James Quilligan on Cap and Rent for Climate Change

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* Article: Interest Rates and Climate Change: Realigning our Incentives through the Power of the Commons. By James Bernard Quilligan. Kosmos Journal, Winter 2010.

URL = http://www.kosmosjournal.org/article/interest-rates-and-climate-change-realigning-our-incentives-through-the-power-of-the-commons/

Summary

According to James Quilligan in a must-read essay in the Fall/Winter 2010 issue of Kosmos Journal, neither prices nor taxes can adequately protect vital long-term common goods. The essay is vital reading and needs to be read in full, but here are some key passages below.

Excerpts:

Part 1: The Problem

Many local communities collaborate in sharing the burden of resource protection. Whether their commons are traditional (rivers, forests, indigenous culture) or emerging (energy, intellectual property, internet), people are successfully managing these common resources. But the failure of the 2009 Intergovernmental Panel on Climate Change (IPCC) discussions underscores the need for a global framework that allocates the use of the atmosphere and introduces incentives necessary to sustain our natural life support systems. In searching for answers, society is trapped in a false dichotomy: we believe that only markets and governments are capable of providing solutions for climate change, even though these institutions were never designed to internalize the costs of negative externalities like carbon emissions.

There is another way to solve collective problems of this scale and jurisdiction. The emerging framework of the commons brings the monoculture of the Market State— the modern economic and governmental superstructure—into sharp focus and provides the analytical tools and predictive power to penetrate the deep dichotomies of its operations and policies. The commons illustrate, for example, how the major policy responses to global heating—cap and trade (via the private sector) and carbon taxes (via the public sector)— are more about the ideological debate on how much government regulation should be permitted in the market economy than about climate change itself. The commons reveal that this supposed rivalry between market and state policies, which dominates our politics and news headlines, is merely a procedural issue, diverting attention away from the essential crisis of our shared atmosphere. Both cap and trade and carbon tax are deeply flawed because they fail to comprehend the very thing they are trying to address—the essential value of the sky to the people of Earth.

These policy proposals (or some mixture of them) are presented as the only options. But from a commons perspective, the narrowing of climate policy to tradable permits and taxes presents us with false choices, reflecting a profound dichotomy in the Market State: an epistemological confusion between price and value. Carbon trading and taxation both adhere to the behaviorist/structuralist principle that truth can be found only in people’s language and behavior—not through their mental capacities or intersubjectivity.

Both assume that the only way the world economy can integrate lower carbon emissions into market calculations is by punishing the bad behavior of emitting greenhouse gases into the atmosphere, and rewarding the good behavior of reducing emissions and conserving energy. Either way, through trading or taxing, behaviorism would become the basis of a new policy framework created exclusively to reduce carbon emissions, as though CO2 were Earth’s most significant economic resource.

We must reexamine the claim that incorporating higher prices for CO2 emissions into our activities is the only way to change human behavior. Price may be a proximate cause of climate change, but it is not the root cause. Price pertains only to the economy—not to the greater flow of natural resources from the environment, through the economy, and back to the environment as waste. The price system cannot express the true risks and costs of extracting and burning fossil fuels because it does not reflect the collective value of our finite biophysical system. This is why global heating will force the entire economic structure to transform. Without a universal agreement on emissions stabilization based on an integrated understanding of people’s needs for a system of value in harmony with the biosphere, the Market State will continue to generate ecologically and socially distorting subsidies and debt-based financing, denying the difference between objective prices in the marketplace and the subjective value (at least potentially) expressed through our currencies. The political refusal to differentiate price from value—the legacy of behaviorism, structuralism and linguistic determinism—is creating an institutional and policy crisis in the Market State. We know that market failure—the inability to absorb the indirect costs of goods and services, value ecological services, and maintain sustainable-yield thresholds— has already caused the breakdown of the economy’s natural support systems. Why then should we expect the market to solve the very problems it created without restructuring the economy itself?

