Emissions Permits Trading, Carbon Credits, Renewable Energy Targets, Feed In Tariffs and other financial structures are all mechanisms to encourage investment in renewable energy infrastructure. They achieve this by manipulating the market in fossil fuel energy to encourage investment in renewable energy.

Why do we do this as a way to reduce emissions?

We do it because the initial cost of producing energy from the sun, hot rocks or from windmills is more expensive than from burning fossil fuels. However, this cost is overwhelmingly one of construction capital. As there is no ongoing charge for fuel, the running cost of most renewable energy plants is less than half that of any fossil fuel energy plant.

The interest charge on money needed for investment in renewables dominates the cost equation. If we had zero interest money available for investment in renewables it would be possible to generate endless amounts of such energy. It would require a significant investment up front but it could be done.

Is there enough renewable energy available?

Australia alone has renewable energy sources either from the sun or from the hot underground rocks to provide the whole world’s population with thousands of times their current energy consumption so yes, there is more than enough renewable energy available.

How much will it cost?

When we double the capacity of renewable energy infrastructure the cost decreases by about 20 percent. By the time we have replaced all our energy needs with renewable energy the cost per installed megawatt will be less than one million dollars. If we assume an average cost of $1.6 million then we will need about $15,000 per person to meet ALL the energy needs of the average Australian. If we average this over ten years then it is $30 billion per year for Australia to achieve zero emissions within ten years. At the end of this time the cost of producing wholesale electricity will be more than halved.

Isn’t this a lot of money?

Each month Australians borrow $20 Billion dollars to buy houses. $30 billion in the scale of national expenditure it is not a large amount of money and is affordable.

How could we efficiently invest this amount of money?

We know that the most efficient way to spend money is to spend it through a market where there are many buyers and there are many potential sellers. We have sellers in such a market in Australia today and it is called the renewable energy and saving energy infrastructure market. There are many sellers of solar energy plants, solar energy photovoltaic panels, windmills, geothermal projects, insulating our houses, etc. The problem is that there are not enough people with enough money who want to purchase their goods.

How can we find the money?

In the year to July 2008 the Australian supply of money increased by $240 billion. Somehow eight times $30 billion of Australian dollars was created that did not previously exist. The government could suggest to the Reserve Bank to create $30 billion dollars of the new money we need and issue it at zero interest and require it to be spent on renewable energy infrastructure.

But do how we do it?

Each day the Reserve Bank creates money. If necessary it creates several billions of dollars per day. There is no reason for the Reserve Bank not to create $30 billion dollars of money with special conditions attached to it. That is, the Reserve Bank can create special dollars on which it charges no interest. Those dollars can only be spent on renewable energy infrastructure and on ways of saving energy. The Reserve Bank can supervise and control such an organisation and the Reserve Bank can hire private organisations to establish and run the system.

Wouldn’t the involvement of private organisations place yet another layer of cost on energy?

The Reserve Bank currently uses private institutions – banks – to provide money and to distribute money throughout the economy. While the banks could handle Rewards it is desirable to separate the distribution and control of Rewards from the distribution of regular currency as the functionality required is different and it would be less confusing for the population.

How would the $30 billion be distributed

Who gets this special money is a political decision and would be determined by the Federal Government as they are the ones who asked the Reserve Bank to create Rewards. It is suggested that Rewards be given to any resident of Australia who volunteers to take it. It could be allocated once a year in inverse proportion to the amount of mains electricity per head consumed in the previous year. Or perhaps each person on their birthday could receive on average $1,500 in what we might call Energy Rewards. The exact amount will be calculated from the mains electricity consumption at their places of residence. Limits could decree that the top 20 percent of energy consumers receive zero of these Energy Rewards, while people (including new born babies) who can prove that they consumed no mains electricity in the previous year would be eligible for $5,000 in Energy Rewards.

How would the people spend the money?

Many – possibly most people would sell the Energy Rewards money to someone better able to invest it. Others would buy shares in investment vehicles that would in turn invest the money. Many would spend the money on household improvements to save energy – such as better insulation or solar panels. Some may spend the money converting their vehicles to run on renewable energy sources. The mechanism for establishing what would be eligible would be determined by the sellers of infrastructure who would have to specify in their sales contracts how the money used by them would create emissions free energy or would save energy. If their claims proved to be false they would be excluded from being able to accept Energy Rewards as payment.

Wouldn’t this be inflationary?

No, because Energy Rewards attract no interest while they are unspent. Energy Rewards are ONLY spent on productive assets and we know that if we invest in new ways to increase income, the result will not be inflationary. When Energy Rewards are spent they produce productive assets that have value and can be sold.

