Economic Recovery and Regulating Greenhouse Gas (GHG) Emissions

8/14/2019 Economic Recovery and Regulating Greenhouse Gas (GHG) Emissions

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A change in the weather is sufficient to recreate the world and ourselves.- Marcel Proust,A La Recherche du Temps Perdu

PROPOSITIONSThe primary and essential function of the federal government is to supply

the institutions that create and sustain trust in the markets ability to

manage risk;1

The present financial crisis is the result of a massive failure to effectively

manage risk;

The most pressing economic risk today is collapse of the national econ-

omy due to the effects and costs from abrupt climate change;

The financial crisis that is absorbing so much capital in spurious at-

tempts to fix the economy is actually a carbon crisis;2

Spending $10,780 billion salvaging zombie financial institutions is a mis-

allocation of capital away from decarbonizing the economy. Without this

decarbonization, it is unlikely that the economy will be able to payback

capital used to detoxify the financial system;

Economic recovery can only be achieved by allocating labor and capital

to new industrial infrastructure that produces positive returns on invested

capital (ROIC) with energy return on investment (EROI) sources of


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WHAT IF THE FINANCIAL CRISIS IS REALLY AN ENVIRONMENTAL

CRISIS AND MUST BE ADDRESSED SYSTEMICALLY

Since mid-2008, more than $9,700 billion -- in taxpayer dollars -- has been

pledged, committed, lent or spent by the federal government in response tothe financial crisis.3 The TALF program to purchase toxic assets adds another

$1,000 billion in non-recourse loans to shore up balance sheets of U.S. finan-

cial institutions (banks, hedge funds, mutual funds, etc.). The financial cri-

sis, to date, has caused more than $50,000 billion fall in the value of financialassets worldwide.4 Along with this unprecedented wealth destruction, the

financial crisis, over the last 14 months, has produced a loss of 4.4 million jobs

in the U.S. and many more millions worldwide. Presently, the two major al-

ternative and conflicting theories to explain the financial crisis are: (1) its a

liquidity problem, and/or (2) its a worthless assets problem.The liquidity problem theory assumes that the burst housing bubble has

spooked both the banks and the public and created a vicious circle of con-

tracting credit. Consumers are deleverging (reducing their exposure to debt) to

avoid going bankrupt so they dont want to take on more debt, and no longer

have the equity in their houses to put up as collateral. As the public pullsback consumption, businesses have excess capacity as they produce less and

fire workers. But, even if someone wanted credit, the banks are reluctant to

loan because they dont trust the durable value of their own assets that be-

cause of the downturn have lost significant market value and they have comeinto this downturn with far too few reserves to weather the storm. Thus, onthe whole were looking at an unnecessary panic. All that is required is to

pump liquidity (i.e. money/credit) into the economy and the markets will

right themselves, assets will regain their true value, banks will start lending,

consumers will start buying again, and businesses will rehire workers to pro-

duce the productsconsumers are again buying as they now have jobs.

The worthless assets problem theory asserts that the financial system really, truly

made bad bets based on unrealistic ideas of the future value of homes, the

E C O N O M I C R E C O V E R Y & R E G U L A T I N G G R E E N H O U S E G A S E S ( G H G )

LYLE A. BRECHT DRAFT 410.963.8680 -- - CA PI TA L MA RK ET S RE SE AR CH -- - MARCH 25, 2009 Page 2 of 12

3 Byron Dorgan and John McCain, Let's Learn What Caused This Crisis, The Wash-

ington Post (Sunday, March 8, 2009): page A15. This amount is about $92,000 for everyU.S. household.

4 The estimated financial losses of U.S. households is $11,000 billion (Federal Reserve

System).


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amount of consumer debt U.S. households are willing to bear, and the as-

sumption ofstationarity (the future would mirror the past) and they lost those

bets. Confidence and trust in the financial system is low because people have

woken-up and finally become more realistic. Many of the assets presentlyheld by the financial system will never regain their original value because

they were way overpriced or even worthless to begin with. Thus, financial

engineering to create markets for these toxic assets and to refloat the econ-

omy by just creating more credit will not and cannot create a sustainable eco-nomic recovery. The problem is the financial industry itself, its present too

big to fail structure, its compensation packages that reward short term re-

sults even as no long-term wealth is generated, its over-reliance on financial

engineering that produces little value to the economy but large payouts to the

financial industry, and the factthat there are trillions of dollars in financialassets on the balance sheets of U.S. financial institutions worth less than their

nominal value. In this view, the vast excesses and damage created during the

housing bubble years cannot be fixed by monetary policy and more financial

engineering, especially while leaving the same managements that created the

problem in the first place in charge of the nations financial institutions.

