Dear Minister,

There is a way to finance infrastructure without incurring government debt.  There is an equitable method of gradually distributing wealth more evenly throughout society and there is a way to reduce the level of green house gas emissions without causing an increase in energy prices.

The following is a long story but then the problems being addressed are difficult and seemingly complex so please bear with me.

My background is as a designer and developer of Information Systems and as a modeller of complex systems.  I started my career many years ago building computer models of the Tasmanian Power System.  Over the years I have continued to build and study computer systems that modelled complex behaviour that arises when many simple components interact in simple ways with other components.  That is, rather than modelling the emergent behaviour of a complex system we model the simple behaviour of components and their interactions and we observe the resulting emergent properties of the total system as a way of checking if the computer model reflects reality. This is a very simple but powerful method of analysing and modelling systems. With the rise in computer power this has become feasible for large scale systems and is the basis for most successful real world models such as weather systems, structural analysis, electricity grids etc.


I am the founder and chief technical officer of an electronic identification company called Edentiti which provides inexpensive electronic identification services.  It is a scalable system capable of identifying everyone in the world in a simple private way. It achieves this by dividing the identification into small components by giving each person the electronic tools to identify themselves.  It works and thousands of people each month are identifying themselves. Our most important customers are the banks.


A few years ago I started thinking about ways of getting rid of the need to have water restrictions for urban water supplies.  The solution I came up with was to build a system where each individual received a payment that was inversely related to the amount of water they consumed.  That is if you consumed less water you received a cash payment.  The money for the payments would come from charging people who consumed more, by putting a higher cost per litre the more a person consumed. While this will reduce consumption it only becomes highly effective if there is a condition put on the money people receive. The condition is to require people to invest their money (let us call them Water Rewards) in ways to increase the supply of water either by investments in water saving and more effective use of water or in ways to increase the supply by recycling, ponds, dams, desalination etc.


If you set this system in place within a few years it will soon remove the need for urban water restrictions. If applied to the Murray Darling River system it will return water to the lower lakes.


The same idea can be applied to Energy.  We charge consumers more per kwh the more energy they consume and we give the extra money (Energy Rewards) to those who consume less energy. Importantly we require Energy Rewards to be invested in ways to reduce the level of greenhouse gas.


The amount of energy consumed per person is approximated by the household mains consumption of energy.


This system will work and the amount of money needed to get Australia to net zero emissions of greenhouse gases is at most  $50K per person. Spread over ten years this is $5K per person per year.  


The only trouble with this approach is that it causes the average price of energy to increase and we need to convince the owners of power systems to set in place a system that will replace much of their existing capital works.


The global financial crisis has pointed a way to get the money for Energy Rewards and in the process fix the financial system.


Financial crises are caused by the way we create money.  In modern economies new money is created by loaning it into existence.  That is, a bank loans you some money and it creates the money it loans at the same time as the loan. When you pay off the loan the equivalent amount of money is removed from the system. Banks, however, do not just create loans willy nilly but only create loans if you have an asset that can be seized if your loan is not repaid.


All this works well but there is a minor quirk in the system that is hard to spot.  However its effect is to cause the emergent properties we call recessions, depressions or now global financial crises.


The minor quirk is that when we create money tokens we immediately attach an interest component to the money.  That is, the money is worth slightly more than its face value.  This is OK if the money was only created by monetizing an asset because this is the same as attaching interest to existing tokens and that will not cause any problems.  Unfortunately not all money that is created is backed by savings.  By various means people have found ways to create money and with it interest obligations without the money representing savings.  The most obvious is when we get asset inflation where the asset used as collateral for the loan is worth less than the face value of the token.  However, most is created where we get loans created on top of loans.


This small increase in the value of the money tokens over and above the value of the tokens can be shown to cause wealth to be inevitably transferred from the poor to the wealthy and for far too much money to be created because the person who creates the money gets a small extra amount of value for no effort. Today with the ability of computer systems to create money through derivatives and other financial products this small advantage of putting interest onto money simply by creating the money has compounded and we now have loans (and with it money) far in excess of the amount needed for commerce.  It has become a monster that has compounded out of control and the current methods of “fixing” the system by making even more unproductive loans only makes the problem worse.


The financial system can be fixed by creating money tokens without interest attached.  We can attach interest later by monetising assets but there is no good reason to attach interest at the time money is created. That is, the people who create money do not get a small profit from creating the money and so there is less incentive to create financial instruments to take advantage of the quirk.


The next question is how best to create money because we need to create it somehow.  It turns out that creating interest free money using the current financial system and distributing is as Water Rewards,  Energy Rewards, Transport Rewards,  Health Rewards, Education Rewards etc.  will do the trick because these Rewards MUST be invested to create new productive assets.  Once this better method of creating money gets going it will turn out that it becomes less profitable for people to create loans on top of loans and less profitable to encourage asset bubbles.


