Zero Interest in Zero Emissions

NOTE: The following is the text to go with the Prezi presentation at http://prezi.com/buub6mwoimj5/

The video of the presentation with voice can be found at

http://www.youtube.com/watch?v=q0y2fK5nLXI

and

http://www.youtube.com/watch?v=YRwgvHGbxpk

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In this presentation I will show how we can reduce the level of greenhouse gas emissions while becoming wealthier.

It is possible to make profitable investments in renewable energy without increasing the price of Energy. To show you how let us first look at the cost elements when we produce energy.

(Trip diagram)

Energy production is a capital intensive industry. The costs components of all forms of energy are Taxation, Repayments, Interest and Profits – or TRIP costs followed by running or production costs.

(show graph of proportion of cost of energy)

This diagram shows us the ratio of repayments (green), interest (red) and running costs (blue) to produce energy under today’s financial system.

For renewable energy almost all the costs are financial charges of interest and repayments. Running costs of burning fossil fuel are relatively higher because we have to pay for the fuel to burn.

(show graph of actual costs)

In this graph the vertical axis is cents per kwh. Unless we address the interest and repayment costs it is going to be very difficult to encourage investments in most renewables.

As finance costs are “man made” they can also be “man unmade” and we will now examine what effect reducing finance costs has on the profitability of renewables.

(show graph of zero interest for renewables)

This graph shows that if we eliminate interest costs and repay our loans over the life of the asset, renewables can be as profitable as fossil fuel energy. This graph assumes we can produce 1kw continuously for a capital cost of $6,000.  Once you have built a renewable energy plant it becomes a money making machine. If you reinvest your repayments it becomes a compounding money making machine – because the sources of renewable energy are large, the demand for high quality energy has no limit and the value of energy will never reduce. We will use as much as we can produce and we can keep the cost well above the cost of production and people will still buy.  

(show graph of comparing carbon tax)

The other way or increasing investment in renewables is to increase the price of energy  by imposing a charge on the burning of fossil fuels. This can be done in many ways, It can be done with a carbon tax, with carbon credits or with emissions permits.  Whatever way it is done it increases the price of all energy. These extra charges are included to cover the finance costs. The price of energy will have to at least double, (and probably triple) to encourage investors to develop large scale renewable energy sources.

To achieve a low cost, low carbon future ALL we have to do is to give zero interest loans to our citizens and require them to invest those funds to build new renewable energy plants and invest in ways to save energy.  To find out how to do this we have to understand how we create money.

(graphic showing the creation of money. This will be headed “how we create money”. It will show banks monetising an existing asset. It will show part ownership of asset going to bank which charges interest on the use of the asset)

When we give a loan we create money by issuing credit. Governments do it by issuing bonds to themselves and then selling those bonds. Banks do it by giving loans backed by monetisable assets. When we monetise an existing asset, in effect, we sell part of the asset and the new owner, the bank, expects to get paid for the use of the asset. This is done through interest on money. In Islamic countries it is done through rent on the asset. If a bank creates money by monetising an asset it also destroys the money when the loan is repaid.  Banks do not have to create money to lend. They can – if they wish lend money in accounts and not destroy the money when it is repaid.

We rarely create money by monetising future assets but there is no accounting reason for not monetising a future asset. 

(graphic showing the creation of money by monetising a future asset.  It will show banks monetising a future asset (which at the moment is worth zero so there should be no interest charge).

We can monetise future assets. However, if we monetise future assets we cannot justify charging interest on the loan because the asset does not yet exist. Part ownership of the future asset goes to the bank. The bank issues money but the money should not earn interest on the money because the future asset is not yet earning and so cannot pay the interest.

In our present economic system monetizing future assets is achieved through equity. People save money and supply it to a company to build the asset.  What this means is that new assets are financed from savings and not from loans. Finance equity is much much more expensive that finance from loans because there are fewer savings than there are potential loans, and because equity is a double charge – one for the interest on loan money and one to compensate the saver for not spending the money on consumption. Equity finance is 20%+ for most new projects. This means it is more expensive to build an asset than it is to buy exactly the same existing asset – not because of the risk – but because of the way we organise our monetary system.