A third explanatory theory, the one that I subscribe to, is that our present fi-

nancial crisis is really an environmental crisis; a crisis of carbon. The financial

aspects of the crisis are only the more visible results of the restructuring costs

to an unsustainable economy recognizing it is unsustainable and attemptingto move toward sustainability.5 Thus, the deleveraging of the household sec-tor is more about moving from spending on consumer items that are mis-

priced because the price does not include externalities, to positioning house-

holds to invest in next level technology that decarbonizes daily activities.

However, consumers are encountering a gap. Businesses in the U.S., for a va-

riety of reasons including the financial systems focus on profits from finan-cial engineering rather than providing capital to the real economy, have not

made available to the markets products that meet consumers decarbonizing



5 Sustainability involves responding to todays planetary emergency by reengineer-

ing interconnected systems that are transitioning from high EROI (Energy Return OnInvestment) energy inputs to low EROI sources. Sustainability is the process of trans-forming these systems undergoing change into complex and adaptive dynamical sys-tems that are resilient when shifting to lower thermodynamic states. Systems are sus-

tainable when thermodynamic state shifts do not cause disruptive nonlinearities -abrupt changes of the system to an unanticipated, less-complex state.


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needs.6 Thus, no amount of financial engineering, monetary policy, and regu-

latory reform, if these measures do not directly address decarbonizing the

economy, will prove useful in producing a sustainable economic recovery.7

That is because the restructuring costs of global warming may be as much$20,000 billion today, dwarfing the $10,700 billion allocated so far to fixing

the financial system.8 Without adequately addressing anthropogenic carbon

loading of the earths atmosphere in a timely fashion, a narrow focus on fix-

ing the financial system is merely whistling in the dark - just smoke and mir-rors that neglects the real sources of todays financial crisis.

THE PROBLEM WITH GREENHOUSE GASES

The normal temperature for the earth is very hot and little or no permanent

ice. As life has evolved, the earth has trended toward cooler temperatures.

Past climate history is that with little or no warning, there have been dra-



6 Presently, the U.S. economy is entirely dependent on burning low-cost carbon-based

energy sources with an EROI of 100:1. We live in a carbon economy. However, thecosts of this carbon economy are the pollution of the earths air and water with heavymetals, ozone, acid rain and CO2, the primary cause of anthropogenic abrupt climatechange. Additionally, EROI of carbon sources is moving towards 10:1 or 4:1. Thus,

existing systems must be reengineered to take into account vastly more expensiveenergy sources. The only way forward is through an expensive process of decarbon-izing the carbon economy. There is no other solution, no Plan B other than decarbon-

izing the economy.

7 Some big-ticket items for households includes private transport that gets 100 mpg

and is safe in 40 mph crashes, the ready opportunity to purchase zero energy housesor rent zero energy apartments, and college-level re-education that actually providesthe knowledge and skills to be productive in a post-consumer, sustainable economy.

8 Today, there are 250 million registered vehicles in the national fleet. This fleet is

technologically obsolete and must be replaced within the next 10-15 years. Likewise,the nation has 111 million dwelling units that are either obsolete or require seriousupgrading to be more energy efficient. U.S. industries also must become much moreenergy efficient, by a factor of 10X-25X. Why? Because the carbon emissions from all

this infrastructure of the economy are a large contributor to global warming. Not fix-ing global warming in a timely fashion has an opportunity cost that approaches$200,000 billion. Not addressing anthropogenic carbon emissions is the most expen-

sive choice we can make for the U.S. economy!


