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.
A Blog by Kevin Cox 