We do not give equity loans let alone zero interest equity loans – but we could if we can solve the issues of trust, distribution and compliance.

(slide)

For Zero Interest Loans to work – money must not earn interest until it is spent and loans must be repaid. For loans to be repaid they must return a profit.

The important point is that there is no accounting or economic reason not to give zero interest loans to create new assets. The reasons we don’t are historical and because creating loans (and with it money) for non existent assets is easily abused.

Under the existing system the bank creates a loan and money at the same time and charges interest on the money immediately. With zero interest loans for equity the bank still creates a loan but the money is a special sort of money. The money is restricted while it is in the borrowers account and earns no interest. When the money is invested in ways to reduce greenhouse gas levels in the atmosphere it can then earn interest if the receiver of the money can find a bank to accept the money.

It is easy to set up a system where money does not earn interest. Investing the money appropriately is much much more difficult. To do this we need to create a system that will guarantee that most loans will be profitable and that borrowers will comply with the rules and restrictions on the money.  Our existing banking system is complex and is highly regulated in an attempt to stop the creation of too much money. It has failed miserably as evidenced by the Global Financial Crisis.  Any system to replace some of the creation of money through zero interest loans is going to be complex.

(show the diagram showing government, bank, market place)

This diagram outlines how we can safely and reliably create a system that enables us to build new assets and to give the public direct equity ownership of those assets.

On the left we decide the politically interesting question of who gets the zero interest loans. Banks could issue zero interest loans but it is better done by government as the issue is a distributional political one. For energy we suggest the rights to loans be distributed to the whole population in inverse proportion to their household consumption of mains electricity. Doing this rewards people for consuming less.  We distribute the money as a right rather than as a loan because we can have a market in rights.  This is important as it provides a way to see if we have created too many rights.  If we give too many rights then the price of a right will go down because there will be few good investment opportunities. The price of rights gives the government a way of measuring and hence controlling the issue of rights. 

The middle section shows the mechanics of issuing the loan money. It is important that money does not earn interest until it is invested. Transaction fees can be charged to cover operating costs plus a small profit. It is more convenient to use banks as they already have the right to issue loans – but other institutions could distribute loans. 

The right hand section is the part that makes it efficient. It is a market place for investments. In the market place will be companies selling their own new shares, manufacturers of renewable energy selling systems like windmills and solar panels, research and development organisations selling their ideas that will lead to later commercialisation, insulation companies selling insulation, biochar companies selling biochar systems or training. All the products and ideas at this conference will be eligible to be sold through this market place. Note we do not sell energy in the market place.

(diagram giving what a supplier will show)

Each seller will have to specify how much ghg will be saved or removed from the atmosphere per dollar spent and the financial return on investment.  They will specify how the buyer will pay back the loan and how much of the loan has to be paid back. (for example the government may allow basic research to be funded with zero interest loans that are paid back in small part). Each seller will specify how the buyers will report ghg saved. Against each seller will be their promises and their past results. This information will be public and transparent and will be continually monitored by buyers.

If a seller repeatedly misses their targets or does not save ghg then they will be banned from the market place.  If a buyer colludes with a seller the buyer will never receive any more zero interest loans.

(slide about compliance)

Compliance through exclusion from access to the loans system will ensure the system will work.

(diagram showing that zero interest loans for new productive assets will not cause inflation)

A question that is often asked is – won’t the creation of money for zero interest loans cause inflation?

The answer is yes and no.  Inflation is caused when there is too much money available to purchase too few goods. Governments in the past have printed money for particular purposes. Historically one reason has been to finance wars. Printing money to finance a war will almost certainly cause inflation.

Creating money to build new productive assets that generate more value than the money invested cannot cause inflation but will keep the currency stable as there is always more to buy than money available and so we will have to continue to create more money or increase the velocity of money so that we can purchase the goods.