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matic shifts in temperature, storminess, and precipitation.9 Climate is essen-

tially a precariously balanced nonlinear system that lurches between very

different states of coldness, dryness, wetness, and warmth. There are many

interacting climate processes that cause a warm world of flowing water andverdant growth to become a cold world of dry winds and arid landscapes.10

Greenhouse gases let visible light and ultraviolet radiation from the sun reach

the earths surface, but absorb some of the infrared radiation reflected back to

space, thus heating the earths atmosphere. Without the global warming ef-fect of the greenhouse gas CO2, the surface temperature of the earth would

be ~0 degrees F, rather than its present average of 59 degrees F. Without the

cooling effect of photosynthesis, especially the phytoplankton in the oceans,

the earth would overheat and be uninhabitable by humans.

EXAMPLES OF GHG CONCENTRATIONS ON CLIMATE

Venus has too much carbon in the atmosphere (97% CO2)produces ex-

treme greenhouse effect with 870 degree F heat (hot enough to melt lead);

Mars has too little carbon and atmosphere produces a weak greenhouse

effect & near freezing constant global temperatures;

For the Earth to maintain acceptable climate for human economic activi-ties, scientists now believe either 350 ppm or 450 ppm CO2 is required.

CO2 concentrations today are 380 ppm and rapidly rising. They will ex-ceed 450 ppm soon without adequate regulation of GHG emissions. If 350

ppm is required, we have already exceeded this tipping point and even

greater remedial action is required.

ANTHROPOGENIC SOURCES OF CARBON IN THE ATMOSPHERE

Carbon dioxide i.e. burning fossil fuels for all the industrial processes that

make up the modern economy of much of the world and that provide

food for the worlds population;

Methane - 20X impact of CO2 e.g raising cattle, rice farming, meltingpermafrost, rising ocean temperatures;



9 Doug Macdougall, Frozen Earth: The Once and Future Story of Ice Ages (Berkeley: Uni-

versity of California Press, 2004), 141, 227.

10 John D. Cox, Climate Crash: Abrupt Climate Change and What It Means for Our Future

(Washington, DC: Joseph Henry Press, 2005), 65, 183.


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Soot - forest clearing in Indonesia, Brazil; cooking fires in India; industrial

pollution.

Presently, we add ~8.2 billion tons of carbon into the atmosphere annually

from these sources. Of this amount, the seas presently absorb 40%; therefore4.4 billion tons are added to the atmosphere annually. Today, there is ~880

billion tons of carbon in the atmosphere. Scientists believe that 935 billion

tons may be the tipping point beyond which the earth will experience run-

away warming as it has in past climate cycles during the earths history. Atthe current rate of carbon emissions, we will reach 935 billion tons by 2020.

Accounting for both direct and indirect annual CO2 produced from con-

sumption no matter where products were produced: U.S. accounts for 50% of

annual anthropogenic CO2; Europe 35%. The breakdown of carbon account-

ability by region is as follows: U.S. and Australia = 5.5 tons of carbon/yearper person; European countries = 3 tons per person; China = 1 ton per person;

India = 0.5 ton per person.

OPPORTUNITY COSTS FOR NOT ADEQUATELY REGULATING GHG

Estimates on the impacts from global food shortages, pandemics, and wars

caused by climate change range from a morbidity of a few hundred million toa few billion humans at an economic cost ranging from $10,000 billion to

$200,000 billion. Other than global nuclear war or multiple terrorist nuclear

attacks, the potential economic cost of abrupt climate change due to anthro-

pogenic carbon loading of the earths atmosphere is one of the largest barriers

to sustainable economic recovery known today.

SUSTAINABLE ECONOMIC RECOVERY IS NOT POSSIBLE WITHOUT

ADDRESSING THE MARKET FOR GHG EMISSIONS

Todays climate changes i.e. global warming are a direct consequent of an-

thropogenic unsustainable development of the earth. The result of todays

anthropogenic unsustainable development is not coastal flooding and risingtemperatures due to atmospheric CO2 loading. These are just symptoms. The

result of unsustainable development is potential collapse of global economicsystems and certain extinction of life on earth. This may be the most essential

and primary function of government today: to rapidly provide the laws and

funding that move this economy toward sustainable economic growth. Sus-tainable economic growth involves responding quickly to todays global

emergency of rapidly growing anthropogenic carbon loading of the earths

atmosphere by reengineering interconnected systems that are transitioning




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from high EROI (Energy Return On Investment) energy inputs to low EROI

sources11 while decarbonizing the economy. Approaching present financial

crisis as a problem to fix through financial engineering or to fix first before

addressing carbon emissions as a second order problem to the real economyand thus of lesser importance and a problem that can be ameliorated with

