Image courtesy of federico stevanin / FreeDigitalPhotos.net

In May this year, nearly one quarter of the 2,000 citizens of Norfolk Island, a remote lump of volcanic rock some two hours by plane from the east coast of Australia, began an unusual experiment: They were issued a carbon credit card by researchers from Southern Cross University to help them measure and then reduce their greenhouse gas emissions (and, potentially, the size of their wastes).

Each participating citizen will use the carbon card to measure their emissions – through their purchases of petrol, the payment of power bills, the purchase of other goods (including food which was measured for high carbon production) or for activities that they undertake. They will then be allocated an individual carbon allowance – a carbon budget if you like – and then try and reduce that budget over time. The community will decide how ambitious they want to be. The health benefits of changing consumption patterns will also be monitored.

It’s hard to imagine the idea of an individual carbon account ever catching on around the globe. It’s been hard enough convincing the world’s 193 governments that they should introduce carbon trading schemes, which gives an implicit annual budget to an economy or to a particular business sector such as electricity or transport, let alone having some 7 billion or more individual accounts.

But the concept of a global carbon budget could really become a game-breaker in the way that the world – governments, businesses, investors, and individuals – view the challenge of climate change mitigation. Certainly, the mechanics of a budget – if you spend too much too soon, there’s less available later – are a lot easier to explain than the complex mechanics and goals of an emissions trading system, which gives only annual or multi-year targets.

The concept of a global carbon budget – as well as national budgets – is now being openly discussed in policy circles. The International Energy Agency, and UN bodies such as UNEP actively promote the concept, as have many environmental NGOS. The clear message from the IEA is to reinforce the urgency of action, underlined by the recognition that delay means more needs to be done at a later date, when it will be more disruptive and more costly. And they have published this graph to illustrate that point, and the fact that the budget is already pretty tight.

Investment banks such as Citigroup, HSBC and Deutsche Bank have written extensively about its implications, and the potential for a “carbon bubble”. The Climate Change Authority, an independent advisory body to the Australian government, is about to craft the first carbon budget for that country, which it expects will be used as a guide to setting policy parameters and emission reduction targets. The IEA and other agencies want the carbon budget to be used to frame more ambitious reduction programs.

Even individual corporates have come on board – AGL Energy, a big Australian utility which just happens to own the country’s biggest emitting brown coal generator, Loy Yang A – and which also has a large renewables portfolio – has urged the CCA to recommend an ambitious carbon budget.

Exactly what that budget will be will depend on what governments agree should be the aim. The world’s governments have agreed in principle to act to limit global warming to an average 2C. The scientific consensus suggests that means a cap of greenhouse gas emissions of 450 parts per million in the atmosphere. Earlier this year, the world passed above 400ppm for the first time in more than a million years.

But exactly how do you frame the budget? The science is not exact, and the budget is different depending on the scale of probability of achieving the desired effect. The most commonly cited assessment of an appropriate carbon budget is that of Malte Meinshausen, a scientist from the Potsdam Institute for Climate Impact Research, who has said that to have an 80 per cent chance staying below 2°C target, the global carbon budget is around 886 gigatonnes of CO2 equivalent of greenhouse gas emissions from 2000-2050. If the world chooses a riskier 50:50 scenario, then the budget substantially to 1440Gt (see Chart1). But by the end of 2011, 420Gt had already been consumed.

This has large implications for industries and investors. An analysis by HSBC Bank says that at the current rate of emissions from the energy industry alone, then the budget for the 80% scenario would de depleted completely by 2026. Even the budget for the 50/50 scenario would be depleted by 2039 at current rates.

The IEA takes a slightly different approach. It warns that up to 80 per cent of current reserves of fossil fuels cannot be exploited in 2°C world without carbon capture and storage. And in any case, emissions from energy will need to peak by 2017, unless some serious initiatives on energy efficiency and the promotion of renewables can extend that window by a few years. This is an important consideration for those investing in new projects, new assets, and new infrastructure.

The carbon bubble referred to above relates to the possibility that assets may become “stranded” .ie they will have no value if we do not take into account of that budget until dramatic action is required.

Is this an impossible task? It’s difficult, says HSBC, but it can be done. It points to the fact tht major European economies – France, Germany and the UK – peaked their emissions of greenhouse gases in the 1970s, and have each cut their emissions by more than 30 per cent as a result of oil price shocks and a structural shift away from coal for economic and environmental reasons.

The challenge is the emerging world, which now emits more than the developed work. But HSBC is optimistic here, because it says there is now a growing awareness of the severity of climate change impacts, because it is already being felt, and because the economics are also aligning. And that is likely to be the deal-maker.

Giles Parkinson founded and edits the website RenewEconomy, Australia’s most widely read website focusing on cleantech and climate issues. He is an award-winning journalist, and former business editor and deputy editor of the Australian Financial Review. You can follow him on Twitter at @renew_economy.