Chapter 4: Policy Packages by Nick Bardsley

A viable mechanism to reduce fossil fuel CO2 emissions, such as Cap and Share[1], is a necessary part of any coherent action plan to avoid catastrophic climate change, and end fossil fuel dependence.

There are many other aspects to the global economic and ecological crisis, though, which have to be dealt with through complementary and synergistic measures. Any element of a coherent package including Cap and Share could, on its own, be counterproductive. This chapter explores some of the main issues that need to be addressed in tandem with capping fossil fuel CO2.

It would take at least a book to do justice to any single one of the themes considered, however, and each has extensive further ramifications. For an attempt to flesh out the implications of ecologically-oriented measures across the policy domain, see Daly and Cobb (1994). What is attempted here is more modest, namely an exposition of some of the main issues interfacing with Cap and Share, and the related policy options featuring in current discussions. Cap and Share is our main measure to address the damage to the ecosystem caused by the global economy’s unrestricted use of fossil fuels. It is a corrective to so- called ‘market failure’ at the heart of industrialised economies. Much of what follows considers other sources of market failure that need to be addressed at the same time for it to work. Working outwards from Cap and Share highlights some issues and not others. We do not discuss here several important issues related to the climate and energy crises which are pressing in their own right, including the measures necessary to reduce other greenhouse gases than CO2.

Each section below outlines part of a climate change policy package that interfaces with Cap and Share. Although one element of this package, the Carbon Maintenance Fee, is seen as a global scheme, the focus is primarily on policy at the national level. This is notwithstanding the fact that much of what we suggest requires cooperation between nations that is currently lacking. The main aim is to clarify the nature of the relationships between the policy areas and to suggest some options.

1. Land – Based CO2 Emissions: the Carbon Maintenance Fee

A substantial proportion of CO2 emissions stems not from the burning of fossil fuels but from changes in land use[i] such as deforestation and draining of peat bogs, and from carbon-depleting agricultural practices. CCSN (2010) estimate that around 30% of total greenhouse gas emissions are from land use, with around 1/3 of this attributable to CO2. Various authors have suggested ways to curtail these, and means whereby the land might actually be used to draw down excess CO2 by enhancing its natural ‘carbon sink’ function. The biggest single problem is with effective emissions from deforestation, which make up around 90% of CO2 emissions from land use. There are currently an estimated 7500 GtCO2 locked up in soils and vegetation (Stern 2006), which it is crucial to preserve. As explained in the chapter by Richard Douthwaite, however, it also seems necessary to increase this stock, to reduce atmospheric concentration of CO2, since 350ppmv of CO2 has already been exceeded. Significant threats to the current stock include continued deforestation and peatland degradation (CCSN 2010).

Approaches that have been suggested to tackle this problem include incorporating land use into the existing so-called ‘Clean Development Mechanism’ (CDM) instruments via credits from ‘Reduced Emissions from Deforestation in Developing nations’ (REDD). The CDM involves certification of projects which reduce emissions relative to a hypothetical scenario, the issuing of emissions credits corresponding to these reductions, and the trading of these credits for money on carbon markets. The premise is that it does not matter where emissions reductions occur, so long as they do occur. Those who are willing to pay more to emit can buy the rights to do so in return for emissions reductions elsewhere, so that emissions are reduced at least cost. The CDM has generated considerable trading activity. However, there are serious problems with the approach.

The CDM is widely believed to deliver few (if any) emissions reductions, at a high cost, to be extremely vulnerable to fraud and to generate perverse incentives. A key problem is that the assessment of emissions abatement relative to a hypothetical future does not imply emissions reduction in an absolute sense. The “reductions”, that is, are only relative to “what would have happened”. Regarding perverse incentives, two examples are indicative. Many hydropower schemes have apparently been certified that would have taken place even without the CDM; and the production of HCFCs has been stimulated in order to generate HFCs, in order to earn credits from abating HFCs HFCs (Tickell 2008, p34-37).[ii] Similarly there is a danger that the inclusion of reduced deforestation will create a perverse incentive to increase rates of deforestation in order that more credits could be earned by a given degree of restraint. One could also expect false claims of afforestation and reforestation to accompany industrial forestry or plantations, which have very different characteristics to naturally occurring forest.

To avoid such issues arising a far simpler approach, advocated by FEASTA, is to pay countries a fee for the carbon stored in their forests and soils, and for this to be assessed via auditing procedures including remote monitoring. This ‘Carbon Maintenance Fee’ (CMF) would thereby give nations an incentive to maintain their forests, to increase the carbon stored in plants generally, and to increase the carbon content of their soils.

The CMF would operate as a global fund overseen by a global climate trust. Countries could contribute to the fund’s costs proportionally to their incomes. FEASTA propose a two-part, annual payment from the fund to each country. The first part of the payment would be based on the estimated mass of carbon in a country’s soils and biomass in the course of the year. The second payment would be for any increase in the stock of carbon that had occurred during that year. There would be a corresponding financial penalty if the stock of carbon had decreased over the period. The scheme is illustrated in the panel below.

The Carbon Maintenance Fee

To illustrate the proposed incentive scheme, we present calculations based on Byrne (2010). The basic carbon maintenance fee would generate a small payment per ton of CO2. A 10¢ per ton fee would amount to an initial $204bn set of transfer payments since there are currently an estimated 2040 Gt of carbon stored in the world’s vegetation and soils. Transfer payments should not be considered a cost to the world since total world income is not affected. The transfer is received in return for a service provided to all peoples. How the funds are used would be left to individual countries to decide for themselves.

An additional transfer is proposed to provide strong incentives for carbon sequestration and penalties for CO2 emissions. Sequestration would be rewarded and emissions penalised, at the CO2 price (determined by Cap and Share). Consider deforestation. It is estimated that a hectare of forest contains an estimated 1000 tons of CO2. If income from crops and sale of timber amounts to an estimated value of just over $2000 / ha (the estimate from Stern, 2006), any CO2 price above $2 per ton would make it unprofitable to deforest, even ignoring income foregone by additional carbon sequestration. The penalty could be levied by withholding the basic maintenance fee. Given that realistic carbon prices would be well in excess of $25 per ton CO2 there would be very strong incentives operating to end deforestation.

Standing forest sequesters additional CO2 each year, so payment of the CO2 price for additions to the stock would constitute regular income for nations maintaining or growing their forests. A recent study in Africa estimates the sequestration rate there as 2.2 tons CO2/ha. This implies African forest sequestration of 1.2GtCO2/yr, so an income of $30bn at a CO2 price of $25/tCO2, or over 10% of total Sub-Saharan African export earnings in 2007. This constitutes an additional (transfer) funding requirement for the scheme, which could operate on a national income tax basis.

Aside from curtailing deforestation and peatland degradation, new activities that this could stimulate include greater use of organic agriculture, and the widespread production and application of biochar from crop wastes. Biochar is a form of charcoal formed by pyrolysis and charged with live organic matter such as compost. See the chapter by James Bruges in this volume and Bruges (2009).

Issues raised by the CMF include how countries might use the funds and how to finance it. Concerning the former, how it would be implemented within a country would be up to the national government. Incentive payments to farmers are one option. An example comes from Costa Rica, where forest cover increased from 22% in 1977 to 51% in 2005, thanks in part to a $45/ha afforestation incentive payment to farmers (Stern 2006). At present making payments conditional on soil carbon improvements on specific land holdings seems too demanding in terms of accuracy of measurement at high spatial resolution. Monitoring of agricultural activities and other land use practices, to estimate carbon sequestration at a local level, seems more feasible (Byrne 2010). It would make sense for incentive payments to go to farmers rather than landowners. However, one problem would be that rents and land values could increase, reflecting the value of the new subsidy, providing windfall gains to landowners. To counteract this, a land value tax could be introduced, whereby landowners would pay either a regular fee or a percentage of the sale price of land.