(how much money is needed)

In Australia we can have net zero emissions within 10 years if we allocate $30 billion a year in zero interest loans. To put this in perspective each year Australia creates $200+ billion in interest bearing loans to buy second hand houses.  

(emergent properties)

This approach to funding infrastructure and in particular renewable energy and energy saving technologies could be called Community Equity Loans.

(slide)

The resulting system will stabilise the monetary system, reduce taxation, eliminate inflation, cause no government debt, make our finite resources sustainable, increase our wealth and give ownership of community infrastructure to the community it serves.

(slide) 

It will stabilise the monetary system. There will be no inflation because governments will increase the money supply in a controlled manner through the use of zero interest loans.  Market based interest rates on existing money will regulate the flow of money.

(slide)

There will be lower taxation.  The distribution of rights to zero interest loans can be used to give more wealth to the disadvantaged and could replace some or perhaps all taxes.

(slide)
There will be no government debt.  The loans are given to the citizens – not the banks, nor the government nor any corporations.
(slide)

The system will lead to sustainability of finite resources. Sustainability is doing more with less and finite resources can be developed by Rewarding those who consume less while requiring the Rewards to be spent increasing the resource.

(side)
Community wealth will increase.  Wealth increases by investing so that the cost of investment is less than the wealth produced. A well run system of zero interest loans will do this.
(slide)

There will be a change of ownership of infrastructure away from governments and external corporate entities towards community owned entities and individuals serviced by the infrastructure.

(slide)
Please direct any questions to Kevin Cox at cscoxk@gmail.com

(slide)

I will leave you with this graphic on the comparison between zero interest loans and pricing carbon as alternative ways of encouraging investment in renewable energy projects.

Letter to the Treasurer of the ACT Government

Dear Minister,

Although initial decisions regarding funding of the Cotter Dam may have already been made, I would like to request that you still give some consideration to the following alternative funding method.  The reason I am pursuing this discussion is that I believe the approach outlined below is superior to your intended government loan for a number of reasons.  The most notable of these are that it: 

• will reduce average water consumption

• requires no total increase in water charges
• removes water restrictions as the water demand control mechanism and replace it with a price penalty.
• will give the ACT community funds to implement other water augmentation methods such as local pondages and recycling.
• is socially equitable.
• is non inflationary
• incurs no cost to the ACT government
• reduces inflation

The proposal will be electorally popular and provides a model for future sustainable government initiatives.

The money to build the dam will come from a zero interest loan issued by the Reserve Bank to the ACT government. The government in turn will distribute the loan equally between every registered ACT citizen. The money to repay the loan will come from the earnings (extra water sold) that can be attributed to the new Dam.

Water restrictions will be replaced by charging more to households with a high per head level of water consumption. This extra money will be distributed as Rewards to the low per head consumers of water. Rewards must be spent on ways to save water or to augment the water supply.

When the dam generates income – which occurs when the capacity of the existing system is exceeded – this income will be distributed to pay off the loan automatically and the remainder of the money will be distributed in inverse proportion to the average amount of water consumed by each registered individual since the dam was built. These Rewards must be invested in extra infrastructure to increase the supply of water or to save water. With the approval of the Reserve Bank loan repayments may be distributed as Rewards.

The construction of the information system to implement this proposal will be funded by a zero interest loan.

The ACT community will save $536M in interest charges assuming a loan of $365M repaid over 50 years with an interest charge of 6%. The amount of money earned will depend on the number of times the new dam capacity is used but assuming a figure of 10%, this will generate one billion dollars of income that will be invested in further water infrastructure. One billion dollars of investment in water infrastructure can augment the water supply by 100 gigalitres per year and, with the increase in capacity from Rewards, will be enough to sustain the likely population growth over the next 50 years.

The cost of excess water will be set at a figure that removes the need for water restrictions. If it increases expenditure on water infrastructure by $10M each year then over ten years this will be the equivalent of an extra inflow of 45 gigalitres.

