The government proposals to introduce a price on carbon are an attempt to encourage investments in renewables and as a way of discouraging energy use.  It uses price as a control mechanism.  The idea is to reduce consumption by increasing the price of energy from fossil fuels and hence encourage investment in renewables.  This approach could theoretically reduce the level of green house gases.

There are difficulties with this approach and with other price mechanisms, such as emissions trading, because they are difficult to adjust and they tend to be inequitable. They can cause unnecessary hardship, which in turn requires some form of compensation. This in turn tends to reduce the effectiveness of the price increase. Price increases reduce the competitiveness of the community because of losses due to less energy consumption.  Higher prices do not guarantee that the energy supply will increase. The reason is that the return on investment for energy supply is low compared to other investments – particularly investment in fossil fuel energy.

To overcome these difficulties with pricing it is recommended that the government introduce a discount system for people who consume less energy.  The pricing mechanism that energy companies currently employ where the more energy consumed the less the price per kwh could be replaced with a scheme where the less energy consumed per person in a household the less per kwh is charged. Households with a low per head consumption of electricity receive a discount on their per kwh energy charges.

This approach automatically adjusts income received by power companies because the energy saved by the low consumers is sold to the high consumers for a higher price. The discounts are paid from the increase in price to high consumers.  Such an approach will be seen by the community as fair and will not be seen as a form of tax grab by the government.

The approach can be made even more effective by requiring the discounts received to be invested in ways to increase the supply of renewable energy.  Power companies could offer different investments, such as bonds to build a solar farm.  Discounts could be used more directly to purchase solar energy systems or install insulation or double-glazing or other forms of reducing consumption of mains electricity. Discounts could  be sold if people did not wish to purchase investments.

This approach of giving discounts when a person does some other restricted transaction is widely used in private markets. An example is the Coles and Woolworths petrol discount and other coupon systems.

Government soliciting interest free loans from banks and the interest free loans used to increase the size of the discounts can further leverage the system.  The loans are repaid from the payment from the bonds or from energy savings or from sales of the increased energy obtained from direct investments.

Increasing the size of discounts with interest free loans

In Australia banks have to go to the international and local capital markets to raise loan funds for their reserves to satisfy the need for loans.  When a bank makes a loan it creates credit and extra cash deposits but it needs a certain level of reserves. There are limits on how many loans a bank can create and this is determined by the reserve ratio of deposits to loans.  That is, in total a fraction more deposits must be held than there are loans outstanding. So if a bank increases the money supply with a loan it must have a fraction of the amount of money it loans available as reserves.

These reserves could be obtained via interest free loans in the following way. This would be much cheaper for the banks than raising reserve amounts on the open market, where the bank has to pay interest, or if the banks increase reserves by raising equity.

If the government, or other institutions like super funds, have large cash deposits that are being held for long term purposes such as pensions and superannuation, then those cash deposits can still earn interest but can be used as security for the interest free loans.  One or more banks are likely to take up the offer as they will obtain large cash deposits that they can use to leverage the creation of their regular loans. The banks give interest free loans equivalent to the cash deposits that are held in reserve. The loan funds are safe because they are secured against cash deposits and the loan funds will overtime be repaid from the returns on the investments created with the funds.

The citizens win because they get a stake in the energy infrastructure that will continue to earn income long after the loans are repaid.  The government wins because it does not have to increase the price of energy as the loan funds can be used as discounts for the low consumers.  The banks win because they get interest free reserves.

The citizens will see that the system is fair an equitable and will see this approach will ensure an adequate energy supply no matter what happens with the climate.

Summary of Energy Discounts

Instead of increasing the price of energy with a carbon tax the government can introduce a scheme of Energy Discounts for citizens who consume less energy.  Energy Discounts must be invested in ways to increase the supply of renewable energy or to make better use of existing energy.

Making sure all investments go through a central market place of approved investments, and banning people who abuse the system from future allocations of Energy Discounts, will ensure wide-spread compliance.

The funds to pay for energy discounts come from charging high consumers of energy more per kwh and from issuing interest free loans.

The system can be set up with little or no legislation and it can be done on a Energy Company by Energy Company basis. Companies that encourage investment this way could get some form of compensation the more discounts they provide.  Households have to join to receive discounts but households with a high per consumption of electricity have to pay more per kwh whether or not they join.

One thought on “Increasing Investment in Renewables through Energy Discounts

  1. Greetings,
    With this particular article you sum up quite a few of the more
    important opinions.. Fairly simple to digest and full of very useful
    information!
    Thank you for sharing Increasing Investment in Renewables through Energy Discounts A Blog by Kevin Cox!!

    Like

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