A land value tax would tap windfall gains deriving from land ownership generally, and raise substantial revenues. Those revenues would also be available on a long term basis. This is appropriate because carbon sequestration will be a very long term process, extending beyond the Cap and Share period. The tax could therefore help nations finance their contribution to the carbon maintenance fee. Land value taxation is discussed further in section 7. An additional source could be revenue from an international ‘Tobin tax.’ A Tobin tax is a small tax on international financial transactions, which would also help to curb speculative financial flows and capital mobility, the magnitude and volatility of which are widely recognised as undesirable features of the current system.

As Tickell (2008, 46-47) argues, however, incentive schemes to governments to halt deforestation risk violating land rights of indigenous peoples and / or existing commons management arrangements. Payments should therefore be conditional on respecting such rights and practices. Furthermore, incentive payments may not always be the best approach at ground level. For example, it may often be the case that strict protection of existing land use rights and commons management arrangements from competing interests provides the best means of preserving and enhancing forest carbon stocks, rather than incentives payments to famers, foresters and so on. Monetary incentives plausibly crowd out intrinsic motivations. This is evidenced in Titmuss’s (1970) classic comparison of blood donation in the UK and USA, for example, and in studies in behavioural economics (Gneezy and Rustichini 2000; Bowles 2008). It may therefore be counterproductive to introduce payments in contexts where protection can be afforded without them.

2. Land Use Controls and Food versus Fuel

One problem with implementing Cap and Share on its own would be that, as fossil fuel use is curtailed and its cost rises, there will be an incentive to substitute into other forms of energy. This is part of the point of the policy, but alternative forms of energy supply are not equally desirable. Perhaps the most evident problem arises from substitution into agro-biofuels, that is, energy produced from crops. As fossil fuel prices respond to the cap, farmers may divert agricultural land to the production of oil crops, such as jatropha or oilseed rape, or sell food crops such as maize to biofuel refiners instead of into food distribution. There is also a knock-on problem of indirect land use change resulting from this, as more land will then have to be cleared to produce food to cover the shortfall. This may happen through the free market in response to higher food prices. It would probably result in increased deforestation, biodiversity loss, infringements of indigenous people’s land rights and so on – a familiar set of adverse development outcomes.

Tortilla Protest in Mexico, 2007. Photograph by ‘Lizdinovella.’ The banner reads “Without Corn, there is No Country.”
Reproduced under creative commons 2.0 license;

The biofuels industry, spurred by biofuels directives and subsidies in the developed world, has already been implicated in food shortages. In 2007-8 there were widespread disturbances, sometimes violent, in Less Industrialised Countries (LICs) as the cost of living surged for many of the world’s poorest people. In Mexico, for example, protestors took to the streets in response to the rise in price of basic foodstuffs, such as the tortilla. This resulted from biorefiners, principally in the United States, buying up the maize crop for conversion into ethanol. By February 2007, the price of tortillas, a staple food and key calorie source for poorer Mexicans, had risen by over 400%. A leaked internal World Bank report (Mitchell 2008) subsequently attributed approximately 75% of the price increases to the expanding bioethanol market. Other reports give lower estimates, citing other factors including crop failures elsewhere and speculation. However, part of the reasoning of the World Bank report was that speculative activity was amplifying the price increase initiated by fundamental factors.

In mid-2011, the UN FAO Food Price Index showed food prices to be higher in real terms than in 2007-8, at more than double their 2002-4 average level. This has triggered further unrest, and appears to be one factor behind the ‘Arab spring’ uprisings.

Biofuels are discussed further in section 5. Whether there is any defensible role for them in the future world economy is controversial, and depends crucially on their land use requirements and energetic characteristics such as Energy Return On (Energy) Investment. Here we ask what can be done to counter this ‘food versus fuels’ problem in the absence of a global ban. The Carbon Maintenance Fee would offer inadequate protection here because it only operates on the land use change aspect of the problem. That is, it does nothing to prevent crops being sold to feed cars rather than people. Also, regarding the land use aspect, the CMF would have to be set at a high enough level to discourage deforestation for crop production. There is no guarantee, however, that those administering the scheme would get this right, or be able to fund a high enough level of CMF.

To prevent adverse land use change, spatial planning policies should decree that agricultural land be designated for food production, and forests protected. To curtail the sale of food crops for refining, certification schemes have also been proposed to ensure that biofuels have been produced using non-food crops on land unsuited for food production. The effectiveness of such measures is likely to depend on the amount of resources that a country can devote to enforcement, and this may decline as diminished energy availability sets in. It will also vary inversely with the incentives to cheat or defy the system, which will be greater the higher the carbon price. Thus it is possible that more direct powers of the state may have to be invoked, such as banning exports of fuel foodstuffs, nationalising biorefining (if and where it can be a viable part of the energy mix) or actually taking over functions of crop purchasing and retailing to prevent their diversion to biofuels internally.

It is in LICs where the food versus fuel problem is most acute, since a far higher proportion of income is spent on food there than in the industrialised world. Many LICs have recently been involved in deals which seem certain to reduce their food security though. Corporations typically from richer countries have, amidst the ongoing financial crisis, been buying or leasing large tracts of agricultural land in LICs to secure supplies either of food or biofuel (GRAIN 2008, 2009). In addition to violating existing land use rights, with consequent social unrest, this trend seems likely to lead ultimately to increased geopolitical instability (that is, food wars). Further comments on this situation are given in section 8.

Advocates of ‘second generation’ biofuels, notably lignocellulosic fuel produced from fast-growing grasses and trees such as switchgrass and miscanthus, have also advocated a lower degree of meat consumption to free-up land. See for example, in a UK context, CAT (2010). However, it is questionable whether biofuels make sense energetically. This matter is discussed under energy policy in section 5. The most critical biofuel analysts imply that the food versus fuels problem is entirely an artefact of misguided subsidies and policy directives.

3. Agricultural Policy

Reduced fossil fuel availability implies huge changes for agriculture, necessitating an extensive program of support and reform. This is because of the extent of fossil fuel use for synthetic fertilisers, pesticides, irrigation, traction and transport of produce. According to professor Albert Bartlett, the use of oil in industrialised farming systems is so pervasive that “Modern agriculture is the use of land to convert petroleum into food” (Bartlett 1978, p880).[iii]

There are implications for both the scale of agricultural activities and the techniques employed. Petroleum-based agriculture has produced huge, minimally employing, mechanised farms serving remote markets via monocultures requiring huge synthetic resource inputs. With less energy throughput, production needs to be closer to local self-sufficiency on a bioregional basis. So food supply has to become less based on international trade and specialisation. It also seems clear that labour must substitute for capital, that organic methods should displace synthetic pesticides, herbicides and fertilisers, and that alternative means of traction will need to be deployed. On-farm energy needs may be met partly by methane supplied through anaerobic digestion of farm waste and manure.

The challenges are exacerbated by the current widespread use of ‘F1 hybrids’ and the increasing use of GMOs. The former, and in practice often the latter, preclude seed saving and the latter are frequently tied to intensive use of inputs and often specific chemical packages. Deprived of these they offer less disease resistance and general hardiness than the inherited seedstock, ‘landraces’, that they have displaced, often to extinction. Thus, the revival of traditional varieties, and seed saving under different local conditions to encourage genetic diversity, seems vitally important.
Organic agriculture should be understood as a set of positive practices, rather than simply coping with an absence of chemicals. The starting point is consideration of what generates healthy soils, crops and livestock, rather than how to intervene when things go wrong. For examples of techniques that follow, green and animal manures and leguminous crops help provide fertilisation, and integrated pest and water management reduce external input requirements, and biodiverse pastures provide a varied diet for cattle and reduce veterinary requirements. Such methods often require reduced spatial scale. For example, bugs accommodated in hedgerows, which eat pests, have a limited range (circa 200m), so vast field sizes become counterproductive.