The precept time is money has led society to speed up the physical flows of production, income and consumption of commodities that deplete resources and destroy the commons. It has also caused the Market State to slow policy efforts to cap its stock of wealth, resulting in the underproduction and under-consumption of commodities that conserve resources and protect the commons. When social progress and life are valued in increments of linear time and people’s lifestyles shift into a faster rhythm, it’s easy to forget how the greater ecological system of Earth, of which the economic system is simply a part, renews itself at a much slower pace than interest rates. So, in terms of green financing, it is not only the carbon price that is problematic: the financial and monetary mechanism of interest compounding through time will not support a self-renewing atmosphere. Conversely, the carbon bubble is also a banking bubble: state capitalism will not sustain its monetary reserve value by continually multiplying the debt of a planet whose biological, chemical and physical resources are constantly being withdrawn. The compulsion for endless economic growth is smothering this planet. By continually inflating financial assets through the expansion of public and private debt and the relentless conversion of our commons into money, we are borrowing time from the biosphere at punitive rates of interest—and time is literally running out."

Part 2: The Solution

SO, WHAT THEN IS A COMMONS-BASED SOLUTION?: CAP AND RENT

"While most of us are probably more aware of the prices of products and services than the value of our currencies, the monetary commons are still an essential part of our lives. Money provides us with extraordinary benefit by storing the value of our labor, measuring our purchasing power and holding the aspirations of our families and communities. Yet under the present system—where interest rates are the cost of renting the use of private money—we are prevented from managing the value of our shared resources.

But what if we had such power? If credit creation were under democratic control, money could be spent into circulation without incurring interest by systematically transforming debt into co-credits across all sectors of society. A group of scientists, economists, environmentalists and other experts could continuously update an index of the sustainability linkages among the various commons, establishing a relative value for these co-credits. This would express the scarcity and replenishability of the world’s key resources through a sustainability rate—a real-time measure reflecting the capacity of the global commons to provide and maintain inclusive wealth for global society (see Kosmos: “People Sharing Resources”, fall/winter 2009; and “The Commons of Mind, Life and Matter”, spring/summer 2010). Money circulation would thus support the production of goods and services in response to social needs, ecological sustainability and energy security, rather than the demand for commodities and profits which must grow perpetually through debt-based currencies and external prices in the marketplace.

The catalyst for this new kind of management and valuation of natural and social assets is emerging from the third sector of society— the commons. When the people of a resource community organize, develop a social charter and create a commons trust, they start from the premise of people’s—not the market’s—needs. The commons trust is a legal and fiduciary entity for the preservation and management of the resources inherited from past generations on behalf of present and future generations. The trust maintains these resources within the limits of their ecological capacity through the principle of cap and rent: capping the capital stock of common resources and renting the flow of matter and energy through production, income and consumption. First, the trust decides on a cap to conserve its common resources by determining whether its capital stocks are maintaining or increasing their value continuously so that their preservation value does not decline over time. This requires a highly credible reporting system to ensure that the cap is based on accurate, transparent and verified sets of data. Second, when the cap is in place and the preservation of resources is secured for the future, the trust determines how much of the remaining resources may be rented. The trust sets a rental fee on the apportioned resource which is collected at the point of extraction or production. This fee, denominated in co-credits, may be assessed for depletable commons such as oil, minerals, technological hardware, aquifers or the atmosphere. Private businesses can then extract, produce and distribute these uncapped resources for profit. A percentage of the rents collected by the trust is also paid in taxes to the state and turned into social cohesion (or adaptation) funds for people whose quality of life is negatively impacted by the extraction or production of a resource, and resource restoration (or mitigation) funds for the repair or regeneration of these resources. Hence, the long-term wealth guaranteed by commons trusts is generated through the sustainability or preservation value of the common assets they are managing, not through the potential financial revenue of those commons. Unlike the interest rate, which measures changes in the value of assets, the sustainability rate expresses the value of changes in assets. This is a key distinction. Instead of emphasizing the distribution of income and consumption through greater quantities of output and consumption, the sustainability metric stresses the distribution of the stock of wealth by ensuring that renewable resources are created at the same rate as the depletion of non-renewables. This will result in a wholesale transformation of values, harmonizing the interests of the users of capital with those of the producers of capital, and realigning the incentives for both public and private investment toward zero-interest energy sources and away from debt-fueled overproduction, overconsumption and CO2 emissions."