Band-Aid solutions misses the point of history. The history of the collapse of

complex systems has typically shown us two things:

Complexity has a cost; greater complexity costs even more;12

Societys investment in complexity to solve problems eventually produces

diminishing returns on this investment. Greater complexity tends to pro-

duce lower EROI over time due to two factors: (1) changing resource

availability increases input costs over time, and (2) operating and mainte-

nance costs (O&M) to keep the system running smoothly are neglected.This propensity of system mangers to defer O&M expenses to the future

often results in catastrophic system failures.13

Today, the nation faces a crossroads. We can choose policies that establish a

framework for technological innovation and for allocating labor and capital



11 In 1930, EROI of oil, natural gas and coal was 100:1; today EROI of oil, gas, wind is

15:1; large hydropower 11:1; conventional coal 10:1 (when add cost of CO2 emis-

sions); newly found oil, photovoltaic solar 8:1; clean coal 5:1 (better emissions con-trol but coal ash and heavy metals pollution); fuel cell, geothermal, nuclear 4:1; oilshale and Alberta tar sands 3:1; LNG 2:1; ethanol (from corn) 1.3:1; hydrogen 0.8:1;

nuclear fusion (unknown). See, Charlie Hall, Balloon Graph; The Oil Drum(www.theoildrum.com); Homer-Dixon.

12 The costs are measured in thermodynamic units (EROI), not money. For example,

the government policy can hide through subsidies the true economic costs of operat-ing and maintaining a failing, unsustainable system, even making the system appearprofitable in the current period when in the longer-term, no economic profits are be-ing produced and it would be the best economic decision to retire the system and

build a new, sustainable system (Homer-Dixon, 221).

13 Recent examples include: the collapse of the I-35 bridge over the Mississippi River

in Minneapolis, MN [Bridge 9340] on Wednesday, August 1, 2007 during rush hourand the December 22, 2008 spill of ~5.4 billion cubic yards of coal ash from the TVAKingston coal electricity plant into the Emory River and across 300 acres in RoaneCounty, Tennessee, both due to inadequate expenditures on O&M. Another example

is the recent collapse of the financial markets in the U.S. that was, in part, the result ofinadequate O&M spending for required regulatory oversight of financial markets.


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to build a sustainable economy or we can choose policies that, instead, lead to

lower economic output, resource wars, more terrorism, and abrupt climate

change hostile to the continuance of life on earth.14 The economy has two

primary tasks; (1) to efficiently reallocate capital and labor to projects thatprovide the technological innovation the economy requires for growth, and

(2) to protect and maintain ecosystem services so that growth can continue

over the long run. When the domestic economy successfully accomplishes

these two primary tasks, it is adequately managing risk: maturity, liquidity,market, credit, currency, technological obsolescence, and wider economic,

ecologic, and political risks. Todays economic collapse is the result of a mas-

sive failure to effectively manage risk.

USING MARKETS TO REDUCE GHG ATMOSPHERIC EMISSIONS15

Regulating anthropogenic carbon emissions should be a two step process in-

volving: (1) nationalization of the carbon emissions market, and (2) reprivati-

zation of this market, once corrective market processes are in place that re-

ward technological innovation and the reallocation of capital toward decar-



14 Timely technological innovation and reallocation of capital to more productive

purposes are the two pillars for fostering economic growth. What government regu-

lations provide is the trust to make long-term investment commitments necessary to

increase the wealth of the society; a primary and essential function of government.See Daron Acemoglu, The Crisis of 2008: Structural; Lessons for and from Econom-

ics (January 6, 2009), 8 and Martin Wolf, Fixing Global Finance (Baltimore: The Johns

Hopkins University Press, 2008), 12-20.

15 One might argue that the primary and essential function of a nations government

is to supply the institutions that create and sustain trust in financial promises, thebasis for all market transactions (Wolf, 16). The foundation of such trust is built on agovernment accountable to the large mass of property owners (Wolf, 18) and themaintenance of the most important of all financial markets that in government

debt (Wolf, 17). Thus, protecting ones country through military means is only effec-

tive if such military defense achieves trust in financial promises for a countrywithout a viable economy is one where no amount of military budget can rescue.