The changes required cannot happen overnight, so countries should be gearing up now for what is in store. It is worth noting that it is not impossible for lower input and more ecologically oriented agriculture to succeed even in the current system, as the organic farming sector demonstrates. One can also point to the survival of the Amish farming communities in the U.S., who deliberately minimise their use of exosomatic energy. However, these examples are on the periphery of current practice. Policy measures that could be enacted now to help the necessary transition include an end to subsidies structured to favour large scale agribusiness; these also inflate land prices. In the same vein, pollution taxes would disfavour practices which rely on mechanisation and chemicals instead of stewardship of the land. Land Value Tax would help by increasing the supply of agricultural land, lowering its price and enabling more people to farm thanks to lower start-up costs.

Also needed would be a support package involving ‘extension work’ in relation to organic agriculture. This is the communication of innovative practices to producers, and provision of support for their use. Farmers are often said to be conservative in relation to alternative approaches to food production, in particular ecologically-oriented approaches.[iv] A reluctance to experiment is understandable in view of both the variability of nature and competitive pressure in food markets, where market power is very concentrated amongst large food retailers. The extension work should accompany significant reallocation of research resources away from industrialised agribusiness to develop expertise and technology for agro-ecological methods. The need for greater development and application of such techniques has also been argued on independent grounds. These include adaptation to climate change and the inappropriateness of corporate agribusiness practices in an LIC context (IAASTD 2008).

?A case study of what may lie ahead agriculturally is provided by Cuba’s experience in the ‘special period’ of the early 1990s. Cuba’s relatively industrialised economy, and heavily industrialised agricultural sector, had developed with the help of Soviet oil. After the collapse of the Soviet Union, oil was only available to Cuba through the world market at dollar prices. This led to a severe fuel shortage, a situation exacerbated by extensive trade sanctions against the country.

An inspiring, if somewhat rose-tinted, rendition of Cuba’s experiences is given in the film ‘The Power of Community,’ which emphasises the extensive use made of organic agriculture and permaculture techniques, particularly in urban market gardens. A more comprehensive and contrasting picture is given by Wright (2009), who reports that the adoption of organic methods was much less extensive in rural areas, and that as a whole the shift is better described as one towards low-input farming than towards intentionally organic methods. The urban organic sector is estimated by Wright to have contributed around 5% of total food supplies in this period, mostly fruit and vegetables for local consumption.

The immediate aftermath of the oil crisis sparked a dramatic fall in agricultural productivity and shortages of food. As a result of this, food items were rationed that had been freely available previously. Oil was prioritised for electricity production, so far less was available for agricultural uses than previously, and fossil fuel- derived fertilisers and agrochemicals were more difficult to obtain. To boost production levels a greater proportion of the workforce had to be recruited into agriculture, animal traction reintroduced, organic methods introduced and biological substitutes developed for pest control. A conflict remained between boosting productivity and sustainability.

Barriers to the take up of new methods apparently included a degree of conservatism in the rural community, with new, urban producers being more open-minded regarding alternative techniques. Wright estimates on the basis of surveys that there were no intentionally and wholly organic farms in rural Cuba, with 83% of farmers ?wishing to use more agrochemical inputs, though there seemed to be little desire for fully-fledged return to high input practices. Wright also reports institutional resistance to innovation from agencies and departments that had developed expertise under the old input intensive system.

A striking feature of the Cuban experience is the variety of agricultural organisations that were developed, including different kinds of cooperative enterprise, private farms and smallholding, coexisting with large state farms, and varied distribution channels, partly it seems, in an effort to find what works. Many farms were downsized and use rights to myriad parcels of land were handed out in ‘usufrucht,’ meaning the right to use and profit from an area of land without actually owning it or having to rent it.

Many countries share a pattern of agricultural development similar to Cuba’s prior to the special period. That is, they exhibit increasing farm sizes, a high degree of mechanisation and use of petroleum derived-inputs, and the progressive concentration of food retail. It seems likely that this pattern will have to reverse as the same inputs become scarcer under the cap. Land reform and the breaking of monopolistic control of the food system may also be necessary. This would facilitate a ‘return to the land,’ and creative experimentation with substitutes for conventional techniques in different growing conditions. There may be a need for some nationalisation of land, the granting of usufrucht rights and the imposition of a land value tax to increase the farmland available for rent.

Finally, Wright suggests that the “main lesson” for the world from the Cuban episode is the importance of planning for the possibility of food rationing and direct government intervention in supply chains, in response to shortages. This may sound extreme, even absurd, to those whose working lives have been defined by the post-Soviet era and (in the North) an age of apparent plenty under minimal government intervention. But a rapid decarbonisation of the world’s economies is an extreme prospect implying dramatic adjustments.

We mentioned above in the context of the Carbon Maintenance Fee that there are land use practices that may significantly enhance carbon sequestration. Here, we note the synergy between such measures and agriculture. There is evidence that established methods of organic agriculture increase soil carbon content over time (Soil Association, 2009). Innovative restorative grazing practices, pioneered by Alan Savory in the plains of South Africa, suggest that properly rotated free-ranging livestock herds could also sequester carbon (CCSN 2010). This involves continuous moving of the livestock, in imitation of naturally free-ranging herds kept in motion by predators, with the effect that the grasses put down a larger mass of roots. This appears to have numerous effects serving both to regenerate the local ecosystem and incorporate carbon into the soil. Biochar, as discussed in James Bruges’ chapter, appears to have an important role to play in both carbon sequestration and enhancing soil fertility, with additional potential benefits from a biofuel byproduct.

4. Monetary Reform

“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the earth. Take it away from them, but leave them with the power to create credit, and with the stroke of a pen they will create enough money to buy it back again. … If you want to be the slaves of the bankers, and pay the costs of your own slavery, then let the banks create money.”

The quotation is attributed to Sir Josiah Stamp, director of the Bank of England in the late 1920s, though this is not verified. The sentiments it expresses are defensible, though they may sound extreme. That banks create credit out of nothing, with minimal backing in deposits, is a fact recognised by orthodox economics in its basic textbooks. The matter is generally quickly passed over, however, and contradicted elsewhere in the corpus where banks are characterised as ‘financial intermediaries’, redirecting funds from lenders to borrowers. The credit banks create, which also constitutes debt, makes up the vast majority of money supplies in developed economies, typically 95% or more, with notes and coin making up the remainder. Virtually all money exists, then, only because interest-bearing debt has been incurred.[v]

There are strong reasons for considering the money system in connection with climate change. GDP, a measure of the level of economic activity, is, unsurprisingly, strongly related to greenhouse gas emissions. Growth is commonly defined as real GDP growth. And real GDP is generally dependent on the quantity and sectoral allocation of credit (Werner 2004). It follows that emissions growth is dependent on credit growth. Credit growth seems to be an intrinsic feature of the modern ‘fractional reserve’ banking system, and seems to have emissions growth written into it.

Various positive feedbacks can be identified in the credit creation system. Firstly, the interest paid on loans provides profits to banks, and these profits underpin further loans. Secondly, the current era of deregulation has resulted in minimal and apparently ineffective reserve and capital requirements across much of the global economy. £1 received in deposits may therefore enable more than £1 in additional loans directly, by the same bank. Thirdly, growing credit creation increases economic activity, which then strengthens the confidence of banks to issue loans. Continuous credit expansion is evident in the graph below, showing notes and coin (M0), deposits in all kinds of bank account (M4) and the stock of debt owed to the banks (M4L) in the UK. That banks expect such an expansionary process is evident in the compound interest normally offered to savers, which cuts the savers in on bank profits.

