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Jan 11 2009 / Aaron

The Energy Standard

In my last post I mentioned the idea of a energy backed currency. This in an interesting meme that I think deserves more attention, especially given the current global financial climate.

I saw a news article today on Zimbabwe’s introduction of a $50-billion note, which is currently enough to buy about two loaves of bread. This hyper-inflation is the inevitable end result of any fiat currency. With the US pumping trillions of new dollars into existence, we can be sure that the long term result will be high inflation.

For a time, the dollar was backed by the gold standard. The dollar had an intrinsic value because it was guaranteed to be exchangeable at any time for a fixed amount of gold. This was abolished in 1971 as they had far too little gold to back the money in circulation. With nothing to constrain growth to match physical reality, things have since spiraled out of control.

Eventually, we will need to return to a more sane system of currency, I don’t think the gold standard is the best choice. Gold is valuable because it is scarce, shiny, and durable. But it is a fairly arbitrary choice with which to back a currency.

Energy strikes me as something far more fundamental. Energy literally powers our economy and life itself. The immense amounts of energy that have been released from fossil fuels have driven our population, productivity, technology, and luxuries. Energy grows our food, transports goods, powers our cars, our computations, communications. Everything we do, need, and love can be reduced to energy. It has an essential value. Equating money directly to energy seems natural.

Money, after all, is but a symbolic token to exchange work of one type for another. When you buy an apple, you are not paying for the apple itself. You are paying for all the energy that went into growing, picking, and transporting that apple to you, so that you didn’t have to do it yourself.

Money would be directly exchangeable with the reserve for a specific amount of energy in some standard form — for example kilowatt-hours or mega-joules. Thus the amount of money in circulation would directly equate to the energy production available. The growth of the economy would be constrained by the growth of energy production. Since energy is so fundamental to the economy, this ensures the economy stays aligned with reality. If a wind farm or coal plant is constructed, this energy can now be exchanged with the reserve, enabling the circulation of more currency.

The government would set official conversion rates for different forms of energy — the energy from a coal-fired plant would convert at a rate first calibrated to the physical output, then adjusted for the depletion rate of the non-renewable resource, as well as any added pollution taxes on the conversion.

An energy backed currency could have unintended side-effects difficult to anticipate. This might help stabilize prices of things like oil, as the price would better reflect the EROEI. It could positively influence the generation of renewable energy, or it could trigger a gold-rush mentality to produce as much dirty energy as possible. It could force us all to live within our means.


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  1. d / Jan 11 2009

    I’ve heard of this concept before, but never really gave it much thought. You’ve made me realize just how insightful it is — possibly brilliant.

    Adam Smith founded modern economics on the premise that money was equated with human labour. A gallon of gas packs a walloping amount of human labour. How about a more Newtonian view, of money equated with Work (energy).

    Our enormous wealth has come from pillaging the planet, with no true-cost accounting or accountability. The single most important factor in the rise of the modern empire has been cheap oil. And it will soon run out.

    Using less energy means having a smaller footprint — being gentler on the Earth. That should be tied to something people understand — money. Burn less oil, save money. Use less plastic, save money. Price items based on the cost in energy to produce them, and the energy required to properly dispose of the waste products — that’s a major step toward true-cost accounting.

    Imagine the justice that results when impoverished cultures are suddenly rewarded for using one twentieth of the resources of the typical North American.

    There will be hard times ahead. There’s no better time to start putting the price tag where it belongs.

  2. Tony / Jan 12 2009

    Hello Aaron,

    It is good to see you posting again. The excitement of Europe must be wearing out.

    Now that there is a new version of CRON-o-Meter(0.9.5), I hope that you update your page:

    Some people on the CRS list complained that it was not current.


  3. Blake / Mar 20 2009

    The biggest problem with energy-backed currency would seem to be that it’s so much more difficult to store than gold or other more physical options. Electrical production is only loosely coupled with demand on the grid. I suspect you would want battery technology beyond what we have today to really make this work.

    Coming up with an equation that factors in the “true cost” of various forms of energy creation seems beyond what US stakeholders would be able to agree on. Perhaps there’s more consensus in Canada. Valuing the risk of spent nuclear fuel storage against the depletion rate of unknown remaining oil reserves (including oil shale, etc.) and the relative risk of global climate change…I’d like to be in that room.

  4. Jack Scott / Mar 24 2009

    There’s also free money beaming directly down on us from the Sun. Does that mean anybody with a solar panel and a battery can become rich?

  5. Aaron / Mar 26 2009

    The idea is not the energy itself backing currency, but the promise to exchange cash for energy is backed by the ability to deliver it — i.e. the energy production capacity. So if I build a wind farm or a solar panel, I can produce a certain amount of energy to back the currency with. You still have to invest in energy production to get more energy. Your economy grows at the same pace as your available energy. This makes sense since energy powers economic activity, and you can no longer print money willy nilly and cause runaway inflation. It keeps the currency grounded to reality.

  6. Sam G / Sep 13 2009

    A time-backed currency would be the ultimate. Time is infinitely divisible but a push out into Sci-Fi territory would be required to enable the distribution of time.
    They don’t say Time==Money for nothing.

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