{I}t is only when governments are solvent that money the unit of account, the ul-timate means of payment and, in the absence of inflation, the safest store of value will remain trustworthy (Wolf, 17). Good government is then the foundation of

anyfinancial system that relies on trust that promises future return of capital withinterest in exchange for the provision of capital to fund productive activities today(Wolf, 12, 19).


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bonizing the national economy to produce sustainable economic growth. The

purpose of nationalization of the carbon market is to correct mispricing in

markets where this mispricing discourages timely technological innovation,

slows down technology adoption cycles, and inhibits the reallocation of laborand capital to those sectors putting U.S. businesses at a competitive

disadvantage.16 One means to accomplish this objective is to implement a

Cost Adjustment Surcharge for certain inputs and outputs of the economy.

Suggestions for Cost Adjustment Surcharges to correct market mispricing in-clude:

Carbon tax of $35/ton for atmospheric releases of carbon from all sources

(this tax is in addition to any Cap & Trade program that may exist);17

Fossil fuels end-user surcharge that progressively raises the equivalentprice of gasoline, diesel, and aviation fuel to $9.00/gallon over a 10 yearperiod to stabilize energy markets;18

Freshwater withdrawal surcharge from surface waters and ground water

adding a $0.10/kgal (per 1,000 gallons) surcharge for withdrawals and

offering a refund of this surcharge for each kgal of water returned to the



16 Wide swings in energy prices, due as much to government policy in the Middle

East and other oil exporting nations as to classical supply and demand pressures,

send inappropriate market signals as to the real cost of energy in terms of EROI. Thisforestalls the allocation of capital to developing and employing technological innova-tions that reduce dependance on high EROI energy sources. This also delays making

investments in end-use efficiency and renewable energy sources.

17 For each quantity of fossil fuel derived production, a per ton CO2 surcharge could

be added to the economic costs of production and paid by the producers of fossil fu-els. If the economy could replace inefficient taxes on goods like food and leisurewith efficient taxes on bads like carbon emissions, there would be significant im-provements in economic efficiency. See William Nordhaus, A Question of Balance:

Weighing the Options on Global Warming Policies (New Haven & London: Yale Univer-sity Press, 2008), 26.

18 In Venezuela and Saudi Arabia, gasoline use is subsidized and costs twelve cents

and forty-five cents a gallon; in Europe a gallon of gasoline costs $9.00 because it isheavily taxed, with revenues going to support single-payer national health care andpublic transportation. The U.S. has the lowest cost for gasoline among industrializedcountries. Thus, between 1980 and 2008, oil use in the U.S. is up 21% whereas in the

United Kingdom oil use has remained flat from 1980 to now, while in France it'sdropped 17% (Energy Information Administration).


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source in substantively the same or better quality of water than what was

withdrawn;19

Waste Stream Escrow Fees for waste stream producers as an alternative to

after-the-fact fines and penalties. This avoids lengthy court battles andcostly legal fees that attempt to recover externalized costs borne by public

taxpayers.20 Offer return of this escrow fee when waste stream producers

eliminate the volume of and toxicity of their waste stream and/or storage.

THE NATIONAL CARBON BANK (NCB)The NCB will have the responsibility for providing loans for decarbonizing

projects by creating incentive for technological innovation and the realloca-

tion of labor and capital to produce economic growth while decarbonizing

the economy. The Bank shall be capitalized with $3,000 billion in liquidityand provide 5-40 year loans, depending on the project payback ROIC (returnon invested capital) at 2.00% for the following decarbonizing projects and

under the following terms and conditions:21

Energy Conservation Incentive loans for electric utilities of one billion dol-

lars per new 1000-MW (megawatt) of energy produced through residen-

tial, commercial, institutional, and industrial conservation measures and



19 Water systems are the largest single category user of electricity in the world, ac-

counting for between two and ten percent of electricity use in a country. In the U.S.,water systems account for about three percent of electricity consumed annually(about 75 billion kWh). About 39% of freshwater use in the U.S. is used for thermalelectric energy production. See AWWA Water Loss Control Committee, Applying

Worldwide BMPs in Water Loss Control, AWWA Journal 95:8 (August 2003), 75 andU.S. Department of the Interior, U.S. Geological Survey,http://ga.water.usgs.gov/edu /wupt.html (accessed 5/1/08).

