A Social and Economic role for Special Purpose Currencies

Over the past decade the success of limited or special purpose currencies has been well documented, with frequent flyer and buyer rewards programs proving to be powerful economic tools when used to achieve special purposes such as customer loyalty. A similar, more recent example can be seen in the growth of virtual online gaming currencies such as the QQ coin in China. This article proposes a new, broader role for limited currencies –as a means of encouraging desired behaviours to achieve both social and economic aims.

 

The common factor in all special purpose currencies is that they are created as a means of allowing their users to earn a bonus in return for a desired outcome (such as reaching a certain level of expenditure). They are structured so that they may only be spent in designated ways that encourage loyalty (or repeat business), further benefiting the sponsoring company. Because they are seen to offer additional value, loyalty programs are popular with consumers and can be a very effective marketing tool.

 

With such wide acceptance it is now time to consider adapting the idea, to invent other currencies to encourage and reward behaviours and actions which society believes are worth achieving. By creating these limited use “Rewards” currencies we can ensure that the most economically efficient technologies will be used for the public good. Because the Rewards are currencies rather than commodities they remain easier to control and easier to ensure that the community of users complies with the rules.

Rewards

Rewards are created by depositing regular currency into a backing account and receiving Rewards vouchers or tokens in return. As they are limited, there can be any number of programs offering Rewards at any one time with each program having its own specified social or economic aims, along with its own set of rules relating to earning, distributing and spending the Rewards.

 

All Rewards however will have limitations in that they may only be converted into regular currencies through activities that have been approved as contributing to that currency’s specific aims. The intention is to ensure that all money raised through the program remains dedicated to the program aims and that it cannot be siphoned off into general revenues, or seen as an indirect tax.

Creating Markets with Rewards

Markets can be thought of as a form of evolution. Evolution occurs when we have lots of individuals competing within an environment so the best “solution” to the problem is likely to continue. It’s an example of the survival of the fittest.

When we create a market it requires a variety of things from which we can choose (sellers) so that we as buyers can select the option that best fits our needs. Each buyer may have different needs but the sellers that best satisfy the needs of the most buyers will be most successful.

 

Often the reason we choose one seller over another is not because of price but because of what economists call “externalities” – things that are not measured by price. As an example, the production of energy creates externalities that are difficult to measure by price. One externality would be greenhouse gases but it could also be the changing of the scenery, caused by chopping down a tree or the digging up of some ground. These externalities are difficult to measure using price because they have no readily available value.

The traditional economic solution to these problems is to create a commodity to represent the externality and to set up a mechanism so that it will have a price attached to it. We thus invent water rights or carbon credits and we create a scarcity and rules so that a price is established for the commodity. This price now represents the price of the externality.

 

Unfortunately this approach has problems. The first is that the definition of the commodity tends to be one dimensional, such as carbon credits which represent carbon emissions but not other factors such as the change to scenery or the look and sound of a windmill. Moreover, the commodity we create – because it is an invention – is subject to misuse and manipulation such as over-allocation of water rights or the generation of carbon credits through planting trees then burning them down.

The mechanism that we suggest for Rewards currencies is to create a market in technologies that can reduce the externalities that we are concerned about. At the same time we do not attempt to define a price on the externality because that is almost impossible to achieve. Instead, we create a market by giving people a currency that allows them to make their own choice amongst an artificially limited market. In setting the rules for each special purpose Rewards program, we can narrow the ways in which the currency may be used for, excluding activities or services that are unrelated to the externalities we are trying to address


Thus we do not put a price on an externality but we simply judge whether this technology will influence the externality. We then allow the market free choice in determining which one survives. This is different to the creation of an artificial commodity approach. What we do is to restrict choice to those things that help but we do not define what the solution must be.

 

It is also important to recognise that the artificial commodity market and Rewards market approaches are not exclusive. They will readily co-exist, with Rewards even amplifying the effect of the commodity market if we stipulate that the currency for trading in artificial commodities is the Rewards currency.

Example 1: Greenhouse Gas Reduction

To reduce greenhouse gases in the atmosphere and keep economies working three things are required:


  1. The invention and development of technologies that will save emissions,

  2. A reduction in emissions and

  3. The extraction of greenhouse gases from the atmosphere.


At present technologies for the production of energy but with reduced emissions are more expensive than technologies that produce energy through burning fossil fuels. One approach by governments to overcome this economic disadvantage has been to create a market for carbon emissions by placing a price on carbon, putting a cap on emissions and requiring that organisations pay for their emissions.