Continuous expansion of the UK money stock (M4) and lending stock (M4L), 1963-2010. M4L fell for the first time ever in publicly-available data in March 2009. Only a around 3% of the UK money stock took the form of notes and coin in April 2006, at which point M0 ceased to be published.
Source: Bank of England, online database, accessed July 2010.

For real rates of interest to be earned, that is, above the rate of inflation, there also has to be greater provision of goods and services. In practice, expanded credit is issued in order to facilitate both production and trades in existing assets. The price of existing assets, such as most stocks and shares and real estate, is sensitive to the availability of credit. Continuous credit expansion therefore implies a mix of growth and asset price inflation. Before the Thatcher / Reagan era of deregulation, attempts to control this mix had been made to ensure enough growth, via steers on the types of activities that bank lending could support. With deregulation, there has in contrast been a proliferation of house price bubbles across Europe, the USA and much of Asia. The tendency of asset prices to be bid up by a growing volume of credit gives rise to an additional positive feedback in the upswing of the business cycle, as analysed by Minsky (1982), since assets serve as collateral on loans.

Conversely, it is not clear how the interest owing on loans can be paid if money incomes are not growing. For only the principal on loans is created when they are extended. For real interest to be paid, either economic activity must expand or redistribution to creditors takes place. In a fossil fuel economy, production can be expanded through a combination of increased exploitation of primary energy sources and energy efficiency gains. But in a world powered by renewables it is doubtful whether comparable expansion is feasible. Energy from a stock of fuels can be converted at a chosen rate, whereas a flow from a renewable source requires a specific duration. Energy analysts consequently struggle to devise plausible scenarios in which renewables replace fossil fuels at current rates of energy use. Mackay (2009) for example, fails to reconcile current energy use for the UK with renewable energy under deliberately optimistic assumptions. The energetic requirements of continued exponential growth are considerably more exacting.

We believe, therefore, that a transition away from fossil fuels needs to be accompanied by a transition away from the current money system. If growth is no longer possible then real interest cannot be paid on a sustained basis. There are additional reasons in favour of a new system. The financial sector, which produces only the credit with which others conduct real business, is in effect a drain on the real economy because of the interest it charges. Interest supports a “rentier class” who live by harvesting interest payments, often supported by inflated asset prices including house and share prices. Although that class is participated in to some extent by anyone holding interest-bearing savings, financial sector growth has contributed to increasing inequality. Under a declining carbon cap, greater equality would need to substitute for growth as a source of improved social welfare. Finance would also need to be channelled away from speculation towards productive uses.

According to data from the OECD, shown in Figure 3 below, the financial sector now ranges from 25% – 33% of GDP in the USA, Japan, UK, France and Germany and is now often larger than all the productive sectors put together. This figure understates the significance of finance in the economy, since trades in existing assets are not included in the calculation of GDP. The sector’s share in corporate profits rose from 10% in the USA in the early 1990s to 40% in 2008 (Gudmundssen 2010). Whilst there is a pressing need for a dramatic realignment of economic activity along ecologically rational lines, an ever greater proportion of economic resources has actually been allocated to the financial sector.

The size of the financial sector 1970-2008. Source: OECD Stat online database; from series B1GJ_K: Financial intermediation, real estate, renting and business activities. Accessed August 2010.

One alternative to the current system, which would allow a deliberate reorientation, is one in which money is spent into existence debt free, rather than borrowed from private banks. Governments, both local and national, are (in principle) in a position to do this because they can decree that currency they issue be accepted for taxation payments. This ensures a demand for the money amongst all who have to pay taxes, and therefore further secures its acceptability as a means of exchange for other transactions. Numerous thinkers have set out proposals based on this possibility, and there are several historical examples of debt free money, spent into existence by government. A useful guide is Rowbotham (1998). Fewer attempts have been made, though, to address the interface between monetary reform and the ecological – energetic crisis.[vi]

Rowbotham offers proposals based around a citizen’s income, based on the suggestions of C.H. Douglas, founder of the ‘social credit’ movement. Each adult citizen would receive a basic income from the state, spent into existence or recycled from taxation as necessary, which would enable much of the means- tested welfare system to be done away with. Others have proposed that the government becomes a more influential player in the economy, for example by directly financing large capital expenditures. With the cooperation of the central banks, the proportion of government-created money could be set to increase over time, displacing that created by the private banking sector.

Integrating such proposals into a climate change mitigation package seems a very promising route. Initially, for example, expenditures of government-issued credit could be used on such expenditures as purchases of renewable energy infrastructure and a comprehensive thermal upgrade of housing stocks, on a zone-by-zone basis. Citizens’ income payments could perhaps be phased in, as people’s income from sales of Pollution Allocation Permits declined, as fossil fuels are phased out. Finally, in line with the likely relocalisation of the global economy, regional currencies and associated credit creation powers for local authorities may have an increasing role to play (Douthwaite 2010).

At the time of writing the credit creation feedback loop seems to be operating in reverse in many countries. The crisis in the Eurozone is dominating the news agenda. However, many of the recent problems originate in domestic banking developments that are not driven by the specific problems of the Eurozone. Iceland, whose banking system collapsed in 2008 following a massive credit bubble, was not a member, and its problems preceded the Eurozone crisis. The United States is experiencing a credit crunch in large part attributable to a declining housing market, again following very rapid credit expansion and house price inflation. Essentially the same process had taken place in Scandinavian countries in the early 1990s, and in Japan in the late 1990s. The Eurozone situation does illustrate the importance of monetary autonomy in responding to a crisis, however. This can be seen from comparing the cases of Iceland and Ireland. Iceland’s currency was massively devalued in the wake of the crisis. Whilst this caused considerable hardship in the short term, as imported products increased sharply in price, it has enabled a degree of economic recovery. Ireland, in contrast, cannot devalue because it no longer has an independent currency.

The current crisis may have been triggered by higher energy costs, which may be attributable to peak oil. If so, the value of money must fall in relation to energy, and this may be occurring via the withdrawal of money from circulation (Douthwaite 2010). The long term danger posed by the resultant situation is that finance will not be available to support measures to achieve a low carbon economy whilst there is still a relative abundance of cheap energy to pursue this. The issue will also, probably, disappear from public awareness, amidst hardships such as unemployment and bank seizure of collateral assets, which are more visible and immediately pressing. Both to deal with the recession in a more humane manner and to support green investment, monetary autonomy seems crucial. This would be maximised if the right to issue currency were reclaimed from private interests and made to operate in the public interest. Inadequate monetary autonomy extends beyond the Eurozone. All signatories to the Maastricht treaty, for example, have pledged not to use central bank credit to fund government deficits.

As part of the response to the current debt crisis we propose an ‘ecological debt jubilee’ (see the box below) which would allocate a substantial sum of money, in voucher form to direct its use, to each citizen, whether or not they are indebted. In addition to relieving an excessive debt burden, this would increase the proportion of debt-free money in circulation.

?An Ecological Debt Jubilee

A debt cancellation is the original meaning of the word “jubilee”. Jubilees appear to have been common in the ancient world, for example taking place every 50 years in Mesopotamia around 2000BC. A biblical description of a jubilee occurs in Leviticus 25. In the recent credit / debt expansion, debts have outpaced income growth. This, coupled with increases in energy prices and associated inflation, has rendered continued debt service intolerable for an increasing proportion of the population. Some form of debt write-off therefore seems inevitable. This could take place in an orderly or disorderly fashion, with disastrous consequences for the populace under the latter. We propose a scheme which would preserve the functionality of banking whilst it is being re-engineered as a very different system, in which the power to create money is no longer privatised. This re-engineering is necessary lest we return after a short interval to the same situation, the eventuality foretold in the quotation at the start of this section.

