Making better use of Water Resources without Water Restrictions o

The community dislikes water restrictions as a way of reducing water consumption. It is fundamentally unfair and is disliked by the authorities and the population so why do we continue to use it as the main way to control the use of water during periods of shortage? The normal economic response to a shortage situation is to allow price to act as the rationing mechanism.

Unfortunately the community also dislikes the price of water increasing over the cost of supply because it is a tax on a community resource. This is the reason that we rarely use price as a demand management tool for water. The price of water would have to increase substantially above the level of the cost of delivery before it could achieve the same level of reduction as restrictions. Increasing the price to the required level is seen as unfair because why should those who have the ability to pay get more of a community resource necessary for life and seemingly free? It is this sense of price increases for a natural resource being unfair that makes price politically difficult to implement as a demand management tool for water.

However, authorities do increase the price of water to fund new infrastructure and they do put in place differential pricing structures depending on how much water is used per meter. Both of these measures are seen as fair and reasonable.

Water Rewards is a way of addressing all the above problems and doing it in the most economically efficient manner possible. It does it by using price as a demand management tool, by using money as a Reward to reduce consumption of water and by using a free market in ways to efficiently increase the supply of water.

Implementation

A community can implement Water Rewards in the following way.

  1. When it is decided that Water Restrictions are needed set the level of consumption rather than introducing restrictions set the price of water so that the price increases reduces the demand to the level required.
  2. The extra money collected over and above the cost of supply is put into a Water Rewards fund.
  3. Distribute this money to the population as Rewards in inverse proportion to the amount per head consumed.
  4. Require the money to be spent in an electronic market place of ways of saving water or increasing supply.
  5. Allow Rewards to be traded. That is, those that cannot think of ways of investing the money can sell at a discount to those who can spend the money on saving water or increasing supply (including the water authorities)

Rewards could be controlled by a body external to the Government or to the Water Authority. It could have a board to control policy with representatives from the Government, the Opposition, the Water Authority and the community. The body could – in consultation with the Water Authority – set the amount of money to be collected and distributed as Rewards. The price of water will stay much as it is and everyone will have to pay for increased costs. It is suggested that Rewards be distributed in inverse proportion to the amount of water consumed per head but that will be a decision of the board. People do not have join Rewards if they do not wish to. Joining Rewards does entail some reporting obligations and does require people to nominate how many people are linked to a particular water meter. Merchants are under no compulsion to accept Rewards for payment and they also volunteer and specify what their products and services do and how much water is saved or generated. If either a Rewards holder or a Rewards Merchant goes against the rules of the Rewards system they will be excluded from participating for a period of time.

It is expected that enrolling in Rewards will be done with a phone call and the supply of a small amount of data about the household receiving Rewards. Rewards recipients can “set and forget” their Rewards accounts. In other words from the point of view of the consumer there is little change except they will get an account of Rewards that they can spend on anything to save water or increase supply that is in the Rewards electronic marketplace.

Cost and Savings Calculations

The price elasticity of water is estimated at about 30%. That is if the price of water is increased by 100% then the demand will drop by 30%.
We also know that for each $10 we spend on water saving and water recycling infrastructure we typically save or increase supply by 1 kiloliter per year.
Given that the current average price of water is $1.50 per kilolitre by how much do we need to increase the price of water to achieve a 20% reduction within 5 years?

We find that a 12% increase in the price of water will achieve a 21% reduction within 5 years. The first year’s reduction is 5% rising to 21% within 5 years.

Each $1 Rewards will return 15 cents return per year for ever. This means that Rewards will be traded at close to par value. It also means that the community members will overall pay less for water instead of a 12% increase. That is the 12% price increase gives an effective net cost reduction. It also means that many people will invest more money than they receive in Rewards as it gives them a way to get a good return on investment.

How can this be? What has happened is that the monopoly on the supply of water by the water authority is broken and the profits from supplying new water and saving water will accrue to individuals who spend Water Rewards instead of going to the government and the Water Authority. Of course this also means it is difficult to get such a scheme introduced because the Water Authority and the Government are the controllers of the resource and believe they have a right to the profits from the community resource and are able to spend the money on other goods and services instead of the supply of water.

How much will such a system cost? The cost of operating this system will be covered by the merchants who sell their products through the water saving and water recycling products.

