It seems today widely acknowledged that facing the climate threat, private and public investors and banking must commit more resources (savings and money creation) to the ecological transition. This shift in public opinion is very fortunate, as it is urgent to channel private savings and direct investment towards the goal of sustainability. The Veblen Institute is for instance a member of a vast coalition of civil society organizations that want to place financial regulation at the heart of the debate on fighting global warming.

Yet it is important, amidst all the figures and technical debates, not to lose sight of a crucial point: investment is not an end itself, but a means of achieving a goal, namely, sustainability. The latter is ultimately determined by demand, not supply: what is or isn’t sustainable is purchasing power, and its impact on limited resources and habits of consumption, mobility, and life. Investment in supply—for instance, in new industrial processes—makes it possible to lessen the pressure on resources while keeping life comfort constant, but it does not abolish the planet’s physical limits. (The latter are, moreover, plural by nature and cannot be reduced solely to greenhouse gases; they also include biodiversity and the local ecosystems on which our survival depends). These two criteria do not always converge, for financing a “sustainable” investment results in the creation of wealth that are not necessarily sustainable themselves.

Rebound effects

Indeed, a key problem in the ecological transition concerns the coexistence of the “new” economy, which presumably uses fewer resources and produces fewer greenhouse gas emissions, and the “old” one – typically, renewable energy versus fossil fuels. The former emerged as a niche in the latter, and developed gradually thanks to technological innovation, new lifestyles, and favourable regulations (subsidies, taxes, guaranteed prices, and so on). But both economies create “value” and allow for accumulation of wealth: in the world financial system, revenues and profits are blended indistinguishably together: all financial decisions are based on monetary system in which a completely fungible currency—“all-purpose” money—makes no distinction whatsoever between wealth produced by both economies. Such all-purpose money increases the possibility of rebound effects, emission “leaks”, and impact displacements, thus partially cancelling out ecological gains at every level, from individual consumption to the global flows of direct investment. Let’s consider two simple examples.

At the micro level, every time that a public policy measure rewards an “environment friendly” choice or gesture for contributing to the goal of sustainability, the impact analysis must include the impact of additional purchasing power gained. If the gain is made in “all-purpose” money, the possibilities for “leaks” grow accordingly, and the overall impact becomes difficult to estimate. Hence the experiments in recent years with “green-for-green”-type rewards cards, which recompense environment friendly gestures not in euros or other national currencies but in complementary currencies, the function of which is to limit qualitatively any resulting increase in purchasing power (ecological agriculture, renewable energy, sustainable transportation, and so on).

On a broader scale, the wealth acquired as a result of investing in renewable energy can be reinvested either in fossil energies or in the destructions ecosystems on the other end of the planet, simply by entering traditional banking networks (deposits, saving products, and so on). Various proposals have sought to correct this problem ex post: civil society has launched campaigns calling on banks to “disinvest” from fossil energies or certain polluting industries, and banks and investment funds have responded by proposing responsible investment funds. But the real value of these efforts cannot be easily determined and tangible progress remains, so far, limited.

Indicators and money

This ecological critique of “all-purpose” money recalls the debate on indicators of wealth: in both cases, the same principle of equivalency (or substitutability) of various forms of wealth lies at the heart of the debate. Transposed to the monetary field, the idea of a plurality of complementary but non-substitutable forms of wealth gives “special-purpose money”, a system of complementary but non-substitutable monetary circuits (or, to be precise, having limited convertibility). This idea is in fact already implicit in many local currency projects, whose charters often lay out the sustainability criteria to which companies seeking to join the network must adhere. Yet these currencies are not investment currencies, and their impact on economic exchange is extremely weak, perhaps non-existent. They are, in practice, pedagogical rather than economic tools, aimed at raising citizens’ consciousness about money’s role rather organizing production and exchange. The sole exception to this rule is found in inter-company exchange platforms such as WIR in Switzerland or Sardex in Italy, in which the goal of sustainability is, for now, largely absent.

The limits of these initiatives are not simply the result of the institutional resistance, public and monetary authorities being profoundly hostile to most kinds of monetary innovation. More fundamentally, they run up against the organization of the economy as a whole, of which they offer a valid ecological critique, but one that is exogenous to the system and, so to speak, impotent—just like the idea of sustainability itself, which seems to week to break through the standard economic thinking about wealth. They could, however, join up with other proposed investment mechanisms, such as public monetary circuits (public procurement, local taxes) or tools for attributing an economic value to environmental impact (such as carbon assets suggested by some economists). In each case, joining the complementary monetary circuit makes it possible to limit “leaks” and to enhance resilience.

One idea would be to use the liberating power of local taxes to ensure confidence in complementary monetary circuits. Local tax revenues could back up the issue of a special-purpose money, demand for which would be partly ensured by public procurement. Another possibility would involve linking special-purpose money to the investment circuits of the ecological and energy transition: infrastructure, local energy production, agricultural conversion, and so on. As we know, these investments are not “profitable” in the eyes of private investors and must be subsidized in one way or another. Yet in such cases, it is necessary to “compartmentalize” the circulation of wealth created through this convention (for instance, through "carbon assets"), lest one find oneself back at the drawing board. A fortcoming Veblen policy paper will develop the second line of reasoning and discuss its technical feasability.

Granted, special-purpose money is not the only way to direct the financial system towards the principle of complementarity and away from the substitutability of different forms of wealth: the key is compartmentalizing the financial system, i.e. increasing the diversity of actors, regulations, and objectives within it. At the local level, a policy of preferential rates or a European version of the US “Community Reinvestment Act” would have a similar effect, requiring banks to invest part of their resources locally, independently of the global “benchmark” of profitability. The same is true of cooperative banks aimed at particular economic sectors and freed of the “benchmark” in question. At the global level, it is possible that campaigns seeking divestment from fossil energies will succeed and that banks will prove unsuccessful in finding ways to avoid regulations. However, all these traditional solutions produce at best a weak version of compartmentalization and resilience: even if wealth is initially circumscribed to a particular use or a particular territory, the very nature of all-purpose money will eventually make the substitutability trend prevail, thus increasing the risks of rebound effects, “leaks” and impact displacement.

Wojtek Kalinowski,
Co-Director of the Veblen Institute

Twitter : @woj_kalinowski