The system can be constructed to apply to both businesses and households.

The reason the proposal is less inflationary than the proposed method of funding is that there is no need to increase the supply of money to pay the interest charges.

From the point of view of the end consumer the system will be simple to understand and it is suggested it will be controlled by a board elected by adults who have zero interest loans. The reason the system does not affect the ACT budget or cost the government anything is that the loan and the Rewards money will be separate from Actew and from government budgeting.

Kevin Cox

22 Yirawala St

Ngunnawal ACT 2913

0413961090

Financing Renewable Energy with Zero Interest Loans

There are two ways to encourage investments in renewable energy. One way is to reduce the financial cost of investing in renewables and the other is to increase the price of energy produced by burning fossil fuel.

Both approaches will work and both can be implemented in different ways but the principle remains the same. In one we encourage investment by reducing the cost of investment and the other we encourage investment by increasing the price of the output of the investment.

The first column in the diagram is the cost breakdown for renewable energy where the capital cost per continuous output of one kw is $10,000. Most of the cost is in repayments where the repayments are over 40 years. The other costs are maintenance costs and profit. The second column is the existing cost of energy from burning fossil fuel where the capital cost of the energy plant is $2,000 per continuous kw and the repayment costs are over 20 years and the interest is at 7%.

As can be seen the profits are about the same.  So if we constructed renewable energy plants with today’s technologies we would make renewables competitive with burning fossil fuel simply by providing zero interest loans to build renewable energy plants. This can be done today by any country without the need for any international agreements. As the capital cost of building renewables will drop by 15 to 20% each time we double capacity the profits to be made from building renewable energy plants will increase while the profits to be made from burning fossil fuel will decrease as the cost of energy increases.

The right hand side shows what we need to do to make renewables profitable by increasing the price of fossil fuel energy with a tax or through purchase of emissions permits. The total cost of energy will double because repayments costs increase because typically investments that incur interest have to be repaid within 20 years. The interest costs are calculated at a modest amount of 7% whereas for many such projects the effective interest rates are closer to 20%. Increasing the price of fossil fuels will only encourage investment if everyone in the world decides to coordinate their industrial policies and that is most unlikely.

Of the two financial approaches to making investments in renewables profitable it is clear that the approach of reducing the cost of investment loans is economically and politically more attractive than putting a price on carbon.

Ensuring Loans are Repaid and Used for Renewables

Why don’t we use this approach? The reason is that our economic system does not allow zero interest loans to be given for future investments.  Future investments are funded from savings and not from loans. The reason this is the case is that if a loan goes bad the loan can be repaid by selling another asset. Funding from savings is called equity investment and equity always costs more than loans because loan money is newly minted money while equity is existing money on which we should pay rent or interest.

To give zero interest loans we have to devise a new loan product to be used for new investments in productive assets. These new loans have to be repaid and so we need different social and financial mechanisms to ensure their repayment.

There are many ways to implement financially responsible zero interest loans. By financially responsible we mean that the loans will be repaid and the loans will be spent for the purposes for which they were given.

Zero Interest Loans have considerable value so distributing the right to have such loans is a political decision. Let us assume that we are going to allow loans to reduce the level of green house gas emissions. One fair method that would be politically acceptable would be to issue rights to loans in inverse proportion to the amount of electrical energy consumed by a person in the previous year. This would Reward people who consumed less and encourage them to remain low consumers. However, some of those people may not wish to exercise their rights and so they should be permitted to sell their rights to others who believe they can make good use of the loans.

Issuing rights to loans also helps enforce compliance of the loan conditions of repaying the loans from the earnings on investment and investing in ways to reduce greenhouse gas emissions. If loans are given regularly – say each year – then if a person was non compliant they could simply be removed from the list of citizens able to receive loans.

One mechanism to obtain zero interest loans is for the government to loan a bank a zero interest amount of new money. That is the government lends new money it is allowed to create to a bank.  The bank in turn loans the money to citizens who have the right to take out loans. The citizens then invest the money with suppliers who then use the money to purchase goods and services to build the investment asset whether it is a solar panel for a house, a share in a geothermal well or an interest paying debenture.

