Carbon in the Monetary Unit: Alternatives to Fiat Currency

Exclusive to STR

March 30, 2009

In an earlier piece, 'An Energy and Carbon Monetary Unit,' I wondered if there might be a happy medium (so to speak) between the bubbly excesses of fiat currency and a perhaps distant but disturbing problem of interest payments under a gold standard.

Energy money can be considered on its own, but I'd like to introduce a 'carbon' credit sub-plot, on the theory that an analysis of energy should be undertaken with all of its output, and tied to its negative externality so that true costs percolate into the light. A related piece of theory is that over a long enough time frame we benefit if all stakeholders at every scale get to give their 'answer' to our economic questions.

My fantasy is that if we could throw the issue into the monetary unit and force a cost judgment on everything, from mini wind turbines hand-knitted of hemp fiber at vegan communes, to whale blubber charcoal cured in spent reactor fuel baths by North Korean child labor, then we could all shut up for just five minutes (except for me; I'd spend ten of my five minutes on a request for exemption).

As an example of energy-pollution monetary interaction, if we determined that wind energy was as friendly as anything could be, then a wind energy unit would require the lowest additive pollution credit to bring it up to one monetary unit-- one 'energy-carbon dollar.'

Say you're a farmer (you don't have to say it out loud if you're near someone who'll think it's weird). You've built a wind turbine.

Perhaps (since you're a farmer), the government will let you use your wind energy on your farm without buying a carbon credit; perhaps (since they're the government) not. But if you want to convert your wind energy into money, then you'll send it through the grid to your bank where they store it in their accumulators and you get, say $.90 for each $1.03 of energy--$.03 in the bank's pocket, and it's matched up with $.10 of pollution credit hypothetically required for clean wind, to create an energy-carbon dollar.

If you want, your energy-carbon dollar thus created could sit and wait for you in the bank as a demand deposit. As is normal for a non-fiat, non-fractional reserve currency, you wouldn't get interest (and don't forget the 3% you just got charged for the bank's administration, risk and loss). Your money, by law (at last rational), would not be loaned out by the bank, since it's waiting there for you to demand it.

If you prefer, you could ask the bank to loan out your energy money as a term loan. Then you would get paid interest, with a portion to the bank as intermediary, but you'd no longer have access to your money until the end of the term. Only one person, the borrower, would be using the saved money until it's returned to you, upon which only one person, you, would then have access. (No credit money has been created 'from thin air,' and no credit bubble can occur-- Austrian School money and credit theory with energy and pollution credits jammed into that mold.)

There is money being created in the example, however the energy piece is created on the productive side of the economy, not the made up financial engineering side, and this energy piece is created from real savings, with a real practical use in future growth, or in a future crisis.

The pollution credit piece is not real savings, and is indeed forged from the fires of Mordor (as some readers may have long ago stopped screaming to their computer screens about out of exhaustion and stress laryngitis). However, I'd like to invite you to please take a sip of water and look on the bright side. The government-created pollution credit part is not real savings, but is 'real taxation' for real use of resources, not credit from who knows what, when or who. Also this money creation can't occur unless it's directly and objectively demanded by the market side of the equation.

There would be no Federal Reserve jamming as much credit into the pipe as they can based on a formula of: (Politics) ' (What We Think We Can't Possibly Get Away With) = (Money Supply).

Back to Mordor for a moment.

I've seen suggestions that government should issue currency with a deliberate predetermined decay (over and above inflationary decay), so that people can't 'hoard' savings. In the U.S. this seems like a solution to the world's biggest non-problem, at least up until now. How this glib manipulation can be viewed as anything other than disgusting--folks who've gamed their way into a nice pension determined that the peasants should never find a way to get any rest of their own--that's hard to fathom.

However, a practical reason for decay that economic actors can attempt to mitigate seems both qualitatively and quantitatively different--the wear to a gold coin, for example, or in this case, costs and imperfections to storage. A key question is how cheap and how good energy storage can become, but that seems like a question worth working on anyway.

Would pollution credit, as essentially a tax embedded in money, make industry uncompetitive and drive out capital? That depends. As a replacement for income tax, it could be the opposite. (Also as a replacement for creating credit-fueled financial whirlwinds and calling them GDP growth.)

Can we get there from here?

Well. (And this may have a familiar upside-down ring to it, if you read Part I of this piece.) I tend to be a pessimist. I believe that if you always listen to the yeasayers, you end up doing stunningly stupid stuff, like building your society's economy on the premise that credit can create wealth, as long as the credit is created faster than analysis can catch up (sort of a perpetual optimism machine).

The positive part of the pessimist's credo is that at rock bottom, there may be some upside. There wasn't any reason to expect that a king would accept the Magna Carta, but with friendly assistance from societal breakdown, a desperate king did.

Monetary reform doesn't get much traction--it takes power away from people who'd prefer not to give it up. The energy in the monetary unit would tend to take some power; the carbon piece might give some back. I think that what's given back wouldn't be as much as the 'political class' might think. Maybe a concept like carbon money could jump in to roll some political logs on the way to hard (or at least harder) money.