Spreadsheet

Current Cost $1.50 Per kilolitre
Consumption 100 95 91 86 79
Reduction from a price increase 30.00% Reduction per 100% price increase
Extra water per $1 spent saves 0.1 Kilolitres
Increase price by 12.00%
Year 1 2 3 4 5
Reduction from price increase 3.6
18 17.03 16.4 15.47 14.27
Accumulated investment 18 35.03 51.43 66.9 81.17
Reduction from investment 1.8 3.5 5.14 6.69 8.12
Total Reduction 5.4 3.5 5.14 6.69 8.12
Percentage Reduction 5.00% 9.00% 14.00% 21.00%
Money earned on investment $2.70 $5.25 $7.71 $10.03 $12.17
Return on investment 15.00% 15.00% 15.00% 15.00% 15.00%

Letter to CT 25th July – Coal buyers pay for renewables

The Federal government has set a precedent with its recommendation in its emission trading greenpaper to move some excise taxes to emissions permits taxes. The same idea can be used to include China and India and all coal buying customers and countries into an emissions reduction scheme.
Here is how it could work. The government is collecting increased royalties and taxes on the sale of coal as a result of the resources boom. Rather than these windfall profits going into consolidated revenue let it go into an emissions reduction fund. Now give this money to the purchasers of our coal – but with a proviso. The purchasers must spend the money in Australia building renewable energy infrastructure like geothermal, solar thermal, windmills, tidal power, and solar voltaics to generate new energy. The purchasers will own the infrastructure but it will be in Australia.
What this means is that the price of coal does not go up. The government does not get windfall taxes. The buying countries and industries do not see the taxes as an imposition because they end up with a stake in the new energy infrastructure which brings assured energy supplies and Australia ends up with green energy sources, of which we have an abundance, which we can now tax.
We all win and emissions are reduced.

Letter to CT 25th July on shopper dockets

The government is going to compensate households for the rise in petrol prices caused by emissions trading. The question is how best to compensate people for the price increase?The government could experiment tomorrow by giving anyone who purchases petrol a shopper docket that they can redeem if they spend the money received on infrastructure to reduce emissions. If they can’t use the shopper docket themselves they can sell it to someone who is willing to do so. The likely value of shopper dockets will be about 75% of the face value of the docket.
The Federal government (or the ACT government) could start small in Canberra by returning 10 cents per litre of the excise currently collected. The system would decrease the price of fuel while at the same time diverting money to infrastructure to produce renewables or ways of saving energy. The infrastructure to implement this would happen overnight for no cost to the government as every petrol station will want to give their customers a discount. Renewable infrastructure projects that will accept dockets will appear immediately and companies will pay to participate. The government will still get to spend some taxes on renewables but the spending will be market driven not government directed.
If it works as expected it will provide a mechanism for the distribution of some of the money obtained from emissions permits trading towards infrastructure for renewables.

Chapter 3 – The information content of money

The information content of money

The evolution of money – The rules of currencies
– “Debt money” versus “trade money” – The emergent effects of present currency rules
– Attaching information to money

Money was invented to facilitate trade between individuals. Every currency contains information in the way that it captures and measures value, and in the way it enables us to exchange value.

The Ancient Egyptians invented some of the earliest money known to humans but it held very different characteristics to the dollars and cents that we use today. Their money began as a way of managing the grain supply. Egyptians kept vast amounts of grain in stores. When a farmer deposited grain, the grain-keeper issued tokens which noted the date of deposit. When the grain was required the farmer simply returned to the grain store, handed over his tokens and reclaimed his grain. However, he would always receive slightly less than originally deposited and the longer it took for the tokens to be returned, the less grain was given. The difference was recompense for the keeper of the grain and it also included a small allowance for rats and spoilage.

The tokens were sometimes used to exchange for other goods and services. They were a currency with the property that it reduced in value the longer it was kept. They also embodied a promise; a social contract where the grain-keeper agreed to return some grain when the tokens were presented. This meant that the system would fail if either the grain keeper did not honour the contract (perhaps through issuing more tokens than grain) or if the farmer forged or altered information on the tablet. The information content embedded in the tokens contained the rules for redemption, including a time component.

