The work leading up to their coming White Paper, aiming to demonstrate how fiscal instruments are integral to Environmental Fiscal Reform, showed that it is theoretically possible to create a stabilized economy that performs to requirements.
A safe house for humanity, with a fiscal system that supports it, would contain monetary incentives and disincentives. Human needs should be assured, and the system should provide each individual with protection should they come close to their needs not being met. It should also encourage sharing and generosity.
THIS ARTICLE WAS FIRST PUBLISHED ON THE TSSEF.SE WEBSITE
In the run-up to the climate talks in Paris, November 2015, the world economy seems to have hit a predicament: restricting fossil fuel burning at a time when austerity measures are biting hard might lower the already less-than-acceptable standards of the least advantaged. Waiting with restrictions on the other hand will risk climate system disruption –and negative effects on the economy – even further. What courses of action are reasonable in this situation? How does the societal system need to change? Can the problem be part of the solution?
Environmental Fiscal Reform (EFR) needs to happen – that is, economic policy is needed to underpin the rapid change and redistribution needed. This article breaks these challenges down, offering a broad outline of the direction of changes that need to happen over the next 35 years using Sweden as an example. We explain where (EFR) can contribute, and what economic policy makers should aim for so the appeals from the scientists can be translated into a sustainable and fair economic reality.
Energy transition: an introduction to wedges
One aid to visualizing the energy transition challenge is as a set of wedges that frame the changes ahead. Given that fossil fuel intensity in the economy must be reduced radically, we can assume this will have wide-ranging effects on other aspects of the economy and energy provision in particular, hence several different types of “wedges”. Capturing the extent of this transition can be a useful first step in framing economic, particularly environmental fiscal, policy.
The wedge approach to energy intensity reduction in the economy was pioneered by Robert Hirsch in the Hirsch Report (Hirsch, 2008). The diagram above illustrates the principle: the demand for fossil fuel is likely to increase, but the extraction shortfall means that demand will not be met creating an unfilled gap, the shape of a wedge.
This “wedge” can be mitigated according to Hirsch, using a range of options for replacing fossil energy sources and reducing demand. The various mitigation options can be presented as separate wedges.
The Swedish Sustainable Economy Foundation maintains that these wedges cannot be realized without adaptations of the economic system. To understand the concepts we offer the case of Sweden as a worked example.
Sweden as an example
According to our analysis for Sweden, there are 9 “wedges” to consider. The diagram below illustrates the scenario where energy demand reduces 50% over 35 years, fossil and nuclear energy are phased out completely and alternative energy sources are introduced or increased.
The wedges are a synthesis of opinions and figures taken from a wide variety of publicly available sources but are offered here just as a worked example and do not represent any government policy as a whole or even a comprehensive proposal from the Foundation. This approach can be seen as a working start.
A 50% decrease in energy intensity
Our starting point is that at present the Swedish economy, from the point of view of being capable of handling limitations in oil supply, has developed an over-dependency on oil. This dependency is understandable as oil-based liquid fuels are a highly energy dense and easily transportable energy source. No current technologies can replace this energy source scaling up in the time available or using renewable resources available. Some calculations assume that within the time-frame it will be possible to keep the same energy intensity. The Foundation however takes as its starting assumption that a 50% reduction is reasonable over 35 years.
In terms of living standards, that would put Sweden on a level where it was in the 50-60s.
New technology/efficiency increases
As a first guess, taking Sweden as an example, we envisage that it will be possible to reduce demand with technological fixes by 25% over the 35 years. Import to note is that increasing efficiency – of engines or machines – normally involves them becoming more popular and overall energy consumption increasing.
Refrigerators, for example, are more efficient, but people nowadays usually buy larger refrigerators so the total energy spent on refrigeration is more, despite the efficiency gains.
With the example of Sweden we should be reminded that the cold climate demands energy to heat homes, crucial during the winter, as well as the energy needed in food preservation and conservation. This is where the emphasis on home heating – via biomass, solar collectors and heat pumps – comes in the following analysis.
Another important lesson from this worked example is that the losses in energy – from that produced to that used are in the order of magnitude of almost 200 TWh lost in a production of 580TWh. The bulk of these losses come from nuclear power (108TWh) so abandoning nuclear power will reduce the percentage of energy lost considerably.
In this case, economic incentives and barriers need to be in place to ensure that efficiency gains are not used to increase energy consumption. The final section of this article discusses policy instruments that might achieve this.
25% of today’s demand reduction could come from changing behavior, using existing infrastructure. It is reasonable to assume this can be done over 35 years as the potential is there. For example: by sharing cars for lifts to work, the overall traffic in the morning commute could reduce by 50% if everyone shared. Recent statistics show, too, that up to 50% of food produced is wasted.
Heat in pumps extract heat from expired air, the surrounding air or from the heat in the ground. For every unit of electricity used they gain about 8 units of heat. Increase in heat pump use would therefore mean a rise in the use of electricity for this purpose and require more electricity produced by solar, wind, biomass or hydro, or equivalent savings elsewhere. In this worked example we envisage heat pump use increasing by about 400%.