A simple write off of debt would have the consequence that banks would incur massive losses, since debts are accounted as assets, but liabilities would be left intact. In that case banks’ incomes would be insufficient to cover withdrawals, with a consequent run on the banks and breakdown of the money supply. We suggest as an alternative that vouchers, worth a substantial proportion of average personal debt, be distributed to each adult citizen, which can be used by borrowers for debt reduction. The vouchers can be exchanged by the banks for new credit issued into their accounts at the bank of England.

Since debt relief would be unfair, absent compensation, to those who are not in debt, they would be allowed to use the vouchers for other, specified, purposes. Given the climate / energy emergency, we propose that householders would be allowed to use them for purchases of energy efficiency improvements, solar panels, solar thermal systems, heat pumps and so on, from existing approved suppliers. This would prevent ‘cowboys’ cashing in on a boom.

Renters, or others who do not need such improvements, would be able to purchase renewable energy bonds, which can be redeemed for kWh in energy bills at a future date, purchased at current prices. The proceeds from these bonds would be used to fund investment in renewable energy technologies. The energy companies issuing the bonds could exchange the vouchers for (debt-free) credit issued by the central bank, via their own banks acting as intermediaries. Since the price of energy can be expected to continue to rise, this constitutes a good investment opportunity for the bondholders.

The cancellation of debts in this manner would result in the circulation of money that never gets retired as debt is paid down – that is, debt-free money. Its effect on the money supply is net positive. This is what is required in a situation where money is disappearing as debts are paid down. The citizen debt jubilee could form part of a larger issue of debt-free money disbursed to relieve states of their excessive debts, as proposed by Richard Douthwaite for the Eurozone.[vii]

5. Energy Policy

Synergy with a Carbon Cap

Cap and Share has a clear synergy with energy policy, in particular policies to promote energy efficiency and renewable energy technologies. These are needed to maintain tolerable living standards, if at significantly reduced levels of consumption in the North, whilst moving away from fossil fuels. Improving energy efficiency means increasing the amount of useful work that a given amount of energy performs for us. There is broad support for energy efficiency, since it is generally seen as both profitable and environmentally friendly.

Similarly, most, environmentalists are committed to the development and diffusion of modern renewable energy technologies. This position is not uncontroversial, however. See for example, the recent exchange of letters between Paul Kingsnorth and George Monbiot. Kingsnorth argues that it is futile to attempt to retain industrial civilisation, which he regards as doomed, with a new power supply. We think Monbiot was correct to reply that a rapid and unplanned energy descent, with no substitute energy supplies at all, would probably be catastrophic and would carry its own adverse ecological impacts. For example there would be accelerated deforestation as people meet their heating needs. Infrastructure for waste management would deteriorate, enhancing pollution. And food production would be curtailed through fertilizer scarcity.

The energy challenge can be partly visualised via consideration of the relationship between the level of income in a society and the proportion of the population working in agriculture. There is a very tight inverse relationship; virtually no economy with high per capita GDP has more than a small minority of its population in that sector (10% according to Giampietro, 1997). Release of the population from agriculture, enabled by an abundance of cheap fossil energy, appears to have been an essential feature of industrial development. Agrarian economies prior to the fossil fuel era had far less energy surplus after providing for basic needs, and population growth was therefore held in check. If this pattern is suddenly thrown into reverse then a high proportion of the population have, apparently, to return to the land. With an agrarian population the economy would not be able to reproduce its non-agricultural sectors.

The idea that greater efficiency automatically leads to reduced energy use is contradicted by a phenomenon variously referred to as ‘rebound,’ ‘backfire,’ the ‘Jevons paradox,’ and the ‘Kazzoom-Brookes postulate.’ The problem that all these terms refer to is that when an energy efficiency measure is implemented, the service that the energy consumption provides effectively falls in price. This normally encourages us to use more of that service, but it also makes us better off, enabling us to produce and consume more goods and services generally.

Similarly, the more efficient an industrial process becomes, the cheaper. So the more applications it will find, and to the extent that it brings about savings, these may finance other expenditures and investments. The boundaries of this process are unclear, reaching into the financial system and beyond. Thus, even if a person or business decides to save money and energy, their bank may issue new loans backed by their savings which trigger increased economic activity and energy use elsewhere in the economy, with further knock-on effects. The rebound effect is the total increase in energy use associated with an energy efficiency measure, relative to the reduced level of energy use that would occur with no change in behaviour anywhere. Backfire, or the Jevons Paradox, is when energy use increases overall – that is, when rebound exceeds 100%.

In the absence of a carbon cap, or other brake on energy usage, there appears to be no theoretical reason to expect the overall rebound effect from energy efficiency to be less than 100%. So energy efficiency measures may increase fossil fuel use. Sorrell (2007) estimates the normal extent of rebound to be far lower, at around 30%, but is summarising a literature in which most empirical studies examine only the ‘direct’ rebound effect. The direct effect is that on the use of the technology which is improved, for example, extra miles driven as a result of a more efficient car. There are few credible attempts at empirical quantification of the total effect. Polimeni et al. (2009, ch4) present macroeconomic evidence. The relationship between total primary energy consumption and energy intensity (energy used per unit GDP) is explored, controlling for other relevant factors including population size and density, and the level of GDP. The USA, 16 European countries, Asia, and Brazil are considered. In each case a very strong positive relationship is reported, indicating that greater efficiency is associated with increased use of fossil fuels.

Although as countries industrialise the carbon intensity of each unit of GDP may decrease, this appears, therefore, to be more than compensated by expanded production and consumption possibilities. The (normally) elastic and expansive nature of the financial system, along with the competitive nature of business, it seems, both drive and facilitate the progression of the economy towards the take-up of these opportunities.

It is conceivable that this effect also extends to renewable energy technologies. For example, advocates of wind energy typically claim that a wind turbine produces a quantity of energy over its lifetime scores of times greater than the energy it takes to create it. If the turbines are produced using fossil fuel energy, however, as at present, this may have the effect of increasing the energy efficiency of those fuels, compared to their use in conventional fossil fuel power stations. The result could, in principle, be backfire in fossil fuel use. We do not claim that there is evidence of this, but the general logic of the rebound / backfire effect suggests that it is a disturbing possibility.

With a carbon cap in place, however, the picture changes. Energy efficiency measures could not lead to backfire in fossil fuel use, since a physical limit would be set on the amount of coal, oil and gas that could enter the economy. In addition, by increasing the scarcity of fossil fuels, the cap will increase their prices. This will further abate rebound. Cap and Share would therefore lock in the gains from efficiency measures. The cap would be driving reduced throughput with or without improved efficiency. Efficiency measures make this reduction more tolerable by mitigating hardships that would otherwise result.

To some extent higher energy prices will drive both efficiency improvements and renewables investments. However, there is no guarantee that the price incentives will be strong enough on their own to bring about the required pace of change. A key soure of market failure in both cases is short-termism, underpinned by the interest-bearing debt-based money system. Returns on investment are routinely compared in ‘net present value’ calculations to the interest that could otherwise be earned on the funds invested, as a default comparison. The higher the rate of interest, the shorter is the effective timescale over which productive investments will be evaluated. Other general sources of market failure include incomplete information and bounded rationality. It may take considerable research to arrive at an informed view on which products or technologies are best. People may also be unaware, or in denial, of the likely future trajectory of energy prices.

If efficiency and energy supply change too slowly, political resistance to the cap may follow as it is driven down, since living standards will fall. Extra measures are therefore called for, both to hasten the pace of change generally and correct for specific problems with free markets. The top level framework rationing fossil fuels and specific technological measures are both necessary, but each requires the other to have the desired effects.