The effect of these rules was that tokens circulated rapidly because hoarding could only lead to loss. The tokens also represented the “real world” where there was spoilage the longer the grain was kept and where it took effort to build and guard grain stores.

In a similar vein but over a thousand years later, the brakteaten system of the Middle Ages saw a number of European communities issue silver plaques as a form of local currency. These plaques were recalled two to three times a year, whereby their size was reduced and they would lose a percentage of their value before being reissued. This “tax” was imposed by the local lords as a payment for keeping law and order. Because the currency became less valuable the longer it was held, people quickly found ways to spend it, or in other words, they got others to do productive work. Bernard Lietaer contends that the cathedrals of Europe were an emergent property of this system and that these cathedrals are still a productive asset as they bring tourists and pilgrims to the local communities.

A similar approach was attempted in the 1930’s when first the German town Schwanenkirchen, and later the Austrian town of Worgl, decided to issue their own currencies to stimulate the local economy. The Worgl currency was backed by the regular currency of the day (Austrian schillings) and could be redeemed at any time for the equivalent amount minus a fee. The currency also had to be revalidated monthly for a fee. This meant that money circulated rapidly and people who held the currency looked for places to spend it quickly before the monthly fee fell due. Under the system trade and employment flourished. For a brief year or two, both Schwanenkirchen and Worgl became towns of prosperity – until their currencies were closed down by their respective governments as it was argued that it could lead to inflation. The fact that a currency that decreased in value and which was backed by another currency could not lead to inflation greater than the underlying currency was either not recognised or ignored.

The monies described above were all created for particular purposes in addition to facilitating trade and creating wealth. Throughout their existence they continued to reflect the underlying asset on which they were based. These monies worked and worked well – some for hundreds if not thousands of years – proving that with appropriate rules, money will facilitate trade and work towards system goals.

Coinage to Paper Currencies

Money has evolved from cumbersome tablets and plaques to coins, then paper and finally to electronic impulses. This has been possible because money is really just information about the value of assets. The format in which it is kept is irrelevant. The history of money repeatedly shows that when the information content of money no longer accurately reflects the value of the underlying assets either inflation or deflation occurs, which in turn disrupts trading as it destroys trust, the important component for successful trading.

Typically made of precious metals, the face value of early coins reflected their gold or silver content and was not subject to the spoilage and diminishment of value that occurred in grain-based currencies. Coins were far more convenient to carry around than tablets and because of their intrinsic value, they were much easier to exchange than a plaque that embodied a promise of redemption by a potentially unknown trader.

Paper money made its first appearance in China as early as 600 AD but didn’t appear in Europe until nearly a century later. It arose for a number of reasons, not the least of which was that it was far less cumbersome than coins and it was not subject to fluctuations in the availability of metals.

Embodying a promise to redeem the note (similar to the early tablets), the issue of paper money was backed by tangible goods such as gold reserves. As these currencies became widespread, more and more banknotes were created until eventually the value of circulating banknotes tended to far exceed the value of the metal reserves backing the currency. This raised a problem: if everyone tried to redeem their notes at once, some banks would be unable to comply and bank failures would follow. Once the inevitable finally occurred, the problems quickly compounded and governments were forced to step in, regulating the issue of money to create a single currency within a political jurisdiction.

Keeping gold or other precious metal reserves for paper money has become impractical because the amount of money needed for trade in a global market far exceeds the value of available metal. Even so the USA kept up the pretence until 1971 when President Nixon announced that America would no longer base its currency on the gold standard.

Our present day problems such as outbreaks of asset inflation and third world debt are caused by the information content of money being compromised as the currency no longer represents a fair and agreed value.

The Meaning (or Rules) of currencies

The currencies of the world remain instruments to exchange and measure worth in the same way the Egyptian tablets and later gold coins and paper currencies were created to facilitate trade. However, if money was invented to facilitate trade why do we now have so much more money than we need? And why do we exchange so much more than required for trade purposes?

Every day approximately AU$70 billion pass through the foreign exchange market. Yet each year the entire Australian economy only produces $240 billion of goods and services. How can the annual value of goods and services produced equate to only four days’ worth of trading? Australia has around $960 billion available for trading – a figure two orders of magnitude greater than the amount of money needed for trading value in tangible goods and services.

It is obvious that money has become something much more than a vehicle for exchanging value.