Biomass captures the energy from the sun and is a good potential energy source. Biomass sources include many forms of waste, firewood and biogas – the latter can produce electricity as well as being used for heating and as a liquid fuel replacement. Some buses already run on biogas – we envisage a rapid expansion over the 35 year period by about 25%.
Windpower produces mainly electricity, (some proponents suggest that the rotating blades can be attached to paddles via gears and the friction of the turning paddles can produce hot water). Hoping that wind technology can develop rapidly, our worked example calls for an increase of 400% in wind power.
In the Swedish scenario it is generally accepted that the large hydropower installations that regulate most of the large rivers in Sweden should not be extended. The installed base of hydropower is therefore expected to grow only slightly from smaller installation possibilities.
Unexpectedly for some, solar power does not show up in the graphs of Swedish energy mix as the present installed base is a small percentage of the total. It is however an important source of electricity and heated water and expected to grow over a thousand percent.
Sweden decided in a referendum to phase out nuclear power, so an initial assumption is a gradual phase out over the 35 year period.
Non-renewables: fossil fuels
Sweden currently produces about 206 TWh from fossil fuels, about 110 TWh goes into the transport system. It might be reasonable to assume that the fleet of fossil-fueled vehicles could be retired, replaced or converted to renewable fuels within the 35 year period.
Reflections on the plan
Requirements on rapid expansion of smallest technologies for buildings
It is remarkable at first sight that solar power, photo-voltaic in particular, shows up as being so small it is almost counted as zero in the overall mix. In 2014, solar accounted for 0.06% of total electricity production.
Even though solar shows up as this small fraction in the overall energy mix, there is potential for a panel to be installed on virtually every roof. The technology is available now, and is becoming better and cheaper.
So although the percentage of the mix is small now, the percentage of solar electricity and solar heat for each building is potentially large.
In other words, taken on a house for house or building for building basis, it is reasonable to assume that today’s 85% reliance on non-renewables can drop rapidly during the time period under consideration.
Year on year change for each wedge
Although the overall challenge might seem insurmountable, it is more encouraging to see the year on year changes required amounting to less than 25% year on year.
The concept of economic stabilization with digital technology
Technology has come a long way, and might offer solutions to creating an economy that performs to requirements. For example, transport vehicles today are based on technology that is over 100 years old. However, they are much safer, respond better to driver commands, are more efficient and environmentally safer today even though the basic technology – including that of the internal combustion engine –is the same.
These developments in the vehicle industry point the way to what might be possible with the economy – to use modern information technology to ensure the economy performs to requirements.
Digital control plays a large part in this development. Today, vehicles are equipped with digital control devices that monitor vehicle performance and adapt it according to driver input. Apart from the obvious controls like speed control, this control layer keeps the engine running smoothly and efficiently, it ensures that the breaks do not lock to cause skids, and even in a bend in the road adjusts the relative speed of the outside wheels to the inside wheels thus increasing traction.
Dividend-bearing, flexible pollutant surcharges
A dividend- bearing pollutant fee mechanism, also known as flexible pollutant fees has been proposed by many economic policy experts, including Anders Höglund of the Swedish Sustainable Economy Foundation.
The principle of the fee mechanism is a surcharge added to the fees levied when a potential pollutant is introduced to the economy, for example via extraction, import or manufacture.
The fee starts off low, and is raised depending on how society performs to abate the pollution arising from the use of the pollutant.
At the same time, money from the levied is fee is paid back to taxpayers to ensure that spending power, and thereby economic robustness, is unaffected by the levy.
As the fees levied are passed on to consumers, prices of pollutant-containing products rise in comparison to non-pollutant products and services. Consumers will be still able to choose to buy the more expensive product but with a good conscience that they are compensating others for the pollution from the consumption. Otherwise, non-pollutant bearing products become comparatively cheaper providing the economic incentive for society to invest in non-polluting alternatives.
Similar to base lending rates, it is envisaged a government body is formed to regularly raise the surcharge levy as needed.
Benefits of flexible fees
As the mechanism employs modern information technology it ensures that the information acted upon is up to date and relevant. All actors benefit in the long run from a sustainable, robust and well-performing economy.
The redistribution mechanism will in practice mean an increase in economic security for the poorest citizens: this is in contrast to other approaches which will reduce the poor’s spending power.
By making pollutant import more expensive, the mechanism encourages green consumption and green jobs. It also encourages new investment in recycling technology, ushering in the circular economy. It is preferable that citizens spend the money they have, rather than invest it in assets like houses and shares, as every penny consumed creates more work and thereby more jobs.
Levying a fee on activities that pollute, and paying it back to tax payers ensures the economy is stable, advantages the poor, and sends a strong signal to the investment community on where their money should go.
Applying flexible fees to the energy wedges
Returning to the initial diagram of the energy wedges for Sweden, our worked example could include the following:
Surcharges on import of fossil fuels and on nuclear fuels, aimed to drive a 35 year phase out.
A surcharge on all products levied according to fossil-fuel consumption in the production and distribution to national borders.