Citizens choose their investments from a selection given by suppliers. Suppliers must supply the likely investment return in dollars for each dollar spent and also the amount of green house gas that each dollar invested will save over the life time of the asset. The supplier will also describe and put in place ways to measure both the returns and the amount of greenhouse gases saved and these numbers will be used to check the claims of the suppliers.  These numbers will be published in the market place and if suppliers are way out in their estimates they may be banned from participating in the market place and potentially return investment money.

The profits from the investments can go back to the citizen who took out the loan and invested and it can be used to repay the loan. The agreement on repayments will determine the amount returned and the amount repaid and the repayments will be automatic when the investment makes a return.

With the scheme the government decides the distribution of loans and the amount of money to be invested. Once the system is in operation it will self perpetuate as the loan monies are repaid and can then be redistributed. The system will not increase inflation because if too many rights are issued it is the rights that will become deflated in value because few people will take up the investment opportunities if they do not exist.

The money will be spent carefully and efficiently because it is spent in a transparent market place.

The loans will have a high degree of compliance because the penalities associated with breaking the rules are much greater than the likely gain from cheating.

As we have seen this system if used for renewable energy will reduce the price of energy and increase the wealth of any nation that adopts the system. It is estimated that $1500 a year to ecah citizen for ten years will reduce any country to zero net emissions and will bring any country up to the same level of energy consumption of the highest energy consumers.

The system can be implemented almost immediately by any community that can obtain zero interest loans from a currency issuing authority which may be the country itself or some international body. There is no need for any country to delay implementation as there is no need to obtain agreement from any other group to implement the idea.

Parties that may be lose their assets because of the system can be compensated by giving them the right to zero interest loans.

In summary the system is practical, simple, easy to implement, and is paid for from future investment income.

Emergent Properties

When we construct systems that are able to evolve we are never quite sure of the resulting system properties. This is the same with Zero Interest Loans.

One likely outcome of the wide spread adoption of Zero Interest Loans is that it will become the main method of increasing the money supply and it will reduce inflation to near zero. The reason for this is that it will become financially less profitable to increase the money supply to buy existing assets compared to building a new asset. This will reduce the pressure on existing asset prices and will reduce the likelihood of wide spread asset price increases. This in turn will reduce the likelihood of the creation of unnecessary and unproductive loans. Rather than banks creating new money when they make a loan secured against an existing asset the bank is more likely to loan existing deposits.

Energy Rewards to Reduce the Level of Greenhouse Gas

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
effect.

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
conducted

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.

Summary

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.

How to build the Cotter Dam with No increase in Water Rates

The ACT government is planning to build a dam on the Cotter River to store an extra 70 gigalitres of water for use when there is little or no water in the rivers.  Over a period of 40 years we can expect the dam to fill at least twice and for at least 140 gigalitres of extra water to be sold during that period.

The ACT government can auction this water so that a person who purchases it gets the right to a kilolitre of water for the next 40 years.  That is the lots would be auctioned in 40 kilolitres lots. The government has to raise $220M and it can be expected that the price that people are willing to pay will be a minimum of $2 per kilolitre as the maximum price today is $3.60. That is the amount of water needed to be sold is likely to be less than the 140 gigalitres of extra water. These water rights can be traded independently and can be used as currency. It is likely that many building construction companies will be happy to be paid in water rather than money.

This investment would be most attractive to superannuation and pension funds who have a need to preserve their assets and to have an asset whose value keeps up with inflation. 

If the government borrows money at 7% interest rate with a repayment of 20 years then it will cost the ACT water consumers $381,700,000 in interest and repayment costs. If the water is presold then it costs the ACT water consumers and government nothing.

Funding the Broadband Network with Zero Interest Loans

The following proposal will finance the National Broadband Network, stimulate the economy in a positive way, and be of no cost to the government.