Energy Efficiency Measures

There appears to be significant potential even in developed economies for energy efficiency improvements. Commonly-used ‘first law’ measures of efficiency mask the extent of this potential. These do not take into account the maximum amount of work that could in theory be done with the resources used. ‘Second law’ measures do take this into account and are generally much lower. Ayres (1998, tables 2 and 3) for example, estimates that spatial heating in a developed country context by the early 1990s was 72% efficient in the first law sense that 72% of the energy content of the fuel ended up as heat in rooms. Applying the second law measure, the same work could ideally have been done with an estimated 8% of the energy inputs actually used. One can visualise such waste considering an open gas fire, from the fact that one is not generally using it to cook in addition to heating the room, which one can easily do by toasting food on a fork. The waste is incurred in central heating systems by using gas that can burn at temperatures of over 1000 ?C to heat radiators to 50-80 ?C; the high temperature flame could be much better utilised. It could in principle power heat pumps, for instance, resulting in less gas use per degree day of heating. For each category of useful work reported by Ayres, second law efficiency is estimated to be a fraction of first law efficiency.

Salient energy efficiency measures include thermal upgrades to buildings and greater efficiency of electric and electronic appliances and vehicles. In addition to raising energy prices, C&S could fund efficiency improvements, particularly to buildings, through the redistribution of revenues to citizens. There are significant problems with free market provision of efficiency improvements though. Energy use may be a relatively small component of costs. Tickell (2008) gives the example of cars. Higher fuel prices give a weak signal here, because for a new car fuel consumption costs are dwarfed by depreciation, the rapid fall in the value of the car over the first few years of use. Buyers of second hand vehicles can only choose from models produced in previous years.

Peculiarities of housing markets cause further inertia. The key problem is ‘split incentives’. In rental accommodation, that is, the landlord has only the weakest of incentives to invest to lower the tenant’s heating bill. A tenant has no incentive to meet the investment costs, since tenancy is typically a shorter term arrangement than the payback time for the upgrade. These problems are compounded by risk of damage to the building associated with upgrades, the burden of which falls on the landlord. Home-owners face a similar incentive barrier, given that it is probable that they will relocate within the payback period of the upgrade.

This means that in the absence of additional measures, renters would suffer greater exposure to heating cost increases than owner-occupiers, exacerbating already inequitable outcomes in housing. Possible additional measures include legal requirements on landlords to conduct thermal upgrades, coupled with comprehensive upgrade grants, and innovative billing arrangements. Regarding the last option, occupants, whether owners or renters, could pay back the upfront costs of refurbishment by paying a premium on (reduced) energy bills, if the bill remains registered to the property rather than the occupant. That is, on selling up or moving out, the premium would fall on the new occupant.

Energy efficiency standards can be set on goods, appliances and vehicles. These should take the form of minimum efficiency standards, rather than the currently popular but weaker measures such as labelling requirements. Cases can be cited where such schemes have backfired. For example, Tickell (2008) discusses the case of vehicle efficiency legislation in the U.S., which because of industry lobbying did not cover utility vehicles. This allowed manufacturers to produce and heavily market the now notorious Sports Utility Vehicles / 4x4s. We consider such cases to show the need for better designed regulation rather than a case for non-intervention.

Renewable Energy Technologies

For an overview of scenario studies of the potential of renewables globally see Boyle (2007). Most of the studies covered are upbeat about potential. Paticularly optimistic assessments have been released for offshore wind for the UK (PIRC, 2010) and concentrating solar power for Africa (DLR, 2006, which analyses this from the perspective of European demand), but the availability of renewable energy resources is very variable across countries. It is also necessary to take assessments chasing financial backing with scepticism. For more critical reflections on renewables see Smil (2011) and Mackay (2009). Key challenges include the low power density of renewables compared to that of power generation by fossil fuels. That is, the output measured in Watts per square metre is far lower. This is why renewables tend to have exacting land use requirements. There is also a general problem of energy storage to match the time profiles of supply and demand.

If an upstream cap were in place, the relative increase in cost of fossil fuels could render many current incentive schemes obsolete. In the UK, these comprise the complicated existing arrangements surrounding ‘Renewables Obligation Certificates,’ the Climate Change Levvy and a host of other ad-hoc measures which effectively price CO2 (Tickell 2008). To this list must be added the feed-in tariffs currently used to boost investment in solar photovoltaics. The tariffs offer financial incentives for households to invest in PV panels by paying a fee for each kilowatt hour of electricity they generate. This is financed by power generation companies and therefore by all electricity users through their bills, so has attracted criticism because of its regressive effects. Poorer households, that is, are unable to purchase the panels but have the tariff passed on in their bills.

Specific reasons for government intervention include the public good properties of technological innovation, which means that there is a conflict between its rapid adoption and the incentives for the innovator to undertake research and development. This implies a continued role for public funding, and regulation involving time-delimited patents systems. Similarly, some renewables systems require large infrastructural support. Offshore wind, for example, requires extensive capital expenditures to enable the power supply to be connected to a grid. Since such equipment benefits all generators, there is insufficient incentive for individual providers to fund it. In addition, with renewable energy technologies there are fundamental uncertainties about which will ultimately prove viable, and therefore about whether investments in research and development will yield a return.

Whilst many of the reasons for government support of renewables may be familiar, the case is distinctive because there is limited opportunity to get things wrong, lest the remaining fossil fuel budget be expended in support of the wrong kind of technology. Thus, with regard to both subsidies and direct regulation, the saga of biofuels is sobering. Both the EU and US have issued legislation supporting biofuels. In the EU, Directive 2009/28/EC requires that renewables make up a minimum of 10% of transport fuels by 2020, which is mandatory for all EU member states.[ix] In the US, the Energy Independence and Security Act 2007 ordered the use of 136 billion litres of biofuel per year by 2022.

Giampietro and Mayumi (2009) examine the feasibility of biofuels on several dimensions. The analysis accounts for the land use requirements of ethanol, based on the per hectare performance of energy crops in capturing solar energy, conversion losses turning crops to fuel, the scale of power requirements to the rest of society, and the internal consumption of fuel by the energy sector itself, within an integrated energetic model of the entire economy. The authors estimate that for even 10% of US transport fuel to be supplied by bioethanol, independently of fossil fuels, 35 times the US arable land currently in production would be required. Similar conclusions hold for the European Union. For example, the authors estimate that for Italy to supply 30% of its transport fuel by biofuels, without fossil fuel inputs, would require 94% of the labour supply to work in agriculture and around 7 times the agricultural land in production.

If this analysis holds, and more summary calculations by Mackay across the range of biofuels (Mackay 2009, p283-286) are supportive, it is scandalous that the biofuels industry has managed to secure a high level of political support, against the background of the food riots of 2007-8 and ongoing global food crisis. The moral of the story would appear to be that there is massive scope for market and government failure in emerging energy markets, exacerbated by the increasingly close relationship between academic scientists and industry.

Measures that could be enacted to prevent the recurrence of such a situation might include the activity of governments in the role of purchasers, and possibly producers, of renewable energy technologies, based on their all- round performance. That is, governments should not limit themselves to enabling market activity. Research governance policies in universities might also be reformed. At present, there appears to be little or no ethical filter on research applications outside of the medical and social sciences for example. This situation might be remedied using mandatory, multidisciplinary research ethics panels for technological research. This might also require reversing the current trend towards increasingly competitive public funding arrangements between academic institutions, if such panels were to have more than face value. The wisdom of allocating substantial proportions of public research funds by matching industry funding should also be reconsidered, given the danger of ‘lock in’ to inferior technologies.

