(Private)-Retroactive Carbon Pricing [(P)ReCaP]: A Market-based Approach for Climate Finance and Risk Assessment

TL;DR

This paper introduces a market-based mechanism called PReCaP that dynamically adjusts carbon pricing using empirical evidence, aiming to improve climate finance and risk assessment by involving private actors and insurers.

Contribution

It proposes the PReCaP prediction market for real-world implementation of retrospective carbon pricing, addressing limitations of current SCC estimation methods.

Findings

PReCaP enables dynamic adjustment of carbon prices based on empirical data.

The mechanism reduces government involvement and systematic risks.

It facilitates climate policy by involving private stakeholders in carbon risk assessment.

Abstract

Insufficient Social Cost of Carbon (SCC) estimation methods and short-term decision-making horizons have hindered the ability of carbon emitters to properly correct for the negative externalities of climate change, as well as the capacity of nations to balance economic and climate policy. To overcome these limitations, we introduce Retrospective Social Cost of Carbon Updating (ReSCCU), a novel mechanism that corrects for these limitations as empirically measured evidence is collected. To implement ReSCCU in the context of carbon taxation, we propose Retroactive Carbon Pricing (ReCaP), a market mechanism in which polluters offload the payment of ReSCCU adjustments to insurers. To alleviate systematic risks and minimize government involvement, we introduce the Private ReCaP (PReCaP) prediction market, which could see real-world implementation based on the engagement of a few high net-worth individuals or independent institutions.