Modern money has come to be considered wealth in its own right rather than a representation of wealth. Large sums of money are used in trading but it is the money itself that is being traded, rather than a transfer associated with goods and services and other assets. How has this happened?

When money’s primary purpose was to make trade possible it encouraged specialisation and the benefits that flow from such a division of endeavour. But how much money do we really need for this purpose?

The amount we need is related to how often money is used for trades of items of value; how often these trades occur; and the time period between getting the money and spending it again. We want enough money to cover these activities. As long as money does not become valuable in itself there is no problem about creating new money. We create as much as we need, when we need it and there are various ways – such as regulation – to ensure that is exactly what we do.

Unfortunately, governments and financial institutions rarely adhere to the idea of creating only as much as we need. Today the conventional wisdom is that for a modern economy to work it is necessary to have inflation of between 1 and 2% and central bankers set this as a goal. It is argued in this book that inflation is unnecessary and should not be tolerated as it leads to undesirable social effects such as moving resources from the poor to the rich.

It is necessary to understand how money is created today to see the problem.

In the 21st century most money is created by generating debt or creating a debt asset. Governments give loans to banks and so create money. That is, the banks are in debt to the government. Banks in turn lend money to people who wish to use it and who have the capacity to pay it back. Banks are only allowed to lend a fraction of the money they have on deposit. They receive a deposit of money and then loan perhaps 90% of that amount. However, this money remains in the bank before it is spent and comes back as a deposit from someone who has supplied services paid for from the loan. The bank can now lend another 81% of the original amount. Doing this many times means that a bank can loan nine times more than the value originally deposited and it does this by creating debt assets or the promise to pay.

People use the money to create goods and services. When the loan creates an asset or a service then the money is backed by something of value. “Productive” loans create more value than the original value of the loan and this is how real wealth is created. This wealth has been earned and can now be loaned, backed by an asset that either exists today or will exist in the future.

All money loaned earns interest and the interest earned should be related to the value of the loan, which is in turn related to the value of the backing asset. A problem can arise when the value of the backing asset falls after the loan was made. This is not a problem if the risk associated with the fall in value of the backing asset is shared between the lender and the receiver, because both the lender and receiver will take appropriate care in conducting the trade. It does become a problem if either party can remove the risk.

The modern financial system has evolved so that lenders can remove their risk associated with lending money. This is done by loaning money against an asset and if the asset falls in value, the lender does not suffer a loss because they have a lien against other assets of the debtor. This has happened recently with house prices in many countries. The lenders are too willing to lend against houses because they will suffer no loss if the house prices fall. This means that house prices will rise, resulting in an asset bubble that must inevitably burst.

The consequences of too much debt money

One problem in the current system is that it allows excessive (or unpayable) debt to be repaid from the real assets of people who were not involved in the creation of the debt. As an example consider the 2007 sub-prime lending crisis in the USA which occurred due to too much debt being created by financial institutions. Because of the interconnectedness of the money systems, the debt will be paid for by the entire world community through an increase in interest rates for everyone who has debt. The risk is unlikely to be borne by those who issued the debt because, for the most part, the debt has been off-loaded through the use of other financial instruments built on top of the initial debt. Ultimately the debt will be paid for from real assets where some of the borrowers will pay from their future wages; many will pay from increased interest charges; and others with real assets will pay because of inflation.

In the 1930s, the 1980s and again in the 2000s we’ve witnessed a very direct transfer of wealth from farmers to financial institutions through no fault of the farmers. Financial institutions lend money to farmers but demand that the loans are covered by other assets. If Farmer John’s crop fails, the institution takes the real assets even though the loan was made against the crop.

Similarly, banks lend money for houses against the anticipated income of the person. If for some reason the income drops, the interest rate on the loan increases, or the value of the house decreases, the lending institution does not suffer a loss because it can claim the value of the real assets. The net effect of this is to transfer wealth from those who have little money to those who have money or who can create debt.

Because it is apparent that the “money owners” can make more money without effort or enterprise on their part, it becomes desirable for individuals to accumulate as much money as they can through whatever means they can. This leads to societies where the accumulation rather than generation of wealth becomes the most desirable goal for an individual. This is played out in a great many ways including counter-intuitive outcomes where accountants and lawyers tend to head companies and governments rather than innovators and engineers.