6. Transport Systems and Relocalisation

Changes in transport systems, and profound changes following from this, seem inevitable, and the need for change would be intensified under a carbon cap. Real distances, measured in the time it takes to get from A to B, have fallen dramatically over time, because of changing transport technologies. Figure 4 visualises this for the case of overseas travel. Traditional, renewables-powered modes were displaced in the nineteenth century by fossil-fuel based vehicles of increasing sophistication, efficiency and power, culminating in jet planes in the 1960s. As a result, intercontinental travel can now take less time than domestic travel before the industrial revolution.

Shrinkage of the globe in terms of ‘real distance,’ because of increasingly powerful fossil fuel transport technologies. Distances, such as the circumference of the earth, are proportional to the shortest possible overseas travel times, determined by the fastest speeds available shown in mph. Adapted from Dicken (1998), figure 5.3.

The associated cost reductions, combined with the imperative on producers to expand for reasons stemming from the financial sector, explain much of what is otherwise puzzling about current spatial patterns of production and distribution. They help to explain why even identical produce is exchanged between countries, and why food is shipped back and forth with apparent wantonness before it is sold. Exporting and importing goods, or sending produce up and down the motorway to packaging and distribution centres, for example, might be not much different from cost and time perspectives than producing and selling locally in the pre-1840 world. The diagram presumably understates the true scale of shrinkage between the first three globes, because various other factors impeded long distance travel, including localised political institutions, lack of geographical knowledge and the dangers of long sea voyages.

Cap and Share impacts on transport mainly by hastening the reduced availability of current liquid transport fuels. In the absence of miraculous technological advances, this means driving and in particular flying less, greater use of road and rail, cycling and walking more, plus more localised production and distribution generally. However, as we noted in the context of energy policy, if this came about all at once, without measures to enable change, a high degree of popular, and organised, resistance and unrest can be anticipated. In effect, reduced fossil fuel availability would put global shrinkage into reverse, fragmenting the ‘global village’ into a scatter of disconnected and over-specialised settlements, progressively less able to provide for themselves.

Moving ‘backwards’ from the rightmost to the leftmost globes in figure 4 involves increased real distances of a factor of around 65. Given that the sudden and unanticipated arrival of such enhanced real distances is likely to be calamitous, measures are needed both to rationalise transport and to kick- start relocalisation preemptively.

Included could be measures such as Alan Storkey’s proposal for a rationalised coach system, with freight going onto rail (Storkey 2007; Monbiot 2007; CAT 2010). Although developed for the UK the principles are general. Coaches reduce congestion by displacing cars, and reduce fuel consumption because of elimination of duplication and economies of scale. Storkey estimates that each coach with normal occupancy represents one mile of car traffic travelling at 60mph. The core proposal is for a conjunction of orbital coach services, linking major population centres, and bus routes connecting the inter-city network with towns, city centres and suburbs. Use of such services increases with the frequency of provision. Such a rationalised network would achieve both direct and indirect fuel savings, the latter through reduced congestion.

Further savings might be made in combination with technological measures, such as electric coach fleets, if the efficiency claims of their proponents can be justified on a life cycle basis (CAT 2010). The main uncertainties surrounding ??such claims stem from scarcity of such analyses, and potential depletion of specific resources that their widespread adoption would exacerbate – in this case, supplies of heavy metals for batteries.

In support of the coach network proposal, we note that Cuba in the ‘special period’ heavily increased use of coaches, including improvised tractor trailers (‘camels’) adapted to hold large numbers of passengers. Coach travel is able to expand significantly and to substitute rapidly for cars, without substantial infrastructure expansion, in contrast to rail. However, there is limited gain from modal shift (cars to buses and freight to rail) alone. Given the very low levels to which emissions have to fall what is ultimately needed is less reliance on motorised transport per se (Mobbs 2004).

Pre-emptive relocalisation can to some extent be furthered by action to curb externalities such as waste, in particular from product packaging and disposal. Heather Rogers (2005, p134-137) details how the bottled drinks industry is able to extend its spatial scale through externalising costs of waste disposal onto taxpayers. Where regulations exist forcing companies to use refillable containers, this acts as a constraint on the ability of the manufacturers to centralise and extend their operations. Delivery lorries have to return with the empty containers, for example. Sales expansion therefore requires replication of production and bottling facilities. This results in a pattern of localised production and consumption, in addition to achieving efficiency gains in terms of energy and raw materials. Unfortunately business has often lobbied effectively to remove such regulations, since they impact on profits and growth in market share. This has enabled increasing concentration of the drinks market in the hands of large corporations.

In some countries, including the UK, there has been a revival of interest in local production and sale of foodstuffs. This has been triggered to some extent by producers’ being squeezed by the market power of large retailers, and supported by grassroots movements such as the Transition Towns. However, these have met with limited support from authorities. Measures authorities could take that would bolster local activity include planning restrictions on maximum size of retail outlets, rent controls on high street stores, and a supportive stance towards new food markets. For example, in France local producers are often allowed to sell in hypermarket car parks.

7. Land Value Tax

LVT is taxation levied on the value of land, raised either through a regular (say yearly) levy on its rental value, or as a percentage of its sale value. LVT has strong economic arguments in its favour, set out in the works of Henry George – see for example George (1879). It is a non-distortionary tax, that is, one which does not interfere with supply, since the supply of land is effectively given. Since land’s market value is social in origin, arising from the competing uses to which people might put it, rather than the result of useful activity of the landowner, taxing it seems just. Moreover, since access to land is a necessity for living, all people who do not own land are subject to rent payments, in the sense of payments of unearned income to landowners. It follows that there is significant potential to use land values as a key, if not the, basis of taxation. George argued that LVT should replace all other taxes, including income tax, and some modern proponents including Fred Harrison (2008) also argue in this vein. Others hold that LVT is insufficient and that other sources of rents (in the sense of unearned income) exist and should be tapped to fund the public purse. Cap and Share is, indeed, an example of this. For a recent report on land value taxation, covering the practicalities of implementation in an Irish context, see Smart Tax Network (2010).

LVT fits with the measures outlined above as follows. Firstly, if incentive payments to landowners or farmers are used as part of a nation’s Carbon Maintenance Fee strategy, market values for land with carbon storage and sequestration potential will increase, even with no actual improvements made. LVT would counteract increased land values being realised as windfall gains, which is inequitable, and would provide a robust tax base to help finance the CMF. Secondly, in LICs, where a global C&S would result in large transfers from high consumption countries, it is likely that people will wish to buy land with their permit revenues. This will result in windfall gains to existing landowners if the increase in values is not captured for the common good.

Potential concerns with LVT include weakening CMF incentives to maintain and improve carbon sinks, and possibly increasing the development of green space. Consider the first issue. If, as we argued in section 1, downstream payments to farmers or landowners would realistically be based on activity monitoring, land values will rise to reflect any potential subsidy earnings. This is independent of whether the subsidy is in fact earned, so the incentives for carbon maintenance and sequestering activities are unaffected.

Alternatively, there might be payments based on the carbon content of specific landholdings, if measurement technologies improve. It is common for advocates of LVT to recommend taxing the unimproved value of the land, so as not to discourage improvements to buildings (Daly and Cobb 1994, p235). Transferring this proposal to the present context, ‘unimproved’ should also be understood in carbon terms. Lands will increase in value to an extent that could in principle be estimated even if no carbon improvements are actually made, because of the potential to use the land to gain CMF-related payments. This leaves the incentive to earn the subsidy intact.
For leaseholders, the rental value of the land is not affected by LVT, merely who ends up with the rents. Therefore any CMF-related incentives accruing to them would be undiluted. Competition between renters could be expected to bid away the unearned portion of these payments in higher rents, just as it would in the absence of LVT.

