In part 1 of this series, Sgouris Sgouridis has outlined how much of the currently produced energy should be set aside according to the "Sower's strategy" in order to obtain a smooth transition from a fossil based economy to a renewable one. In this post, he discusses how this transition could be obtained in practice, taking into account the characteristics of the financial system and how it should be reformed in terms of an energy based currency system.
Guiding the Energy Transition (Part 2):
Bringing the Financial System Back to (physical) Reality: a Case for
an Energy Currency
By Sgouris Sgouridis (part 1)
Paying the costs of
the sustainable energy transition (SET) introduced in Part 1 (link)
is necessary, but will not be sufficient to overcome the significant
coordination problems involved - either on a regional or a global
scale. There are multiple factors at play. Cognitive
psychology has repeatedly shown the severe discounting of the future
that most (westernized) humans exhibit. As described by Mancur Olson, key
regulatory processes are captured by lobby groups and elections are influenced by
moneyed interests through media control. There is significant inertia in the habitual and systemic
components of everyday behavior - even if we wanted to change our
behavior, it requires a rebellious spirit to go against ingrained norms
and without the right infrastructure some choices may be impossible
(e.g. walkability and public transport in US suburbs). But these
factors are in some ways a reflection of the fundamental economic
reality - a root obstacle lies in the disconnect between financial
and physical economics.
The current financialized economy is the
result of a reinforcing process in which wealth seems to become
increasingly abstract and with nominal values exceeding the
productive capacity of the planet. To a large extent, this is another
artifact of our ability to harness energy at will. Before the
industrial revolution, societies tended to grow at a much slower pace
and when they did enter periods of “irrational exuberance” and
debt overextension jubilees, revolutions, migration, or wars managed
the debt write-off. This past three-hundred years, though, have
probably seen the only time in history where continued economic
growth has allowed most of the debt issued to be repaid. It should be
clear by now, that the ability to expand the economy at a rate
sufficient to repay debt (collectively) is only made possible by the
ability to expand the energy source to fuel the economic growth. As
fossil fuels peak, we reenter the dynamics of an economy of flows and
an alternative path to financialization will be needed.
In Part 1 I focused on the physical
requirements for completing a SET (sustainable energy transition). In this second part, I revisit Principle
V which I described in the first. The principle states that "Future
consumption commitment (i.e. debt) is coupled to and limited by
future energy availability". The question is what could be the economic repercussions of the transition and whether it is possible to avoid an incapacitating economic collapse. More importantly, how it will be possible to obtain the continuity of investment necessary to complete a
SET. Based on the fifth principle, we can see that in a post-peak economy the ability
to extend debt (that in aggregate could reasonably be expected to be
repaid) would depend on the future energy availability and the
rate at which energy use becomes more efficient. It is possible
therefore to write this equation for our closed Earthship economy for
post-peak as:
This equation ties the amount that new debt
a society can be expected to issue to the critical renewable
energy investment ratio (epsilon). If the debt to GWP ratio remains
below this bound, it would reduce the chances of a financial crisis and
of economic depression in the future, caused by unpayable debt.
Combining the implications of the normative
SET principles (see part 1) and their resulting equations, it
becomes clear that in order to set in motion an adequate transition, we need
to control both the financial system and rapidly increase the
renewable energy investment ratio. An ideal option would harness the
two in a positively reinforcing dynamic. Realizing that debt is, by
far, the predominant mechanism for increasing the money supply,
then exploring the idea of an energy currency system becomes a
logical inference. There are many flavors an energy currency system
could take and they are presented in detail in the recent Frontiers
in Energy Policy article.
I distinguish two basic types: a system of energy credits, and one
where debt issuance (and hence monetary supply) is in part or in its
entirety adjusted based on the energy/debt equation above.
The first type (and the one more likely to
be implemented earlier) can be bottom-up. Local and regional
complementary currencies based on energy can be fairly easily
introduced to support local economies that have specific energy
limits. As described also in Sgouridis
and Kennedy 2009, energy credits are issued in advance (similar
to prepaid phone credits) in a way that they represent the available
(or targeted) energy supply for the issuance period. As citizens and
companies consume energy services they withdraw from their allotment.