Inflation is a transfer of value from the owners of tangible assets to the issuers of the currency. The reason is that the currency issuers build an inflation factor into their interest rates. In effect it is the ‘house’ percentage in the currency gamble stakes. While it is small and when there is little debt it is not important but like all gambling establishments it makes sense to increase the turnover. It could be argued that any money system that allows inflation is allowing the transfer of wealth from the producers to the currency issuers. This is important because it means that interest rates include a factor for inflation.

The effect of interest rates on investment is particularly significant. The higher the interest rate the faster an investor will want to see a return on investment. While this is reasonable for some investments, it does not make sense for goods and services produced over a longer period of time. Such short-term thinking results in investments flowing towards quick returns rather than greater returns over a longer period. As we will see later, this has implications for the renewable energy sector.

Other emergent properties from the rules around money

Money gives us a way of measuring the value of traded goods and services. In its current form it does not include other factors that we might value and it does not include any goods and services that are not traded. In other words, the money economy recognises consumption but fails to value other aspects of life.

We overcome this by the allocation of funds to good causes, the arts or to the environment. We give baby bonuses to new parents or provide pensions. The problem is that these funds remain outside the market system and we have relatively poor ways of allocating resources to non-consumables or to things we value but not with regular money. It would be desirable to devise better resource allocation for non-consumables and for things that have no trade-measurable value, or indeed to create adaptive learning systems to manage the allocation. That is, money could be used as a way for people to express preferences for non-consumption items and its information content (or meaning) could be adjusted to reflect this need.

As an example climate change makes it desirable for people to consume fewer goods that cause increases in emissions. There is a case for paying people not to generate greenhouse gases as well as charging them when they do generate greenhouse gases.

If we agree that money now represents wealth and that buying and selling money is a trading activity involving the transfer of wealth from one agent to another, we could treat these transfers the same as other trading activities such as imposing taxes. If we sell assets, we pay capital gains tax. If we sell goods and services we pay a Goods and Services Tax or Value Added Tax. For money to be treated the same as other wealth assets we could impose equivalent taxes when money is transferred. We don’t of course, because the transfers of money assets are orders of magnitude greater than the transfer of other wealth and trades. However, if we did, the taxes on other transfers could drop and the speculative transfers that make up many of the reasons for money trading may reduce in frequency and effect.

The difficulty we have created for ourselves on a global scale as money has become transferable is that there is an inbuilt tendency for the accumulation of money to become an end in itself and for different agents to think of ways of inventing or creating money that is not backed by promises that can be honoured, or by true wealth.

Does any of this matter? Well yes it does. It leads to instabilities in what is called the “true economy”. Instabilities in one part an economy are never isolated. Too many risky home loans in the USA lead to increases in the cost of loans in the rest of the world. Asset speculation in Sydney leads to higher house prices throughout Australia and results in housing becoming unaffordable to new buyers. It also transfers real wealth to overseas suppliers of money when the asset boom inevitably contracts. It means that financial institutions become the most profitable places to invest even though they create little true wealth and that those who have money assets, for whatever reason, become richer at the expense of those who don’t. It leads to a distortion in the distribution of wealth both within countries and between countries. It means that enterprises that produce real wealth have to compete for funds from institutions that accumulate wealth from debt money. As a consequence the producers then have to distribute more of the wealth they create to the financiers for the services they render.

Of more importance it means that wealth as measured by consumption will continue to increase at an expanding rate to the detriment of the long term sustainability of the planet.

What can be done?

We know these undesirable effects happen because we observe them everyday in the existing system. The distribution of wealth in communities is heavily skewed to the rich and in most countries the distribution is becoming more pronounced. We continually see asset bubbles and shifts in the value of assets unrelated to their underlying worth. We see community investment stifled in favor of individual consumption.

We can solve the problem and we can do it relatively simply. The Rewards system allows us to increase the information content of money and to introduce new goals into our economic systems. It opens the way for sub-economies that address particular asset classes or certain forms of expenditure and enables the introduction of regional or community based economies.

21st century communications and information processing capacity have done away with the efficiency imperatives that drove the establishment of a single currency. For the first time we are in a position to make our money more information rich. Rewards returns currency to its original purpose, removing the inherent instabilities present in the current highly connected economies of the world where most money represents debt