An import surcharge should be fairly simple to implement. Fossil fuel performance can be monitored by the government body, collecting data such as:
Efficiency of transport system
Uptake of alternatives
Investment in fossil-fueled infrastructure
Economic performance of transport system actors
Transport price development
The wedge approach, then, can be a useful tool for sorting out national energy strategies at high level. The flexible fee mechanism can be employed to ensure consumers continue to purchase in general, thus preserving employment, but finding environmental solutions cheaper they drive a green economy.
I had the honour of addressing the Baltic Sea Action group on the opportunities to drive the circular economy using fiscal instruments.
The main thread of my presentation was the work done with the Swedish Sustainable Economy Foundation on the nutrients phosphorus and nitrogen from field to plate to field and the framework of the fiscal and economic realities affecting decisions at each step.
If you take a step back to see the whole chain, you realise that no-one wants to be counter-sustainable, but from each person’s viewpoint they must make economic decisions for the domain they are responsible for.
By going as far up the supply chain as possible, it is possible to add dividend-bearing surcharges to existing levies that stimulate a circular economy.
BERLIN 5 MARCH 2015: As an extra attraction at the 2nd European Sustainable Phosphorus Conference (ESPC2), The Swedish Sustainable Economy Foundation (TSSEF.SE) presented a shortened version of its simulation of divided-bearing pollutant fee mechanism. The simulation, which is played as a business game scenario, pits a government charged with reducing emissions of phosphorus against food producers and property owners who are charged with following regulations and keeping profits up.
The aim of the simulation is to bring participants up close to the myriad of factors – from technical and legal to emotional – surrounding putting a price on pollution. The simulation is aimed at giving participants an idea of how Environmental Fiscal Reform (EFR) works. The simulation highlights the dividend-bearing pollutant mechanism created by TSSEF. Basically a surcharge is levied as high up in the supply chain as possible on potential pollutants. (Pollutants are also useful substances, just in the wrong form and the wrong place.) Essential to understanding the levy is that it is paid back to taxpayers – to ensure that consumers retain spending power. Download the poster here.Continue reading “Dividend-bearing pollutant fees in simulation at European Phosphorus Platform”
Professor Werner calls on Universities to look more into the role of local banks and the role of banks in general in the economy.
In this speech from MOTALA in Sweden Professor Werner explains the problem of large banks only investing in buying and selling assets, instead of investing in the local community in productive projects that create jobs.
An article newly published in the New Statesman points out something that is clear to economists: a national economy is not the same as a household economy. Politicians of all persuasions seem to be getting that badly wrong.
Politicians can cause problems by inferring that the nation must pay its debts like any well-run household because it just doesn’t work like that. Nations, unlike households, have a money-printing machine in the basement.
The article cites and incident of British Prime Minister David Cameron trying to use the “handbag” routine:
In 2011, Cameron had to hastily rewrite a speech stating that “the only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills” after economists pointed out that this would massively exacerbate a recession fuelled by lack of demand.
The idea that a nation’s books must balance is counter-intuitive. Yet when it comes to the environmental books, the need to have a healthy flow of nutrients in the economy without degrading land and depleting resources, this seems to be accepted as some kind of necessary evil.
It is as if the Prime Minister want the money system to have its books balanced whilst the environment (and poverty) is a tool to achieve that .
The opposite is the ideal: balancing the environmental and social books, and the money system is one tool to ensure that. If the money books don’t balance so what? They aren’t even meant to. You cannot say the same for nature.
Complementary currencies like the Bristol Pound act as vouchers for national currency. You swap one Bristol Pound for a Bank of England pound at a 1:1 or 1:0,9 rate. The benefit of a currency like that is that it encourages money to stay in the local economy (jobs with it). The Bristol Pound is valid only locally.
The question is, can complementary currencies take a next step, towards keeping money locally AND stimulating the green economy – an economy where nutrients recycle instead of being brought from outside (entailing a large expenditure of fossil fuel) and an economy where wind, biomass and sun provide the energy.
A recent updated version of a report from Stephen Hinton Consulting demonstrates one way that might be achieved.
The vouchers are not swapped for national currency but for sorted biomass, and for promises to sequester carbon in the soil.
Learn more about this proposal in the white paper.
Let us start by agreeing that the fossil carbon economy presents some tricky issues: much of what we see around us, and the standard of living we enjoy, comes to us thanks to an economy driven by energy and chemicals extracted from fossil fuels. The best jobs are thanks to them and our pensions are invested in them; these largest companies in the world rely on fossil energy or are suppliers to those industries. That is hard to just give up, especially when no alternatives as agreeable are in sight. Continue reading “OPINION: The overwhelming case for tax on carbon and climate dividend”
As a Brit living in a country that drives on the other side, I still have a moment of hesitation crossing the road; looking both ways, both sides. I was about to cross the road yesterday to go to a conference on banking, and as I stopped the thought crossed my mind that maybe economists in the mainstream are so used to one way of doing things that they are not looking in the right direction either. I couldn’t shake the feeling something has been missing. Why have the warnings about climate change not changed anything? How are things different now that the IPCC has put its foot down and stated clearly that we need to exit fossil fuel burning and transition to clean, renewable energy? Maybe low inflation is not the answer, but HIGH inflation? Continue reading “Economists: Make sure to look in the right direction”