Governments have created carbon credit markets by inventing a commodity that measures emissions and then calling the commodity “carbon credits”. Each carbon credit scheme has a set of invented rules governing the generation of carbon credits, the calculation of credits and the policing of the system – all of which are difficult, but not impossible to establish.


The resulting markets restrict the total amount of emissions allowed and make it possible to have activities that create “negative emissions” – activities that either save or reduce emissions, or that remove greenhouse gases from the atmosphere. Any activities creating emissions are required to have permits in the form of carbon credits.

Carbon trading and emissions control are first steps in addressing the problem of greenhouse gases in our atmosphere. It is believed that they will also provide a flow-on benefit by indirectly influencing the development of a market for low-emission technologies.


Now, imagine if we were to magnify the effect of carbon credits through the introduction of a new special purpose currency called Greenhouse Rewards. Thus when an organisation wishes to purchase carbon credits they would first have to deposit money into the Rewards backing account before receiving their Rewards, which they may then use to pay for the carbon credits.


As well as all trade in carbon credits being in Rewards, buyers who purchase goods that create emissions could be required to issue Rewards to themselves. The amount will be set by the government. For example, when a person purchases electricity there will be a surcharge on the price, with the surcharge issued to the purchaser as Greenhouse Rewards. The Rewards have the effect of a tax on carbon but without the political or economic disadvantages of a general tax.

Organisations or individuals receiving Greenhouse Rewards could then convert the Rewards into regular currencies by spending them on activities or items that have been approved as contributing to a reduction in greenhouse gases. These activities could be many things including behavioural changes on the part of citizens, or research into technologies that have the potential to reduce greenhouse gases.


 

The result would be a program that supports the original aims of placing a price and cap on emissions, at the same time as creating a mechanism to direct expenditure into a limited range of activities that extend the benefits of simple carbon trading. Greenhouse Rewards ensure that all revenue through the program is spent on greenhouse-related research, technologies or activities.


In addition, Greenhouse Rewards will create a direct market for greenhouse reduction technologies. There will be many buyers with Rewards just as there will be many sellers of technologies. The buyers will choose the best investment to maximise their economic return from all the available approved technologies. For example, they may choose to invest in research activities that have a low probability of success but a high payout if they do succeed. They may invest in ways to reduce their own production of greenhouse gases through the installation of solar hot water units, through using public transport instead of cars, taking fewer hot showers, or they may invest in a Wind Farm.

Greenhouse Rewards do not reduce the utility of carbon credits or emissions caps but they multiply their effect and will reduce greenhouse emissions by creating a market for greenhouse gas reduction technologies.

 

Example 2: Water Sustainability

People invented the idea of water rights as a tradeable commodity as a way of rationing water. This in turn has raised two main issues: determining how many water rights to issue and who receives them.

 

If we extend the water rights invention a little further to the invention of a new special purpose currency called Water Rewards which is used for transactions related to water rights then we have a way of guaranteeing an increase in the availability of water. It works as follows.

 

When a person buys water rights they pay for it with Water Rewards. Within urban water systems, high consumers would pay more for water and this money would be distributed to low water consumers as Water Rewards2.

 

Water Rewards can be used like a normal currency to buy and sell things but they can only be converted back to real currency after the purchase of approved goods or services such as desalination plants, recycling systems, ways of reducing water wastage, research into better ways to utilise water, systems for better measuring water consumption, reclamation of waterways to slow runoff, ways of reducing evaporation etc.

 

Water Rewards will create a market in water sustainability technologies and their application requires minimal legislative changes. Again, a defining characteristic of the Rewards is that they ensure that any funds assigned for the purpose of increasing sustainability of water supplies will be used for that purpose.

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A currency of choice

 

The more ways that each program allows Rewards to be spent, the better the market will operate. The more people participating as buyers in the market, the more likely the market will operate efficiently. Because end consumers will attempt to get the best value for themselves from their Rewards it can be expected that the expenditure will be efficient. Rewards in the hands of suppliers are the same as regular currency and so suppliers will treat Rewards as cash.

Unlike rebates and special purpose grants, Rewards will not distort a market because people will always have choice as to where they spend their Rewards.

Rewards offer communities and governments with a way of building on consumers’ existing familiarity with limited currencies to promote and attain social and economic benefits. Using a carrot rather than stick approach, programs can be designed to focus, encourage and reward a target market for achieving desired outcomes. And perhaps most importantly, Rewards address the difficulty of externalities with unknown costs by enabling the currency users themselves to determine the outcome, through their own spending decisions.

2 See http://www.waterrewards.org for a detailed explanation or have your say on the idea at http://www.surveymonkey.com/s.asp?u=799553573429

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