The Energy Problem
The psychology of carbon pricing – Bottom level transactions – Conducting transactions –
The surcharge on energy – Can we achieve economic efficiency? – Simplicity and Fairness-
Emergent properties of the system
The Psychology of putting a price on Carbon
Conventional wisdom says that if we put a price on greenhouse emissions from fossil fuel energy plants, then energy from these plants will become more expensive. This will encourage investment in alternate ways to satisfy the need for energy. In other words price signals will encourage people to invest in clean energy. This approach is the “penalty” approach to changing behaviour and while it works it is remarkably difficult to implement and has limited effect.
One important reason is that people (and countries) see any penalty price increase as fundamentally unfair and will do everything they can to circumvent the penalty.
The debate surrounding the introduction of an emissions permits trading system in Australia shows all the ways that people use to bypass the penalty by finding reasons why they are a special case. This is quite understandable because the approach of increasing prices to get investment elsewhere is fundamentally unfair and people instinctively know it.
The fact is that there is plenty of money available from the sale of scarce goods – like oil and coal – and if it was invested in renewables we could solve the problem. When we trade any goods we know the trade is fair if the price we have to pay reflects the cost of producing the goods plus a reasonable profit margin.
Unfortunately for the fairness test, energy production costs are way below the cost to the energy consumer. It is well-recognised that there are enormous profits being made because of reasons other than the effort of producing the goods. So when a government tries to increase the price of a very profitable product through taxes (or permits), people instinctively and rationally decide that the penalty they are being asked to agree to is unfair unless everyone suffers the same pain. Trying to work out how everyone can suffer the same pain is an impossible task.
This means that no matter how hard we try, emissions permits trading will not give us the investment needed. In a perverse way it is likely to increase the attraction of producing polluting energy. A clever energy producer will be able to achieve an increase in price for polluting energy through effective lobbying so that they will not have to pay for emissions permits. This will cause them to try to produce even more energy in polluting ways because it is more profitable. People who consume little energy will resent the fact that they have to pay more for groceries because they believe they are not the cause of the problem. Motorists who have seen the price of fuel skyrocket with no visible increase in the availability of renewables will believe that an extra increase in price is not going to make a difference and will question why fuel should be included.
To solve the problem we have to leave the price of energy to be set by the market but we must require that some of the profits and taxes from the sale of coal, oil and electricity be used to invest in the market place in ways to produce green energy or in ways to save energy. This is fair to all – both the producers, the buyers and the community. This chapter describes the mechanics of how this can be done and gives an indication of how quickly it will work, whether there is enough green energy available, and how quickly it can be developed. The beauty of this approach is that it will not impact on the economy of any country that embraces it and make the country richer.
The bottom level transactions
The concept behind Energy Rewards is to make everyone pay a little more for the energy they use. Put this money into a pool of savings and distribute it as Rewards to those whose energy consumption produces the least amount of greenhouse gases. Those who receive Rewards agree to only spend their Rewards money on ways to either:
remove greenhouse emissions from the atmosphere,
reduce the amount of green house gases going into the atmosphere or
produce energy that will generate little or any greenhouse gases.
We can measure the success of the program by measuring the amount of energy produced (or saved) from the investments against the amount of greenhouse gas emissions produced. We keep the system operating until the amount of greenhouse gas in the atmosphere reaches the levels we desire.
Overview of how the transactions could be conducted
It is often said that a concept is the easy part. Making it work is the difficult bit. One way to make implementation easier is to make it as simple as possible and make it self-regulating.
How we collect the money for Rewards is largely irrelevant. It can be done by putting a price on carbon and using either a carbon tax or emissions permits. However, trading system is unnecessary and only creates systems that are difficult to police and open to abuse. They give rise to many regulations and require continuous agreement.
The simplest thing is to charge an amount on ALL energy produced and to put it into the Rewards fund. This can be collected at any appropriate time in the production chain and the simplest is at the point where the energy is last sold. The amount of the charge becomes a carbon price based on the energy being generated and is fairly easily calculated based on the profitable portion of energy generation – that which incurs charges over and above the cost to produce. To keep the equation fair and simple we can put this charge on the electricity that is sold to end consumers, on liquid fuel sold to end consumers and on solid fuels sold to end consumers.
The next step is to calculate to whom to give the Rewards. Viewed from the system’s objective of increasing investment in renewables, it does not matter who gets the Rewards as it all has to be spent on renewables. What matters is whether it is simple enough to encourage involvement and whether it is fair. What is seen as fair for electricity is likely to be different from “fair” for liquid and solid fuels. For transport fuels it is probably too complicated to implement anything other than simply giving money back to the people who paid for the Rewards in the first place – that is each litre of fuel will generate a Reward to the purchaser.
With electricity it is possible to use the same system as used with Water Rewards because it is relatively simple to measure how to give Rewards to low per head energy consumers. Rewards can be calculated on the basis of the amount of energy taken from the mains per person at their designated home address. How much each household pays is known. How many people live at a household can be reported. Rewards collected from the payment of electricity can be given in inverse proportion to the amount of electricity consumed by an individual in their designated place of residence. The system can be organised so that every individual who wishes to participate will get some Rewards.