20 Example: the December 22, 2008 spill of 5.4 billion cubic yards of coal ash from the

TVA Kingston coal electricity plant into the Emory River and across 300 acres inRoane County, Tennessee. One means of paying for such spills would be to impose a$0.05/gallon ($10.09/cubic yard) escrow fee on all coal ash storage and ongoingwaste streams, as a fee for remediation, restitution, and waste stream reduction. The

intent of the Fee is to encourage waste stream producers to reduce or eliminate wastestreams and to provide safe storage.

21 If the tipping point is 350 ppm rather than 450 ppm as some scientists believe, then

the cost to achieve this new target could be $20 trillion rather than the $9 trillionamount to achieve as 450 ppm CO2 limit.
http://ga.water.usgs.gov/edu%20/wupt.htmlhttp://ga.water.usgs.gov/edu%20/wupt.htmlhttp://ga.water.usgs.gov/edu%20/wupt.html


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electricity generation from renewables (e.g. wind, solar, geothermal, algal

and nonfood biomass).22

Water Conservation Incentive loans for public and private water systems to

implement demand management programs (plugging distribution leaks,metering water use), implementing conservation pricing (increasing block

rates that charge the full cost of providing water), and establishing water

conservation education programs.23

Administer Feebates Program for stimulating demand and retooling na-tional transportation fleet to double CAF total fleet mileage within 7-10

years.24 This is a self-funding program that requires $20 billion in stimu-

lus funds for seed capital to initiate the program.25

Implement Carbon Import Fees on imported goods and services based ontheir implicit carbon embodied in that good or service based on the coun-try of manufacturer GHG budget.

Executive compensation during the decarbonization loan payback period

shall be limited to total maximum compensation of $500,000 per annum



22 A common misperception is that nuclear generated electricity should (must) play a

role in reducing CO2 emissions to the atmosphere from electricity production. If CO2contributions from the nuclear fuel cycle, decommissioning, long-term storage ofspent fuel rods and their transport to secure storage, and remediation of watershedsfrom uranium tailings, nuclear electricity contributes only marginally less CO2 to the

atmosphere than clean coal and 4x-5x more than other renewable energy options.

23 One measurement metric might be the reduction in ADD (Average Day Demand)

per ERU (Equivalent Residential Unit). Conservation could result in producing anincrease in the nations water supply for less than relying solely on supply augmenta-tion (impoundments, diversions by way ofpipelines and desalination) to producenew supply.

24 A feebate program is a self-financing system of fees and rebates that are used to

shift the costs of externalities produced by the private expropriation, fraudulent ab-straction, or outright destruction of public goods onto those market actors responsi-ble for the taking of the public goods in question (Wikipedia).

25 Registered vehicles rated less than 40 mpg/combined mileage would pay a pro-

rated annual fee. Registered vehicles with greater than 40 mpg/combined mileagewould receive a prorated annual rebate.


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in 2009 dollars, adjusted yearly for purchasing power parity that includes

salary, stock options, and benefits;

For private sector companies choosing not to make use of the NCB that

go bankrupt or are not able to meet their carbon emission targets at anytime during the next fifteen years, an automatic clawback and mandatory

disgorgement provision goes into effect whereby all executives and re-

lated parties who received more than $1,250,000 in total compensation

during the five years prior to the bankruptcy or noncompliance eventshall immediately owe all proceeds exceeding this amount to the NCB.

Any person not in compliance within 20 days of notification or who con-

tests this provision shall owe the overage amount and a penalty amount,

not-to-exceed 120% of the amount owed;

This program will continue until five years after all $3,000 billion in NCBfunds liquidity has been lent out for projects specified under the targets

set for atmospheric carbon have been reached or until the private capital

markets have the liquidity to provide the capital necessary for new tech-

nology adoption cycles necessary to meet future carbon reduction targets,

whichever shall occur first.



Documents

Economic Recovery and Regulating Greenhouse Gas (GHG) Emissions