The broadband network will be funded by individuals in Australia taking out zero interest loans and investing the money from these loans in shares in the National Broadband Network. The money to repay the loans will come from earnings from the wholesale charges on broadband connections.

Assume the broadband network will cost $40 billion dollars to construct. Assume there are 20,000,000 Australians who will take out loans to purchase shares. Each loan will be $2,000. Assume there are 8,000,000 connections and assume the wholesale cost per month is $50 and of this $10 is used for administration and maintenance. That is each year there is $480 profit per connection. This is distributed to the share holders or for each $2000 in shares there will be a distribution of $192 per year. If half of this used to repay the loan then the loan will be repaid in 21 years and the loan holders will receive $86 dividend payments.

Individuals apply for the right to a loan and they may or may not take up the right. If they take up the loan they are required to repay it automatically from the dividends they receive from the NBN and they are required to connect to the NBN if it is made available to their dwelling.

A household with 4 inhabitants will receive dividend payments of $344 per year and pay $600 broadband connection fees. 

For this scheme to work the banks must be allowed to issue zero interest loans for this purpose and must ensure that the money is invested in shares and that the repayments are made from the profits of the NBN. If the loans are not repaid the banks do not have to cover the cost of the loan repayments.

With this scheme everyone wins. The population, not the government, goes into debt but the debt is repaid from the earnings. The NBN is owned by the population. The banks make fees from administering the scheme. The population that wants it will get fast broadband connections.

 

Fixing the GFC while reducing ghg

I have just listened to the last Soros lecture and he makes many good points http://www.ft.com/indepth/soros-lectures .

Soros has long argued that stable equilibrium as a model does not reflect reality and he continues to make a lot of money because policy makers act as though it does.I have also listened to a talk by Tim Jackson and read his book – Prosperity without Growth. http://www.earthscan.co.u

k/?tabid=92763

Jackson says to solve the GFC we must invest in ways to reduce the growth in consumption of finite resources while still growing the economy. He says that the current economic system is one where growth comes from consuming more finite resources and that this is unsustainable. Soros says that the global financial system is unsustainable as it has what he calls reflexive feedback in the way we invest in existing assets. What he means by reflexive is positive feedback.

There is a single solution to both these problems and it does not require any change in the existing economic system – only an addition.

The addition is to provide zero interest loans for greenhouse gas reduction investment or other investments that reverse consumption of finite resources.

This will not change the existing economic system – only favour investments in a particular area of the economy. It solves Soros reflexive problem because the loans increase the amount of productive assets rather than push up the price of existing assets. Our current system is one where it is financially cheaper to borrow money to buy existing assets than it is to build a new asset. Reverse this (with some – not all) assets – particularly where we have asset bubbles – and we would find the reflexive forces diminish and financial markets stabilise so making the stable equilibrium hypothesis better reflect reality.

I would most appreciate any comments on the following slide show. It takes 8 minutes and it shows a financially responsible way to give zero interest loans without causing excessive loans to be created and ensuring that most of the loans get repaid. It can also be constructed to be equitable and reduce the influence of vested interests (those who already possess wealth) while at the same time fairly compensating those (like the fossil fuel burners) whose asset values are destroyed.

http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

It is practical, can be quickly implemented and can be constructed so that the whole of society shares in the increase in wealth from the new investments. This should make it politically saleable.

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Zero Interest with Zero Emissions

A slidecast of this presentation is available at http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

Approximate text

This talk was first presented at the green new deal event put on by the green institute http://greeninstitute.org.au/gnd

It came after an talk by Tim Jackson who presented his book Prosperity without growth. 

In the talk I discuss one mechanism to implement Prosperity Without  Growth. 

The key to sustainability is energy sustainability. We cannot have prosperity without adequate energy and so the starting point for sustainability must be energy. If we can have abundant cheap sustainable energy we can address other issues but if we do not have energy we will not be able to achieve overall sustainability. To achieve cheap sustainable energy we must replace or substantially modify the way we generate most of our energy and that will require investment. This talk addresses how to obtain the money to invest.