An important point here is that most electricity is actually consumed and paid for by organisations. However these build the cost of expenses into their business model so that it is the end consumer who bears the brunt of any changes. Therefore, limiting Rewards to individuals is fair and works to increase the number of Rewards available for distribution to all households.
Compliance with the system is enforced by the system of Rewards being voluntary and as part of the signing up participants will have to agree to abide by the rules for the distribution of Rewards. If they disobey the rules then they are not given Rewards for some predetermined period of time.
The third part of the system is the spending of Rewards. This again is simple to organise; We just open up a market place where buyers can spend their Rewards. Suppliers who think they have a product or service that will help build infrastructure to reduce the level of greenhouse gases can volunteer to sell their products or services and at the same time they can say how they will reduce the level of greenhouse gases. When someone pays an approved supplier using Rewards, the supplier can then convert the Rewards into unrestricted money (i.e. general currency). The body running Rewards will agree to let suppliers sell in the market providing their claims on reduction of gases is achieved. If they do not obey the rules then they and any colluding buyers are banned from the system for a period of time.
The system must remain flexible so that over time, if it is deemed necessary, the value of Rewards can be adjusted to reflect the amount of greenhouse emissions saved per Reward spent.
A market in Rewards will arise, with people who feel they are unable to purchase anything in the sustainable energy market place offering to sell their Rewards to others. Selling a Reward does not change the need for the Reward to ultimately be spent in the market place for renewables and saving emissions. It is unknown what the market price of Rewards will be but we can confidently predict that it will be significantly less than the face value of the Rewards. If it isn’t, people will have no need for the Rewards as it will indicate that renewables are recognized as being as economically efficient as fossil fuel sources.
The interest on Rewards money is used to run the system and any money left over is put back into the Rewards pool.
How much of a surcharge do we need to put on energy?
The surcharge placed on energy should equate to the estimated amount of money required to invest to generate all energy through renewable sources over a period of time.
Let’s start by setting a goal of generating all electrical energy through renewable sources within ten years.
At present the total electricity energy consumption of Australia is about 200,000 gigawatt hours per year or an energy generating capacity of 23000 megawatts at 100% capacity. This means we need to build 2300 megawatt hours of renewable energy capacity per year for 10 years to completely replace electricity from burning fossil fuel with renewable energy production.
We know that today we can build geothermal power stations and solar thermal power stations for a cost of $4.5 million per megawatt of continuous power. This means we need to invest about $10 billion per year at current prices to build the infrastructure that will allow Australia to generate one hundred percent of its electricity energy requirements through renewable sources within 10 years.
However, we also know that the cost of building systems such as power stations decreases by 15% each time the built capacity doubles. This means that over 10 years we will need to spend $76 billion or an average of $7.6 billion per year.
So, to become energy neutral within 10 years we would need to increase the price of energy by an average of 4 cents per kilowatt hour over the next 10 years. If we gave this increase back to consumers but required them to spend the money on investing in renewable infrastructure, the net cost to consumers would be close to zero.
Is it Economically Efficient?
How can we be sure that Rewards will achieve the objective of creating enough sustainable energy infrastructure to meet our needs and that it will achieve this at the least cost?
The answer is in the way that Rewards uses a free market; it’s a mechanism that is widely accepted as leading to the most efficient to allocation of resources. As explained earlier, a market place of many buyers and many sellers trading in a particular good will allocate the money to produce the system in the most economically efficient manner. This remains true regardless of the good which in this instance we have defined as energy infrastructure and greenhouse reducing technologies. Using Rewards we can create a self-regulating market place in ways to reduce greenhouse emissions, and the best and most economical ways to do this will be the outcome of the system.
Fundamentally the running costs of renewable energy is less expensive than burning fossil fuels because the cost of the fuel is zero. The reason it is seen as more expensive is that we have yet to build enough renewable infrastructure capacity while with fossil fuels we have low costs because we have invested in capacity over many years. The capital cost of infrastructure is dominated by the interest costs charged, which in financial terms is an opportunity cost and a charge caused because of expected inflation. Rewards breaks the investment interest problem by effectively removing the capital charges from investment. It is similar to patient equity investment where the returns are expected in years rather than months.
Simplicity and Fairness
The essential ideas in the detail of the system are simplicity and fairness. The scheme should be judged on whether it is seen to be fair and whether people can understand it. Without popular support any system is unlikely to obtain wide acceptance and it will be tempting for special interest groups to create a political divide.
The proposed system is likely to gain widespread support providing it is explained properly. Its benefits are appealing: it will work; it need not put any Australian Industries at a disadvantage; it will create a large number of jobs and investment opportunities in new technologies; and it will be socially equitable.
