 1% of global CO2 emissions. But Europe as a whole contributes 10%. There needs to be participation from all countries, therefore, and for that to happen, we need the right incentives and the right institutions.

Photo — Daniel Spiess

Our idea for a Central Bank of Carbon remedies this lack of coordination by creating a new regulatory climate institution that is simple, efficient, robust and universal, and with a single objective: to set a single price for CO2 and an upcoming price path for CO2's increase over time.

The BCC will have a monopoly on the issuance of CO2 emission permits throughout the European Union, and it must control the main points of entry and creation of CO2 by the EU's economic system (mines, imports, specific heavy industries, agriculture, soil management).

This BCC will be independent and transparent, led by a board of recognized personalities in this field, and will report its policy to the European Parliament. Like the European Central Bank (ECB), the BCC will have exclusive supranational power throughout the EU and will handle coordination issues within the EU.

A high and predictable price for CO2 will encourage investment in climatological progress.

The BCC will receive a clear and democratic mandate from the European political powers to achieve a so-called "ZEN" (zero net emissions) carbon target by 2050 (or earlier). The body will also set prices (and issue future price forecasts) for CO2 emissions. The idea is to have an institution that is both simple and efficient.

In the EU, the BCC will sell CO2 emission permits, with fixed prices and varying quantities, to a limited number of companies (importers, mines, etc.). This price will be revised periodically to respect the rate of decrease of CO2 emissions defined in the mandate.

This mechanism will apply mainly to imports — their carbon content will be subject to these permits — and will thus restore the carbon balance between European production and imported products. The BCC will also be able to purchase CO2 allowances from capturing carbon emissions (i.e., negative emissions).

A high and predictable price for CO2 set by the BCC will change individual and collective behavior (the polluter pays principle fees). It will encourage the public and private sectors to finance investments in techniques for climatological progress. The BCC settles the question of "how?" within the borders of the European Union. That, then, leaves us with the next question: "How do we extend this to the rest of the world?"

*The author is a French economist and the director of the think tank Asterion.

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