Regarding the second issue, LVT may have mixed effects on green space. One of these is to ease pressure on any land reserved as greenbelt, through making urban space more readily available, since it becomes costly to hold empty land and property. A second potential effect, which pushes in the other direction, could be to jeopardise wilderness and therefore biodiversity, since all land holdings will also have to pay enough to cover any tax owing. Much currently unused land will have low market value, however, and therefore attract lower rates of LVT. Also, we have argued that, for wilderness land with carbon value, the CMF scheme will still operate as an incentive in the presence of LVT. It is possible for there to be conflict between use of land for carbon sequestration and biodiversity, however. For green space in or near cities, the CMF value of the land is likely to be dominated by property development value. The government will in this case share an incentive for the land to be developed, since the value of land, and so tax, with planning permission greatly exceeds that without it. It is likely that there are other cases where this problem would arise. For example, for unused land with both strong agricultural potential and high ecological value the former may dominate.
These considerations underline the fact that other elements of the policy mix, such as spatial planning controls need to be used to counteract any undesirable side-effects of the policy. The tax is also flexible; a zero rate could apply to land below a certain value for example, to assist farmers on low incomes.

8. Less Industrialised Countries

The discussion above focuses primarily on industrialised countries’ policies, as opposed to those of LICs. This is partly a reflection of our focus of climate change mitigation, which is primarily the industrialised world’s responsibility. Policy discussions often focus on adaptation in an LIC context. However, if only industrialised countries adopt C&S, the fossil fuel based economy may quickly migrate to LICs. This has already been happening in India, China and other eastern countries to such an extent that in many respects labels such as LIC have become questionable. LICs therefore need to be part of the constraining framework. Most of the populace of such countries stand to benefit from C&S, for perhaps most of the duration of the scheme, since people in the South typically consume so little per capita compared to their counterparts in the North. Also, much of the potential for enhancing carbon cycles and sinks lies in LICs.

Adverse effects of climate change are likely to be born disproportionately by LICs; some small island states, such as Tuvalu in the South Pacific, are already becoming uninhabitable because of sea level rise and resulting salination of agricultural land (Lynas 2004). The only available response in those circumstances would appear to be managed migration, with the cooperation of neighbouring states. Other reasons why many LICs may suffer disproportionately from climate change include narrower tolerance of crops to increased temperatures, outside temperate zones. Lower per capita income reduces resilience to loss of crops because it implies less access to imported food.

LICs could receive an enormous boost from a global cap and share scheme (Wakeford 2008), helping with such costs. However, this could either be via per capita shares from individual sales of permits or a managed fund (as under Cap and Dividend proposals), with possibly distinct implications for how the resources would ultimately be used. These options are discussed in chapters 6 and 7. Having said this, the third world debt crisis continues to be a major drain of resources for the South. Further annulment of 3rd world debt therefore seems essential lest transfers of Cap and Share scarcity rents be diverted to interest payments transferred back to the North. In the same vein, LICs will benefit more from such revenues to the extent that they avoid an economic trajectory determined by imported fossil fuels. The 1970s oil shocks, it should be noted, played a key role in fomenting the debt crisis. This resulted in foreign exchange shortages in LICs and petrodollar gluts in OPEC countries, stimulating lending by the latter to the former.

We believe much of the discussion in previous sections, therefore, is in fact no less relevant to the LICs. In many LICs agriculture has become petroleum dependent, so tooling up, and skilling up, for organic agriculture and other agro-ecological initiatives seems a policy priority. Debt-based money has the same dynamic in LICs as elsewhere, in conflict with hard energy constraints, and so debt-free alternatives need to be developed in this context too. In addition, one likely use of C&S funds by individuals, or communities under cap and dividend, is to buy land. Land values could be predicted to increase, giving rise to windfall gains for landowners and speculative bubbles. LVT would help by capturing speculative gains and enabling the redistributing of windfalls. A barrier to certain policies at present, including Cap and Share and LVT, is low administrative capacity compared to the North, so strengthening this would be a priority.

The geopolitical situation of LICs seems to be a significant barrier to enlightened policy, however. Were they to tackle the issue of the lease or sale of agricultural lands to foreign companies, for example, they would face conflict with the IMF, World Bank and WTO, whose neoliberal ideology favours the land deals (GRAIN 2008, 2009). These institutions have operated in the interests of transnational corporations and their political backers, undermining national economic sovereignty. Often, for example, they have lent large sums to countries in financial difficulty with onerous conditions that both precluded their repayment and favoured western corporations and strategic interests. Tariff barriers were reduced, domestic industries privatised and sold, cheap access to raw materials was provided to overseas firms and so on. This caused the countries in question to take on further loans, deepening their problems and debt dependency which can be exploited by western government and business interests (Korten 1996). To take a stand against these institutions calls for considerable bravado, as amongst other sanctions they can make it impossible for a nation to borrow, and crash its currency.[x] There might also be diplomatic problems and intimidatory tactics or worse against the politicians involved, as recounted in Perkins (2005) for the case of Latin America.

9. Conclusion

A CO2 policy package based around Cap and Share, we believe, should include monetary reform, the CMF, state support for renewable energy and energy efficiency measures, land use controls and restrictions on biofuels, an agricultural support program promoting organic, low input and agro- ecological methods, and rationalised transport infrastructure. Land value taxation would dovetail with this set of policies and provide a durable funding stream for the CMF. It also captures rents for the public purse in what are likely to be difficult times economically.

The policy set presented has, we believe, an encouraging internal coherence, but nonetheless we finish on a cautionary note. This is because we have not considered all aspects of the problem under consideration, partly because of space and time constraints and partly because of limiting ourselves to consideration of the CO2 aspect of the climate change problem, and by extension the climate change dimensions of the ecological problem. We may therefore fall victim to the so-called “fallacy of misplaced concreteness” which results from treating an abstraction as if it were the phenomenon of interest in all its fullness.

Not addressed here include, for example, questions of reform to organisational forms and corporate law. In particular there is the issue of the ‘fiduciary obligation’ of company directors to shareholders, commonly interpreted to override any social and environmental considerations where these conflict with profitability.[xi] We have also abstracted from the need for action in relation to the other greenhouse gases, including Nitrous Oxide, Methane, and the Halocarbons, and the effects of black Carbon particles. Finally, we have also abstracted from other aspects of the ecological crisis, including the need to preserve biodiversity, and the question of human population growth.


i. So-called ‘LULUCF’ emissions: Land Use, Land Use Change and Forestry.
ii. HCFCs are refrigerant gases, damaging the Ozone layer, controlled by the Montreal Protocol. HFCs are alternative refrigerants falling under the Kyoto Protocol, and extremely powerful greenhouse gases. HFC-23 is a byproduct of HCFC production.
iii. This section draws freely on Daly and Cobb (1994, ch. 14).
iv. Mike Bryant, University of Reading, personal communication.
v. This section draws freely on Werner (2004).
vi. At the time of writing in the UK, for example, there is the ‘Positive Money’ campaign. This argues for 100% reserve banking, under which banks can only lend out money that their customers agree not to withdraw whilst it is out on loan. This would make the money system more stable and manageable, but would not address its need to grow indefinitely if loans and savings accounts still bear interest.
ix. The earlier directive 2003/30/EC explicitly specified biofuels as the fuel from renewable sources in a target of 5.75% of transport fuel. The current target has been received with outcry from civil society groups (Giampietro and Mayumi, 2009, p6-7). It is not clear at present what could substitute for biofuels in meeting it.
x. Far from resisting the transfer of land rights to transnational corporations, governments pursuing development are frequently assisting this process. See Shiva (2011) on India, for example.
xi. See for example Milton Friedman (1970) for a classic statement of this interpretation.


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