Part 3: the larger context, i.e. commons-oriented policy-making

Intergenerational Wealth: Toward the Commons Economy

"Nations are deeply divided over how to manage the global commons, particularly the decarbonization of the atmosphere. Rich states refuse to make major emissions cuts until large developing nations like China, India, and Brazil also take radical steps. Poor states argue that the industrial world, which has been producing emissions for centuries, should provide the resources to help them grow economically while they adapt to climate change and minimize their own emissions. Yet the differences between rich and poor nations cannot be resolved on the same terms that gave rise to them. Our predominant vision of social justice—adaptation to cope with the impacts of climate change through investment, aid and technology—will not be realized through the current economic structure. Adaptation to address present impacts and relieve human misery and suffering is vital for obvious reasons; but the catalyst that is needed to unify nations and transform the economic system is mitigation—measures for limiting future damage from climate change.

The 1987 Brundtland Commission Report called for “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Thus far, the world community has viewed sustainable development through the lens of neo-liberalism and progress has been slight. But fully honoring the principle that the future has value to the people who will live in the future would adjust our fundamental patterns of economic activity toward a more holistic system that will also benefit the present generation. Ensuring that people in the far future have a standard of living on a par with our own requires a new kind of international planning based, not on geopolitical or corporate objectives, but on global resource distribution relative to population growth and ecological carrying capacity. Giving the same weight to future generations’ welfare as we give to those now living obliges us to increase the present wealth per capita—and this will transform the balance of trade, finance and aid for the current generation.

But as long as our global plan for the well-being of future generations is merely a quest to get prices right in the present, the value of the commons will continue to be suppressed by the market. Far from presenting a comprehensive alternative to climate change, carbon emission permits and taxes are incomplete measures of the sources of human incentives and collective worth within the greater biosphere. Renewable energy and technology are essential, but today’s green economics is merely another expression of the market’s misalignment of incentives and risk, since green investment is almost entirely dependent on subsidies, protectionism and debt-financing, which shift social incentives only at the margin. Nor is it adequate to address the problem of climate change by discounting the future—spending more money now and living with less global heating, or spending less money now and living with more global heating. Mitigation to reduce global heating must be measured, not by the scarcity-based instruments of interest or bond rates, but through a value that balances claims of future wealth with the economy’s power to generate that wealth sustainably today.

In a commons economy, the cost of failing to address climate change is viewed as a function of the sustainability of the resources that back our currencies. Thus, in computing the costs and benefits of climate mitigation for the future, it is money itself—the medium of exchange between buyers and sellers—that creates the incentives necessary for the global adjustment of value. With a commons reserve currency issued in co-credits, where the relative value of present and future goods arises from the commons as a collective expression of nature, society and culture, signals about the actual scarcity of resources and the cost of environmental damage and social disparities are conveyed directly through our money. When global sustainability is expressed through the value of currency, each of us will have much fuller and immediate realization of the potential impact of our purchasing power in spending, saving or investing, making it worth less to do ecological and social harm, and worth more to be ecologically and socially restorative. Prices will find the right level only after money is properly valued, breaking the endless-growth imperative, balancing the interests of the future with those of the present, and actualizing our incentives through nature, society and the economy. To get prices right, we need to get money right. This means getting energy right. And to do that, we must first get the commons right.” — (http://www.kosmosjournal.org/kjo2/library/kosmos-articles/interest-rates-and-climate-change.shtml)

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