First let us look at the costs of energy by various means. This diagram shows the proportion of costs to produce a kwh hour of energy using the economic system we have in place today. The green represents the cost of repayment, the red the cost of interest and the blue the running costs. The red and the green financial (or money) costs dominate the cost equation for all ways ways of generating energy.

This slide shows the actual costs in cents per kwh. Clearly unless we address the interest and repayment costs it is going to be difficult with today’s economics to get the amount of investment needed to produce enough energy.

In this slide we see the estimated costs in 2020 to produce a kwh of energy. Again the dominant costs are interests and repayments. If we do not reduce the costs of interest and repayments to make renewable energy economically competitive we must increase the cost of fossil fuel by increasing the operating costs of burning fossil fuel. We can do this by putting a price on the emissions of carbon in some way.

This slide shows how much do we need to increase the price of fossil energy to make renewables price competitive. Even for very efficient methods such as large scale geothermal or wind energy we will need to double the price of energy to make renewables price competitive. This will impose unacceptable burdens and it is highly unlikely that we can get all countries in the world to agree to such price increases.

This slide shows us how much it costs to save 1kg of CO2. The negative amount for coal shows the cost of saving 1 kg of CO2 through energy conservation. Clearly energy conservation is today the cheapest way to reduce CO2.

The message from the previous graphs is that if we could reduce the cost of finance we would make sustainable energy profitable and hence people would invest. 

To see how we can reduce the cost of finance let us examine how finance works today, then propose an alternative and show what is needed to make it work.

Let us first look at how a coal producer with and existing energy plant finances the building of a new coal plant. He goes to the bank and requests a loan. The bank decides to give him the loan and creates the money to give to Fred. It is important to realise that the request for the money comes first and then the bank creates money which the government promises to honour. The bank does not take money on deposit and give it Fred. The bank creates new money that it is going to give to Fred if he promises to pay the money back at some time in the future. To make sure Fred pays back the money the bank requires a mortgage on Fred’s existing assets. That is Fred promises to give his existing power plant to the bank if he does not pay back the loan. Fred takes the money and builds the power plant. He promises to also pay interest and typically that might be 7% interest and repaid within a period of time. The new plant either succeeds or it fails. If it succeeds the loan is paid back and the bank destroys the same amount of money it previously created. If the plant fails then the bank is obliged to seize the old power plant sell it and use the money to pay back the loan and destroy the money.

The purpose of the existing process is ensure that creating money through loans and the destroying it when it is repaid will limit the total amount of money in the system and hence reduce the risk of inflation.

Let us know look at the case of someone who wishes to build a new asset but does not have any existing asset. Fred wants to build a solar thermal plant. Currently he has no asset and so he cannot go to the bank to get a loan as he has nothing to mortgage. Instead he goes to an investor. The Investor has saved some money and gives it to Fred. The investor expects a high rate of return on his money – typically a minimum of 20%. Fred builds his power plant and in order to receive a high rate of return he must charge a high price for his output. The new plant succeeds or it doesn’t. In one case Fred and Investor have an asset that will continue to generate money for them. In the other case they lose their money or part thereof. The important point is that no money was created or destroyed in this process.

Using equity investment rather than loan investment means that the cost of finance is high because an investor can simply leave the money in the bank with near zero risk and still get a return of interest. There is also a shortage of money for equity investment because it must come from savings or from people prepared to risk other assets to create a loan to then invest. If there is a shortage then the price rises.

Let us now look at another scenario. In this case we are going to give zero interest loans and require repayments from the earnings. Fred wants to build a Solar Thermal Power Plant. He goes to the bank that creates the money and gives it to him. The government guarantees the money so the bank need not charge any interest because it does not have to pay interest on money to cover the loan because the government is guaranteeing the money. Fred now builds the power plant, trades and either the plant succeeds or fails. If it succeeds it makes a profit and the profit is used to repay the loan. If it does not succeed then loan is not repaid and Fred loses any deposit he may have made. The money supply has also increased.

