Using energy as currency - The Ergo proposal
Sgouris Sgouridis, Associate Professor at Masdar Institute
Dr. Sgouris Sgouridis is Associate Professor at Masdar Institute of Science and Technology in Abu Dhabi. He obtained a PhD in Engineering Systems from MIT and has worked at the US Department of Transportation, the Port Authority of Thessaloniki and the Hellenic Army. Together with dr. Scott Kennedy, he conceptualized an energy currency called Ergo. The Ergo concept was initially designed as a proposal to Masdar city, though it did not progress to implementation.
Interview by Marion Dupire
Energy is a determinant for economic growth and, as a consequence, a determinant for financial stability. The Ergo concept proposes the direct integration of energy as part of the financial system which, in its current form, does not reflect the limited physical availability of energy.
“While the boundaries of the physical world that we inhabit are clearly delimited, our civilization has constructed a super-structure that fundamentally defies that reality in the form of the financial system.” (Sgouridis, 2012)
dr. Sgouridis, has any energy currency ever been implemented?
“No. There have been several energy currency proposals, such as the solar dollar or the WAT in Japan, but they were all very rudimentary. Everything that has been implemented so far is very small in scale and often not really based on energy focusing on carbon mitigation. The reality is that there has been no such implementation so far.”
There has been other alternative currency proposals, what makes Ergo unique?
“The Ergo concept is working on two levels: micro- and macro-. On the micro-level, the Ergo works as an energy credit system where the community has a specific target for a given period. This target is expressed in terms of the amount of energy that the community allows itself to consume. The Ergo basically works as a way to allocate scarce resources within the community in a way that satisfies the supply availability constraint, allows the users to meet their energy needs, and serves as a planning mechanism for the future energy system. Users have access to a credit for a given period, e.g. a day or week, and at the end of the period the credit expires. It works as an asymmetric market: you can either use your credit and only if and when it runs out, buy exactly what you consume; if you need more than what you have, another user is incentivized to give up her credit through the trading structure. Energy currency systems have never been proposed in that way before.
On the macro-level, the Ergo could be implemented as a component of monetary policy. If we want to avoid climate change, we need to phase out fossil fuels within around five decades. This means that we need to be installing renewables at a continuously high rate. There are many reasons why I think that nuclear energy cannot play a sufficiently big role and fossil fuels with carbon capture cannot scale up sufficiently to meet both the energy needs that we have and the carbon constraints. The policy discourse have been focusing on instituting carbon markets. However, I think that carbon markets are counter-productive because they are based on pricing a negative good, carbon emissions. Our proposal rather focuses on the positive side and incentivizes the installation of renewable energy which would make the use of fossil fuels redundant once energy needs can be covered by renewables. The macro-scale Ergo concept works as follows: we set an objective in terms of economic growth, and derive the amount of energy needed to achieve that growth, knowing that the availability of fossil fuels is declining. The Ergo puts a constraint on the banking system: it ensures that banks lend money only up to a level where there is sufficient energy to allow the real economy to grow at the same time. Complementing the Chicago plan for debt regulation, every amount of debt issued by banks should have a corresponding amount of renewable energy available in the future. So banks would then have an incentive to finance renewable projects.”
Would the Ergo be adopted in parallel to or in the place of another conventional currency?
“At the micro-level, it is presented as an energy-backed currency, i.e. a dual system with both the e-currency and the conventional currency). At the macro-level, it does not have to be coupled with another currency, you can make it as an energy-referenced currency, i.e. self-sufficient.”
When the Ergo would be implemented at the macro-level, how would the role of banking regulators evolve?
“The interest-rate system does not function anymore, interest rates are now almost zero or negative and do not really have an effect on the economy indicating that this lever is not sufficient to support economic growth or at least prevent contraction. With the Ergo, the role of the regulators would evolve in the way in which the Chicago Plan was envisioned: the total amount of debt made available is controlled by the central bank. In some ways this makes the economy more controlled and the central bank more empowered but it also creates the possibility for a tighter connection to the physical economy and lowers the risk of financial crashes.”
Energy is not the only determinant factor for economic growth, could the Ergo concept integrate other factors?
“I agree that there are other important factors. Alternative currency proposals like the Bancor (Keynes) and the Terra (Lietaer) were intended to reflect baskets of goods. Energy though is a very clear candidate: it is almost a one-to-one relationship. The connection is so strong that, if we assume that the real economy truly grows, we must assume that the energy supply will also grow. That is not necessarily true for other factors, we can hardly find other materials which correlate this way to the economic system; for most of them we can find direct substitutes with the only exception of phosphate for fertilizer. Clean energy is also the limiting factor in any global climate change mitigation effort. Therefore, it is simpler and creates an advantage to look at this just from an energy perspective”.
How could the concept be concretely implemented? Would it start at the micro-level and then become generalized to the macro-level? Or the other way around?
“We could actually see it progressing in both ways. We could also see a macro-level change if conditions change. Central banks can use energy to reference the issuance of debt and create incentives for commercial banks to support renewable energy, as discussed earlier. And you can see forward-looking municipalities to implement zero-carbon, renewable energy and community support goals with an Ergo alternative currency eventually merging in a network.”
What would be the role of financial institutions in this scheme? Are there opportunities for banks, already today?
“My view is that financial institutions do not like to be constrained and do not want to tie their ability to extend credit to a factor like energy. Nevertheless, such a constraint may eventually be forced upon them by a serious climate mitigation policy. As such, I think there is an incentive for financial institutions to look at it strategically. One way could be for example to support local micro-currencies based on energy another to proactively increase their portfolio of renewable energy investments.”
- Sgouridis, S., & Kennedy, S. (2010). Tangible and fungible energy Hybrid energy market and currency system for total energy management. A Masdar City case study. Energy Policy, 38(4).
- Sgouridis, 2012 “Using energy as currency: re-establishing the bridge between the financial and the real world”, Network Industries Quarterly, Vol. 14, No. 2 & 3
- Sgouridis, 2014 “Defusing the energy trap: the potential of energy-dominated currencies to facilitate a sustainable energy transition”, Frontiers in Energy Research
- Collins, J. R., Ludwig, S., & Greenham, T. (2013). Energising Money (pp. 1–79). New Economics Foundation.