Save the planet and the financial system

Kevin Cox and Heather Caulfield

Most would agree that we want to continue to enjoy a high standard of living and that we need to reduce greenhouse gas emissions. To achieve this we first need to invest in renewable energy systems and in ways to save energy. The problem is that right now we are being told that the financial system is failing to provide enough money to keep our economies going, let alone the huge sums required to invest in energy infrastructure. It’s a situation in which global warming concerns are at risk of being pushed aside while the economists and politicians battle to keep the economy afloat.

However, it doesn’t have to be an “either/or” situation. We can combine the two issues and address the financial crisis and rising greenhouse gas emissions with one solution. It’s a market-based approach that should please economic rationalists. It will also make social democrats happy as it results in wider distribution of wealth. It gives environmentalists a boost by offering zero net emissions within a reasonable time frame and delivers lower energy prices along with an enhanced standard of living to the person in the street. Bankers benefit through reduced risk and it provides the Reserve Bank with a method of fine tuning the economy for continuous stable growth while eliminating inflation. What’s more, it is an approach that will please the most fiscally-conservative government because it can be adopted without incurring a deficit.

The solution is to stop banks lending money they don’t have and for the government to lend energy-frugal people zero interest loans that must be invested in infrastructure to reduce greenhouse gases. Right now banks create much of this country’s money from thin air: They agree to a loan with a customer and suddenly the funds appear in the customer’s account.  Most of the money didn’t exist prior to the establishment of the loan and there is only a small amount of existing money actually backing this newly created deposit in the customer’s account. If banks stopped lending money they do not have we could break the link between debt and money. This immediately stops the debt spiral whereby the more money we create, the more debt we create and the more money we have to create to service that debt.

It is this spiral that has caused the financial crisis because much of the debt was to pay for non productive loans or overpriced assets. As various bubbles burst, we are getting rid of the excess debt but we are also getting rid of money and this is where the problem lies. By breaking the link between money and debt we can increase the supply of money without increasing debt. Last year in Australia the total supply of money increased by $170 billion dollars.

However, if we stop the banks from creating extra money it is necessary to find another way to increase the total money supply. One option is for the government to issue zero interest restricted loans. The restriction is that the loans must be invested in ways to reduce greenhouse gas emissions. Think of them as a kind of shopping voucher that can only be redeemed at certain outlets only in this instance those outlets involve greenhouse-friendly goods or services. Once the loans are invested they become regular money and increase the supply of money. It is similar to the way that banks currently create money but we are guaranteed to that the new money will be backed by an asset. Repayment of these zero interest loans can occur over time, taken as taxes on the profits of the investments. 

If we distribute the loans to those people in society who consume relatively less energy – for example those who use less mains electricity – the investment potential of the loans will encourage people to use less energy. They will also look for ways to obtain the best financial return, leading to a system bias for the greatest reduction in greenhouse gas emissions for the least cost. As many frugal people are poor, the distribution of loans will be socially equitable.

Wholesale electricity from renewable energy plants under such a system would cost one cent per kilowatt hour. As the average wholesale cost is now six cents a kilowatt hour renewable energy systems will be very profitable and it is likely that energy prices will drop, not increase.

All this can be done without any world wide agreement and without the economy plunging into recession and without causing a government deficit. 

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