The risk to the government (or really to the community) is that if too many loans fail it will increase the money supply to such an extent that it causes inflation.

To make zero interest loans work we have to ensure compliance and we have to make sure we do not create too much money. We first ensure compliance by the government deciding how much money to create and the areas of investment where the money will be invested. That is, the government limits the overall risk.

A key question is to whom to give the right to take out zero interest loans. It could keep the right to itself – which it does in times of war – or it could give it to people who already have assets or it could give it to the population. Giving it to the whole population on an equal basis is fair and democratic and is likely to be a politically acceptable solution. Let us assume that this is done. Each person in the population gets a relatively small amount of rights to take up a zero interest loan. People can trade their rights if they are risk averse and do not want to invest themselves. 

Loans are made with a 10% deposit that is paid back when the loan is repaid. When the loan is given then there is an agreement on how the money will be repaid from the earnings on the investment. 

Finally if the bank, plant owner or investor breaks the rules of investment then they are banned from further participation and they have to repay all outstanding loans.

Low cost finance will lead to low cost renewable energy. It is estimated that we can get to zero emissions by 2020 with $1,500 of loans available per person per year.

Please contact me if you are interested in more information or would like to implement zero interest loans.

Patent Protection of Genes Unnecessary

In a recent LateLine discussion Jim Greenwood, president and CEO of the Biotechnology Industry Organisation put out a challenge to Australians to come up with a better way of financing research and development in gene research than the approach using patents. The following is a better way.

Patents are used to increase the cost of the commercial products arising from gene research and development.  This increase in cost is used to pay the interest and repay loans created to fund the investment research.

The other way of funding gene research and development is to give R&D institutions interest free loans to conduct the research and development and to repay the loans from any profits that might arise from products created from the R&D. That is, instead of increasing the cost of the final product to pay for the investment we reduce the financial cost of the investment and repay the zero interest loans from the profits. This will result in an explosion of research and development in this and other related technologies.

To see more on this idea visit this article on how to fund investment in ways to reduce greenhouse gas emissions. Another article that discusses the details of one way to implement and share the benefits from this approach can be found at this article on the democratisation of government spending.  There are many other variations on the same idea at http://cscoxk.wordpress.com on ways to fund investment in public infrastructure but the central idea is the same. 

 

The idea is an old one and was used by the British Colonies in America to fund the development of the USA once the USA broke away from Britain. It was used by the Japanese to fund their post war expansion. It appeared to start in the Renaissance Italian States but they, and other states that followed, tended to use it to fund wars and so the approach fell into disrepute. Perhaps the other reason the ideas have not become the dominant method of organising finances is that the current system concentrates wealth with a few and they tend to work to hold on to their economic advantage.

The same ideas are at the heart of the work of the Kelso Institute. Download the two books The Capitalist Manifesto and The New Capitalists.

 

Creative Finance to build the Cotter Dam

ACT Residents are being asked to pay extra money for water to pay to build the Cotter Dam. The following is a financing arrangement that will build the dam, cost the government and Actew nothing, cost the Federal government nothing, give the residents of Canberra ownership and ongoing income from the dam and be very attractive to the banks.

Each resident served by the dam can be given the right to take out a zero interest loan with special conditions from any bank that wishes to offer the loans. The special conditions on the loan are that the money from the loan must purchase debentures from Actew. The money from the loans does not earn any interest. The loans must be paid back from income from the debentures which will come from higher water prices. Because the banks do not give interest on the money and because the loans must be spent purchasing Actew debentures the risk of the loans not being paid back is low and so banks do not have to take out any loans themselves to cover the assets nor do they have to keep a fraction of the loan value as liquid reserves because there will be no claim on the loan. If a person sells their debenture they must immediately repay their loan in full.

Banks can charge appropriate transaction fees. Actew gets money to build the dam. There is no cost to the government and residents end up owning the dam and once the loan is repaid residents will keep the income from the debentures.

Published as a Letter to the Editor CT 9/9/9

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