Two ways of increasing investment in greenhouse gas (ghg) reducing technologies and practices are:
1. Raise the price of energy from fossil fuels and so encourage investment in non polluting production of energy.
2. Decrease the capital cost of investing in ways to reduce greenhouse gases.
Of the two, the second will be the most effective, the fastest acting and the most certain. This is because it is comparatively easy to estimate how much investment is required to reduce emissions. And because we can easily reduce capital costs by removing interest payments and only requiring repayment of capital when the investments earn money.
Let us form a slightly different banking enterprise — one that takes deposits and give loans, but which only gives loans to those people making deposits. Moreover, let’s make the size of the loan dependent on the size of the deposit and stipulate that the deposit must remain with the bank until the loan is repaid. There is no interest paid on deposits or on loans.
This form of banking fits easily with Islamic Principles.
The loan the person is allowed to receive is up to the fractional reserve permitted for the bank. If the fraction is 10% then a $1000 deposit allows for a loan of $9000. The loan incurs no interest and the repayments come from the money earned from the investment. Where possible, for every $1 earned 50% is repaid and 50% is kept by the borrower. The loan repayments continue until the loan is repaid.
The loan however, can only be invested with approved investment opportunities that reduce the level of ghg concentration in the atmosphere. This could be investments in building solar energy plants, insulation in a house, investment in a windmill to generate energy or installing a geothermal heat pump.
These investments will earn a return to the borrower or save the borrower money. When money is earned or saved then the borrower will get a return and also pass on 50% to the bank.
Investments that save energy and hence money – such as insulation – may be repaid on an installment basis. An estimate will be made of the energy savings and from this the energy cost can be calculated. The borrower will agree to repay the loan at regular rates based on keeping 50% of the savings and returning the other 50%.
In the case of an all electric vehicle powered with renewable energy the individual receiving the loan it is suggested the loan be repaid over a period of 10 years.
Once the loan is repaid then the original deposit is available for withdrawal.
The banking organization charges a transaction fee for loans made to the client and for transaction fees to merchants being paid. It is estimated that initially this will be of the order of 5% of money through the system. This is much less than the current system of charging interest on new money every day as well as loan fees and other transaction fees. The bank does not need to receive interest on the loan because it pays no interest on deposits.
If the bank lends $1billion dollars then the transaction fees will be $50M.
What are the differences between this system and other banking products?
The first difference is that no interest is paid. However, the main difference is that the expenditure of the money and the return of the money are controlled. Money must be spent on new productive assets that reduce the level of ghg concentrations in the atmosphere and cannot be spent on consumption (things that do not earn or save money) or things that already exist such as an existing company.
This does not stop existing banks lending to purchase existing assets but it makes it difficult for them to compete against banks targeting investment in new productive assets (such as new banks specialising in investment in renewable energy).
This form of banking can be used for any productive purposes. It will NOT cause inflation provided the bank only loans for revenue-generating or revenue-saving purposes. The reason is that the money generated can be used to purchase the goods or services produced by the investments. General inflation occurs when there is not enough goods or services available for purchase.
The bank takes NO RISK because it keeps the deposit if the loan is not repaid and the loan is simply written off. All the risk is on the part of the borrower. This means any organisation with a license can run such a bank if it gets a license. This means community groups can run their own banks if they only use this banking product.
It is important that this banking product NOT be used to purchase already productive assets such as existing factories. The reason is that because it is so easy to borrow money the price of existing assets will rise too rapidly and there will be asset inflation. Existing assets should be purchased with existing money through the same loan process. As there are more existing assets sold than new assets created this will make little difference to the existing banking business which can continue as it does.
Controlling Loan Expenditure and Return of Money
For this banking product to work there has to be tight control over the expenditure of loan money and there have to be guaranteed ways for the money to be returned. This is done through simple contracts and by the bank giving the money under instruction from the borrower to suppliers. This means there is a tight integration between the loans and the supplier systems.
The contract with the borrower is that the money is only available for expenditure through suppliers who have contracts with the bank. Suppliers must give the loan holder complete online access to their accounting records to verify suppliers expenditures.
The contract with the suppliers is that the money must be spent on new renewable energy infrastructure and must not be spent on purchasing existing goods and services. They must estimate the amount of ghg emissions the investment will save and work with the borrower to monitor and report on the amount of ghg actually saved.
If borrowers are found to purchase goods and services that do not reduce the level of ghg in the atmosphere then they will not be permitted to borrow from the bank again and must repay their loan within three years.
If suppliers are found to sell goods and services where their estimates of ghg saved are significantly less than their claims, then they will not be permitted to accept new borrowings through the bank.
To stop loans being used to create “extra” money for the same investment if a borrower sells the asset they have purchased with their loan they must immediately pay off the loan.
Statistics and Control
Compliance is achieved by making the investments transparent and accountable. To that end all loans will be monitored in real time by the borrower. In particular the total amount of ghg saved and the cost per saving will be visible to all to see. These figures will be published and be made available to prospective borrowers to help them choose their purchases.
People without existing assets
Some people do not have any money they can risk in order to get access to these loans. For those people the government could consider providing funds as the deposit for the loan. Of course the government may decide to issue all stimulus packages this way and allow individuals to sell their loan deposits to whomever wants them.
Bank System Components
The bank system will need
- An identification system to enforce compliance
- A website to sell goods
- A website to give loans
- Specialised websites for different suppliers
- Specialised systems for analysing supplier accounting records
An example of a specialised website is the website for investment in companies. Loans may be used to purchase equity or bonds in companies or organizations that build or produce systems that reduce ghg emissions. A typical example would be a solar thermal power station. The funds could be used to build parts, or to put together other parts of the system. The funds cannot be used to purchase existing operating plants.
Not all systems will be available when the system is launched and there will be limited suppliers. While the contracts will be in place not all components – such as monitoring accounting records – will be initially present.
The initial products will be simple as with the website used to offer loans and where suppliers will offer their goods and services.
Funding the Software Infrastructure
The software infrastructure can be funded through the bank. That is, one of the investment projects offered via the bank will be to fund development of the system that runs the bank.