Energy Rewards is a socially equitable, economically efficient, wealth creating system to reduce the levels of greenhouse gas levels in the atmosphere to whatever level we collectively decide.
The method is to give citizens the right to take up zero interest loans in inverse proportion to their consumption of energy. If the loan rights are taken up the money must be invested in ways that demonstrably reduce the level of greenhouse gases in the atmosphere and guarantee that the loan will be repaid from the income or savings generated as a result of the investment.
This approach can be used by any community of any size and is independent of the actions of other Communities. Communities that adopt the approach will get cheaper energy and their wealth will increase more rapidly than communities who continue with the status quo or who attempt to use pricing mechanisms to reduce the level of greenhouse gas emissions.
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
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 thepenalty 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 and we must use market mechanisms to decide the most efficient methods to reduce greenhouse gas emissions. The remainder of this article 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 it will make any community or nation wealthier.
How it works
The concept behind Energy Rewards is to reduce the cost of finance for ghg reducing investments by issuing the right to take out zero interest loans. If the rights are taken up the loan money must be invested in ways to reduce green house gas concentrations. The loans are repaid through the earnings on the investments and the loan repayments are guaranteed by the community. Zero interest loans means that many ways of reducing green house gas concentrations will be profitable investments. If we give a wide choice to investors and we have many investors then the methods that cost the least for the greatest reduction in ghg concentrations will tend to be the ones chosen. This will ensure the most economically efficient methods will be chosen.
The money can be invested in ways to
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
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.
The idea of issuing the right to zero interest loans repaid from investments fits easily within the existing banking and financial infrastructure. The only change from the current way money is loaned is that the community takes on the risk for the loans being repaid not the banks. This is the only variation we need to the financial system and this is already being done with other contingent loan schemes such as the Australian Higher Education Contribution Loan Scheme.
The difficulties arise in ensuring the loans are repaid, the money is invested where we want it to be invested and ensuring the investments are distributed equitably throughout society.
Loans will be repaid if the repayments are “automatic” and are tied to the use of the loan money. Loans will be spent on reducing the level of emissions if there is a penalty for not investing the money in the areas designated. This penalty will be banning people who abuse the system from future loan participation.
Who gets the right to have loans is the next issue. One suggestion is to give the rights in inverse proportion to the amount of mains energy consumed. This will Reward people who consume little energy and will distribute the loans to the less wealthy in society and so it will be equitable. It is important that people agree to get the rights because that means they can be banned if they do not obey the rules. It is important that we give rights to loans rather than giving loans because people might decide there are no worthwhile investments and save their rights for a later better opportunity or people can sell their rights if they cannot be bothered to invest.
How the money is invested is critical to success. We open up a market place where investors can invest their Rewards loans. 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 converts 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 are achieved. If they do not obey the rules then they and any colluding buyers are banned from the system for a period of time.
A market in the right to a Reward loan 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 invested 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.
What is the value of loans needed?
We can estimate the value of loans needed to make a difference by estimating the amount of money required to invest to generate all energy through renewable sources over a period of time.
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 also know that electricity is about 1/3 of our total energy consumption so to replace all our energy with renewable electricity will require an investment equivalent of about 7,000 megawatts of electricity generation per year for the next 10 years.
We know that today we can build geothermal power stations and solar thermal power stations for a cost of $5 to $8 million
per megawatt of continuous power. Let us assume $6 million per megawatt of continuous power.
We know that the cost of building infrastructure reduces by about 15% for each doubling of capacity. Over the 10 years we can expect the cost of renewable energy to drop to $4million per continuous kw. This means we need to invest about $30 billion per year at current prices to build the infrastructure that will allow Australia to generate one hundred percent of its energy requirements
through renewable electricity sources within 10 years.
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 all citizens while at the same time solving the greenhouse emissions problem should be a relatively saleable proposition.
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 there will be no increase in costs to existing industries.
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. This is easily done by giving them zero interest loans to be invested in renewable energy plants to build the same capacity as their existing plants.
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 $300 billion of investment over ten years. Each month Australians invest $24 billion dollars in housing so $30 billion per year is a manageable amount of investment.
For those who want to sell their Rewards rather than directly invest them, it is expected that the right to a loan will probably be about 50% of the loan 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 article has outlined a framework for the development of a sustainable energy economy. The exact details will change from the initial estimates 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.