Again it turns out that if we create Rewards then we do not have to be exact in the number we create for the system to work and remain stable.  If – for example – we decide we need to create $5,000 per person or $11 billion per year for Australia for investment in renewable energy it will NOT cause inflation in the general economy.  It doesn’t cause inflation because Energy Rewards – which are tradeable – will simply drop in value and will absorb the inflationary effect and if we create too many Rewards for the economy to handle – people will horde them and not use them until it becomes profitable to invest them.


This approach can be implemented through the commercial banks to their advantage. All that is needed is a bank and group of people with a large amount of cash that they wish to invest and that will get the attention of the bank. The bank and the people with the cash will all profit from the system and will be able to get others who join to profit as well. The government has a large amount of cash on deposit with various banks.  It could use a small amount this cash and work with one or all the major banks to implement the following scheme.


The government would deposit the cash in the bank or would use an existing deposit within a bank. This money would remain on deposit with the bank and nothing would change with respect to the government receiving interest on the cash.  However, the bank would be asked to create the same amount of money – backed by the deposit using its fractional reserve rights – and lend it out as Energy Rewards to the population.  Theoretically (and practically) the bank can create nine times the amount of the deposit if the fractional reserve limit is 10%.  Normally it creates loans of nine times and lends the money out at interest. To balance its books it gets in deposits matching this amount of money and pays interest on the money. However, the bank can lend the money it creates at whatever interest rate it desires.  It will not go broke if some of this money is lent out at zero interest as long as it pays no interest on the money it creates while-ever the money is on deposit with it.   If the money moves out of a banks interest free deposit account to another bank then provided the money is secured against some cash (the deposit the government has put into the bank) the bank can balance its books by getting further loans or deposits.  In effect the bank lends the money the government has on deposit and does not create extra money with the loan while at the same time leveraging the money to create more money through loans.


However in return for the backing of the money on deposit, which only gets taken if the loans are not repaid, the government asks the bank to put restrictions on the money that is loaned.


It is suggested that the government initially requires the loans to be given as interest free Energy Rewards.  Energy Rewards must be invested through an electronic market place – much like Amazon – but where investments in ways to reduce green house gases are sold. The suppliers of investments have to specify the expected return on investment, the expected reduction in green house gases per dollar spent, and how the return will be given to the lender and how the reduction in green house gases will be measured once the investment is made.  If the conditions of the loan are not met then the seller is banned from the electronic market place.


The loans will be repaid over the life of the investment which is typically 40 years or more for most renewable energy or energy savings systems. With a long repayment period and zero interest almost all existing renewable energy and energy saving investments will be profitable at today’s energy prices.


Because Energy Rewards have value over and above their face value Energy Rewards themselves will be tradable and the distribution of Energy Rewards can be used as a way to change behaviour.  Energy Rewards will be distributed up to a maximum value of $10,000 per year to anyone in Australia who wants them. However the maximum amount that a person can receive is inversely related to the amount of household mains electricity used per person. This calculation is done so that on average every person can receive $5000 in Rewards per year.


Our company – along with many others – know how to economically build and operate such a system as it is a variation on our existing identification system which in turn is built on the same principles as well known systems like Google, EBay and Amazon. The system will be built for no cost to the government and will be paid for from part of the transaction fees collected by banks.


The banks will make a handsome profit from Energy Rewards through transaction fees rather than through the difference in interest payments. It is expected that fees of 2 or 3 percent will be collected by the banks.


Energy Rewards will be as, or more, profitable for the banks as lending out the money and collecting an interest differential. This is because the banks will take no risk on the money lent as Energy Rewards.


While the system is complex to describe, to the citizen getting Energy Rewards it will appear simple.  They will sign up online, agree to let their electricity meter readings be sent to the bank and specify who is living permanently in their house on the day their meter reading is taken.  They will receive Energy Rewards in their account and they will select an investment from a list or decide to sell for cash to a buyer.  They will then sit back and collect a return on their investment.


For the government it is virtually risk free and it is politically an easy sell.  The government will act as a facilitator and rule setter not as an operator. The banks will be the contact with the people and will take on the reputation risk associated with giving loans. The government will get the kudos by giving out investment money to the population in a fair and equitable manner. The cost to the government will be for regulation and overseeing the system but that can be achieved through APRA for very little extra cost.


It will show the government is serious about climate change and it will not cause energy prices to rise.


Are there any losers?  There are no losers because the system generates more income than it costs to build and it has been designed to distribute this extra income widely throughout the community.  Even the coal miners and oil companies will win because they will be forced to find other markets for their products. There are many avenues that will be open to them ranging from plastics to building materials all of which will fetch higher prices than burning these complex hydrocarbons.


While the above describes how to tackle Climate Change the same approach can be used to address other areas of market failure.  In particular the problem of homeless people, of funding medical services and of funding the National Broadband Network. 


The government is already using the Rewards approach for the last twenty years with its HECS contingent loans so this approach is not new. What is different today is the ability to easily administer and operate such systems.



Kevin Cox
22 Yirawala St
Ngunnawal
ACT 2913



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