In order to avoid either hoarding or imbalanced front-heavy
consumption, the credits should be issued at fairly short intervals
(daily/weekly) and expire thereafter. An asymmetric market for those
credits can support both of these goals and adjust demand to the
actual energy supply. This market operates by allowing users to sell
their credits to the market if they find the spot price attractive
and are willing to adjust their consumption. The spot price is
generated algorithmically by comparing the actual cumulative energy
curve to the anticipated cumulative curve and increasing (reducing)
the price if the actual demand exceeds (is lower than) the
anticipated one in an attempt to correct the divergence. A key part
of the system is the existence of energy futures (which could act as
yield bearing, maturing investments) when an investor decides to
invest in a future renewable energy generation. Energy futures would
eventually mature and provide as yield a certain amount of normal
energy credits.
It is possible that if a number of such
energy credit systems emerge, then the futures could act as a more
secure substitute to fiat currencies presenting a bottom-up path to
a full energy currency system.
Alternatively, a top-down path for energy
currency institutionalization is also possible if the political will
to effectively control monetary supply materializes - perhaps as a
result of an ongoing crisis. In theory, there are several ways to
control debt issuance by governments, but none that is consistently
effective (even in a controlled economy like China’s) as
bank-issued debt tends to be either more (fueling bubbles) or less
(strangling the productive economy) than desired. This problem was
noticed in the Great Depression, and a proposal known as the Chicago
Plan was put forward by a group of economists led by Irving Fisher.
The idea that bank-issued debt should be centrally controlled and
fully regulated if it does not utilize investment savings (i.e.
deferred consumption) is regaining ground led by IMF economist
Michael
Kumhoff.
The question though of how much debt to
extend remains unclear - what should be the desired level of debt
that would allow an economy the right growth? My thesis is that in a
post-peak fossil fuel society, it should be governed exactly by the
energy/debt equation. If that becomes the case, financial capital
suddenly has a clear case to invest in renewable energy generation, so
that the amount of extendable credit available increases (the only
way of exercising leverage of capital in the financial markets under
the Chicago Plan). It should be fairly trivial to tie some
preferential terms and prioritize the investors active in the
physical energy markets for access to debt to make this a virtuous
cycle. Of course, it might be possible that the energy market could
overheat and exceed the desired levels of investment, but this is
still controllable by the central bank authority that could preset
maximum limits.
In summary, while the targets of a carbon
budget and the perils of a fossil energy peak have been repeatedly
discussed, a coherent, systematic look at the energy economy system
allowed us to relate the rate at which we need to invest energy in
building the renewable energy infrastructure with social,
environmental and economic requirements and constraints. It is clear
that the carbon constraints are more binding than the depletion rates, but in either case, a significant acceleration in the renewable energy infrastructure buildup is necessary if we are to avoid the energy
trap. Our debt-based financial system still acts as an additional
mask of the depletion of easily accessible fossil fuels and if we
maintain it intact in the future, it will act as an obstacle in the
efforts to reversing the decline in energy availability. A preview of
how the trap may operate can be seen today in the countries of the
European South. Once the decline in energy availability cannot be
masked by debt, infrastructure investment will freeze and the focus
shifts to addressing more pressing needs of day to day survival. An
energy currency system provides an option worthy of further
investigation to negate this vicious cycle and couple the financial
system to the realities of an economy based on renewable energy
flows. Of course, there may be other limiting factors outside the
energy sphere (e.g. pollution) but these would still need energy to
be addressed.
(*) Sgouris Sgouridis is Associate Professor at the Masdar Institute of Science and Technology (UAE). His research interests focus on understanding sustainable energy transitions using socio-technical systems modeling. He has been working on the energy currency concept, electric vehicle adoption, sustainable aviation, and local and global sustainable energy transitions. He initiated the development of the Sustainable Bioenergy Research Consortium at MI and was a member of the Zayed Future Energy Prize review committee for the past four years. He holds a PhD in Engineering Systems (MIT-2007), MSc in Technology and Policy and MSc in Transportation (MIT-2005) and a BS (Hons.) in Civil & Env. Engineering (1999-Aristotle University).