If too many Energy Rewards were issued then the Rewards themselves may become devalued but that is of no concern to the rest of the economy. Wholesale electricity energy prices are about five cents per kilowatt hour. The operating cost of most large scale renewable energy is one cent per kilowatt hour. Rather than being inflationary, renewable energy plants will decrease prices because renewable energy will be cheaper than fossil fuel energy.

But wouldn’t it create too much demand for Renewable Energy Infrastructure?

There are many ways to spend Energy Rewards and the market will determine where it is spent. It is thought that initially most money will go towards companies that have large plans for renewable energy plants such as solar thermal, geothermal and wind power. People will buy shares in those companies and those companies will spend the money efficiently. If too many Energy Rewards are created that cannot be spent wisely the owners of Rewards will most likely hold onto them, waiting until the price of infrastructure comes down and they can obtain a better deal for their investment.

Wouldn’t it require parliamentary legislation?

The Reserve Bank has power over the issuing of the currency and provided it works to maintain and protect the currency it could do whatever it wishes. There is no legislation required. The Reserve Bank may well consult with the Federal Government and if the Reserve Bank did not wish to follow this path the Federal Government could pass legislation to require the Bank to issue currency via Energy Rewards.

There must be something wrong with this idea otherwise some country would have implemented it?

This idea has probably been around for a long time in the archives of many governments or universities. However, until we get a crisis that demands some action then initiatives such as this tend to be forgotten because the current system appears to be working well. The recent turmoil in the global financial markets and the worry over climate change are now drawing attention to the way our financial system works and have created a need to consider different ways of encouraging investment in renewable energy. The benefit of Energy Rewards is that they can solve the Emissions problem while helping ease the money supply problem in non-inflationary ways. If operated worldwide this approach would give a non-inflationary method of increasing the money supply and it would break the current runaway increase in debt and money supply.

Wouldn’t it be too expensive to implement and run such a system?

The other reason it has not been suggested is that until the Internet was in place it was impractical to implement. With today’s information technologies this is a relatively simple system to implement as we have efficient ways to identify people and we have many electronic market places that operate with millions of buyers and sellers. The cost of running the system would be born by the sellers of infrastructure and they currently have much higher selling fees than the 1% or less fees required of this system.

What do most economists say about this system?

Most economists appear to believe that money is like any other commodity; it can be brought and sold, and this will ensure that the best price is obtained for the money. The best price is the most money the money will earn in the shortest time.

However money is not like bread or buttons. It is a measure of value and not a store of value. Money does not obey the laws of supply and demand because the supply can always be increased and the demand is insatiable. It is a bit like saying we can buy and sell volume rather than the space the volume represents. If we allow the measure of volume to be of value in itself and we can invent volume in a virtual space, and if we allow the virtual volume to be exchanged the same way real volume is, then we have a problem. Privileged people who are allowed to create virtual space will do so and then exchange it for real space with houses in it.

The point is that money should not be bought and sold like a commodity unless it has a real asset backing it. Unfortunately this is not what most economists believe – including those in charge of money. Economists seem to believe that all money is “equal” and should be treated the same and they see nothing wrong in charging interest for money that is not backed by an asset. Until they recognise that money is different from wheat or houses or labour we will continue to face financial crises every few years.

Most economic models are variations on the idea of General Equilibrium. That is, an economic system is a stable system and if you push it in one direction then it will come back into equilibrium. Unfortunately economies do not work this way and something like this proposal does not fit these models because it embodies a positive feedback loop that means the more money you put into the system the more value it generates. The system as proposed will cause runaway increase in value as opposed to our current system which causes runaway increase in debt.

How does tagging money – or Rewards – overcome the problem?

The Energy Rewards system described here overcomes the problem of money creation. That is, we create some money but do not charge interest on it while it is only money and while it does not yet represent an asset.

When we spend the Rewards we know that we have created an asset because we require it to be spent on infrastructure of some form. This asset will typically be worth more than the money used to create it because the people spending Rewards will seek out the best value for the Rewards. This means the untagged money that is released into the economic system is typically backed by more assets than it represents.

If the Reserve Bank is called upon to create more money because there is not enough available in the system, it can create a Reward of some sort whose expenditure requires the generation of an asset. How much is created and how quickly it is spent do not matter because if we create too many Rewards any inflationary impact will be isolated to the particular Rewards asset class. In other words, we will still get inflation but it will be isolated to the particular Rewards currency and it will not impact other money. This problem will also correct itself once enough assets become available in that asset class.

Energy Rewards is just one example of the application of tagged money. It is a political decision to decide on other potential applications, but some of the strongest candidates are those areas where we have potential “tragedy of the commons” situations. The most obvious of these include water, health, education, land for housing, food production and energy.

2 thoughts on “Financing Renewables and Solving the Financial Crisis

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