Carbon quantitative easing (CQE) is an unconventional monetary policy that is featured in a proposed international climate policy, called a global carbon reward. A major goal of CQE is to finance the global carbon reward by managing the exchange rate of a proposed representative currency, called a carbon currency. The carbon currency will be an international unit of account that will represent the mass of carbon that is effectively mitigated and then rewarded under the policy. The carbon currency will function primarily as a store of value and not as a medium of exchange.
CQE is designed to manage the exchange rate of the carbon currency by enacting an internationally agreed floor price for the currency. The floor price should rise predictably over many decades in order to deliver on the main goals of the 2015 Paris Agreement.
CQE is the name given to the currency trading operations of central banks that have agreed to cooperate and coordinate their efforts in order to guarantee the floor price for the carbon currency. In addition to the currency trading, central banks should telegraph their intentions by advertising the future exchange rate of the carbon currency to market participants, thereby increasing private demand for the carbon currency in the foreign exchange market.
With CQE, it is proposed that market participants will accept the new carbon currency as an investment-grade asset given that it will have relatively low financial risk, relatively high appreciation, and relatively high liquidity.
History
CQE was first proposed in 2017 by Delton Chen, Joël van der Beek, and Jonathan Cloud in order to create a new socioeconomic roadmap for delivering the main goals of the 2015 Paris Agreement. CQE was reviewed in 2018 by Guglielmo Zappalá as part of an economics thesis, and it was first mentioned in the mainstream media in 2020 with two online articles appearing in Bloomberg's business news service.
CQE has yet to be included in mainstream narratives on the economics of climate change even though it has the scope to address many critically important climate-related systemic risks, such as weak carbon pricing, lack of climate funding, and lack of societal cooperation.
Monetary policy
The ideal implementation of CQE will involve every central bank in the world, however CQE can be implemented with just the central banks of the 20-40 largest economies, approximately, given that this group of central banks represents about 80-90% of the world economy by nominal GDP. Prior to applying CQE, the participating central banks need to be given a mandate that allows them to manage the exchange rate of a currency that represents mitigated carbon. The representative currency is the economic instrument of the global carbon reward policy. The currency will establish a positive price signal that will complement carbon taxes, cap-and-trade and non-market policies that are also implemented.
Carbon currency
The representative currency should be denominated in carbon mitigation services. A unit of account of 1000 kg CO2e mitigated for a 100-year duration, or similar, is recommended. The proposed representative currency may be called a carbon-backed currency, or more simply it may be called a carbon currency. The carbon currency will not be legal tender in any country, and it will only be traded as a financial asset.
The carbon currency will provide three key functions: it will function as a financial incentive, as a store of value, and as an accounting instrument for recording the carbon stocktake under the global carbon reward policy. The total supply of the carbon currency will be proportional to the total mass of carbon that is mitigated and rewarded. All of the carbon stocktake will be retired from carbon markets, and so the carbon currency will not act as a carbon offset because there will be no carbon offsetting under the policy.
Central banks that participate in CQE will be instructed to create additional bank reserves (MB) to buy the carbon currency in open markets. The expansion of MB and the associated currency trading should be coordinated in order to give the carbon currency an exchange rate floor that is calibrated to meet the goals of the Paris Agreement. The purpose of CQE is to underwrite the long-term floor price of the carbon currency while the supply of the carbon currency is increasing over time. The supply of the carbon currency will increase when it is issued to enterprises as a financial reward for their climate mitigation services.