It will attract considerable voter support because it will lead to more wealth for the citizens of the country. For once it will be new wealth that is created, not money taken from existing well-to-do people. That is, the system will ensure that the distribution of new wealth is divided more evenly across the community. The community is asking for something different from our political system. One that increases the wealth of most citizens while at the same time solving the greenhouse emissions problem should be a relatively saleable proposition. The system can be introduced gradually with the first Rewards coming from existing excise and resource taxes which will illustrate the potency of the approach at no cost to the consumer or to industry.
The question of hurting export industries is an important one. There are arguments that any increases in input costs to Australian industries will make them less competitive. With Rewards the increase in energy costs will be relatively low in comparison to the existing variations in costs caused by the oil price shocks and by variations in the Australian dollar. It will also be much, much lower than the increases from emissions trading. As pointed out above, it can be introduced at no cost if the Rewards are taken from existing taxes. Most export industries are not energy intensive and those that are, such as aluminium smelting operations, should be among the first to move to renewable energy.
One of the potential opponents of the scheme is existing power generators. It is unfair that their assets will become worthless and so they should be Rewarded if they close down fossil burning power stations. The amount of the Reward could be the replacement cost of the fossil burning power plant. They will have to spend their Rewards on other ways of producing energy. Given this scenario it is likely that existing power generators could become the chief supporters of the system.
Another argument put forward by those wary of Australia starting first in the renewables market is that it is unfair if Australia reduces greenhouse emissions while the rest of the world (those who make up most of the emissions) does little. Their view is that we should wait until there is a global agreement in place before doing anything. This however will only result in further delays to the inevitable changes that Australian industry must begin to make.
The alternative perspective is that Rewards and global emissions offer a once in a generation opportunity for Australia to increase its wealth and prosperity. Rather than causing a reduction in living standards it is much more likely that Australia will experience an unprecedented increase in wealth as resources are diverted towards long term investments where climate and land forms give us a competitive advantage. Commonsense tells us that money diverted to investment in infrastructure to produce massive amounts of new energy at less than half the running costs of existing methods must increase total wealth.
Emergent Properties of the System
The goal of the system is to reduce greenhouse gases. We know that will happen with Rewards. We also know that the country can afford to divert $76 billion of investment over ten years.
For those who want to sell their Rewards rather than directly invest them, it is expected that the Rewards will initially trade for around 75 percent of their face value. This reduces the inflationary impact of the system and reduces the amount of money in the system which in turn increases the value of the underlying assets. In other words the excess money that has been created from the minerals boom and from inflated house prices will be removed from the system through investment in productive assets. It is expected that it will lead to a reduction in house price and to an increase in exports as Australia ships more energy and associated technology overseas.
At the end of ten years Australia will have an energy-producing infrastructure that will last at least 100 years; whose base energy running costs are half the cost of current fossil energy running costs because the fuel is “free”. The whole process can be speeded up and Australia could become the energy provider for most of Asia. Once the capital infrastructure is in place the cost of producing sustainable energy is of the order of one cent per kilowatt hour. This could lead to an unprecedented expansion of wealth across the globe because energy is the driving force of economic development.
Australia can export renewable energy to Asia in various ways. Indonesia and South East Asia can be supplied from direct current power lines from the north west of Australia. Energy intensive industries such as steel or aluminium production, and generation of liquid fuels can all be based close to renewable energy plants. Similarly industries such as computer server farms to power Google searches are best located next to power sources because it is cheap to export information compared to exporting energy.
The coal industry would be encouraged to find alternative markets such as becoming a supplier for the production of synthetic materials. Work is already underway in this area and there is a real possibility for coal to find a new role that will make it a more valuable commodity than it is today.
Another emergent property of the system will be the widespread ownership of new energy resources by the bulk of the population. One of the products that will attract Rewards money will be solar and geothermal power plant investments. Companies wishing to finance these ventures will look for ways to convince Rewards holders to become part owners in the plants in return for the Rewards. with the result that we will see many people holding shares in power generators to fund their superannuation.
Community-based renewable power schemes for suburbs or even whole new industries combining energy, water and greenhouse gases are other potential outcomes. However, these are only possibilities. What will emerge will probably be quite different from anything we can envisage right now. What is certain is that the future will be an energy sustainable one with greater wealth created for all.
Emergent Properties for the world as a whole
The same principles of Energy Rewards can be applied across countries. The details will vary but the principle will remain the same. Countries whose population creates few greenhouse emissions per head of population will be Rewarded but they must use the Rewards to build renewable energy plants which in turn will return a dividend to the Reward giving countries. That is, everyone benefits and the world is a richer place.
This chapter has outlined a framework for the development of a sustainable energy economy. The exact details will change from the initial guesstimates but the overall principles will remain the same. That is, we create simple day to day transactions that lead towards a goal of energy sustainability with no green house gas emissions. If the system does not work the way we expect, we can change the day to day transactions in small ways to get the desired outcomes. Rather than planning a journey into the unknown we build a system that can adjust itself and adapt to the inevitable changes to the environment that will be created because the system itself exists.