Energising Scotland – Introducing the ECO

There is perhaps no more crucial or contentious subject in the debate about Scottish independence than the subject of Scotland’s currency. There is nothing new about this: as long ago as 1705, in the run up to the 1707 Act of Union, John Law – the remarkable Scottish adventurer, gambler and originator in France of the first modern Central Bank – published a proposal for a land-backed currency for Scotland Money and Trade Considered: With a Proposal for Supplying the Nation with Money

Few are aware of this, but only less than 3% of the UK money supply is £ credits issued by the Bank of England on behalf of the UK Treasury. Over two thirds of the £ credits which constitute the UK money supply was created privately by banks to back mortgage loans, so that the majority of UK bank deposits are based on UK land. This fact makes it difficult to separate a Scottish monetary and fiscal system from the UK without the permission of Westminster.

But in considering a Scottish monetary system, in addition to the value of land and buildings, there is also the value of goods and services, the value of machinery, technology and (increasingly) of knowledge, data, and other forms of intellectual value.

Above all, there is the value of energy, and this proposal to energise Scotland’s economy through the introduction of the Energy Credit Obligation (ECO) is based on the simple fact that while the value of land use is by definition locally acceptable, the value of the use of energy is global. In other words, energy knows no nationality and no borders.

The ECO will not compete with the existing UK system, but will be complementary to it, being implementable now with no change in UK law.

The Big Picture
There are two strategic trends driving the evolution of modern economies: increasing energy intensity & the evolution of smart markets.

The former Saudi oil minister Yamani observed that the Stone Age did not end because of lack of stones, and that the Oil Age will not end for lack of oil. Whereas 30 years ago one barrel of oil fuelled the production of over 35 barrels, now the ‘easy’ oil has been extracted, and a barrel of oil may now be needed to fuel the extraction of 5 barrels or even less.

So while energy intensity of oil & gas production has increased, the Energy Return on Energy Invested (EROEI) has declined to the extent that the oil price has reached a level at which it is increasingly unaffordable, affecting demand. Moreover, it is increasingly economic to substitute oil with renewable energy, and to reduce oil use through smart interventions in energy efficiency (the Fifth Fuel).

The outcome of this secular increase in energy intensity is that the global $ oil price is effectively capped. Why else would Saudi’s Aramco and Russia’s Rosneft be prepared to sell equity ownership? They would never do this if they expected oil prices would continue to rise.

The current energy market is a transactional commodity market where energy is produced, bought and sold to consumers by middlemen such as oil companies or the Big Six, with a view to investor profit. Finance capital typically takes the form of equity (shares in a joint stock company) or debt (bank credit based in turn on bank equity capital).

For two decades, we have seen direct instant ‘Peer to Peer’ connections increasingly bypassing middlemen who have adapted by changing their business model. There is a transition to services driven by a very simple economic rationale. While owning assets and taking market & credit risk ties up a lot of finance capital, to provide services requires only ‘smart’ intellectual capital – knowledge, know how & know who.

For service providers it makes commercial sense to share assets, costs & risk wherever possible and to compete only on quality of service. However, the fundamental structural problem with the emerging Sharing Economy (exemplified by Uber and AirBnB) is that landlords, banks and above all shareholders don’t share.

National Grid to Natural Grid
No-one consumes raw energy in physical commodity form such as oil and gas. What we actually use is “Energy-as-a-Service”- dynamic energy delivered over time, such as heat/cooling, power, mobility, electromagnetic radiation & light.

Following the 1973 Oil Shock, when the oil price rose by 400% from $3 to $12 per barrel, Denmark (with an economy > 90% reliant on oil) faced an existential threat and implemented a new bipartisan energy strategy in order to achieve energy resilience, security and independence.

The organising principle of Denmark’s resilience-focused energy strategy was that for any given use of energy as a service, the Danes would minimise consumption of oil as a commodity. Denmark therefore invested massively in renewable energy such as wind (creating a global leader, Vestas, founded on Scottish technology), in heat & power infrastructure (again building huge expertise and a technology base); a switch in mobility to cycling and efficient public transport; investment in buildings and so on. In other words the Danes put energy cost before financial cost.

The following image strikingly illustrates how this organising principle transformed Denmark’s energy infrastructure from a centralised National Grid, in 1990, to an emerging distributed Natural Grid in 2014.

What about the economic outcome? Surely this massive infrastructure investment – which broke all the conventional market rules – must have wrecked Denmark’s economy? In fact, while Denmark’s GDP has more than doubled since 1973, the Danes’ energy use declined and carbon fuel use declined significantly, which in turn – as an unintended consequence – reduced Denmark’s CO2 emissions.

So Denmark demonstrated in practice that to apply a strategic organising principle of least resource cost leads not only towards national resilience, energy security & independence but also to a transition to a low carbon economy. However: Scotland is not Denmark.

Denmark was able to achieve this transformation firstly because energy utilities were publicly owned, and secondly because Danish local government is not only more local than in Scotland but also was well resourced fiscally through land value taxation (but note this source has been diluted). Denmark was therefore able to deploy public capital, directly and indirectly (eg through guarantees of bank loans to Coops) to infrastructure which would not have been financially viable using private finance capital of debt and equity and the Nordic commodity market in energy which has since emerged..

Scotland has very different institutions to Denmark: our councils are regional, not local: our energy utilities are in private not public hands; and in any case, energy policy is reserved to Westminster. So Scotland needs innovative institutions and instruments to mobilise resources and moreover, it must be possible to implement these bottom up with little or no change in the law.

But how? Enter Financial Technology (Fintech).

Energy Fintech
The current wave of new data sharing/authenticating protocols between machines (Blockchains) and financial instruments (Coins such as Bitcoin) have emerged completely outside the existing economy and have created what is clearly a financial bubble, akin to the historic South Sea Bubble and the more recent Internet Bubble.

In the same way that modern online businesses emerged from the Internet bubble, we are now seeing Fintech evolve as this new digital layer is integrated with the real world economy, and nothing is more real than energy. This proposal to energise Scotland brings to bear innovative legal design of the institutions and instruments which – Back to the Future – pre-date the modern economy.

Energy Credit Obligation (ECO)
An ECO credit instrument is simply a promise issued by an energy producer in exchange for value received from an acceptor. An ECO holder has no right to demand payment in £ sterling, so it is not a debt instrument. There is no right to demand delivery of energy, so an ECO is not a derivative (forward/futures) instrument. The ECO confers no right of ownership such as a rent or dividend, so it is not an equity instrument. Finally, it is not purely an authenticated receipt or proof of value received or expended without any additional obligation – so it is not a Fintech Coin instrument like Bitcoin.

The obligation of a supplier of energy services who issues an ECO is simply to accept this instrument in payment for his energy supply So if a customer presents an ECO instead of (say) £ sterling this will be valid payment for energy supply and an authenticated ECO cannot be repudiated, and £ sterling claimed instead..

There is nothing new about promises as a means of payment: this instrument pre-dates all others and has been routinely in use for millennia wherever people trust each other. Promises/credits form the unseen foundation of all economies even today.

Historically, governments and banks have been the institutions which acted as intermediary organisations to provide the trust which is necessary for the creation, exchange and fulfilment of promises. This reality is embedded in the English language so that Tax Return refers to the return and cancellation of sovereign tax credits; Rate of Return to the rate at which promises may be returned to the promissor, and Stock refers to the split tally stick wooden tokens which recorded promises.

The question is what are the future Scottish risk, cost and surplus sharing institutions which will provide a framework of trust for the ECO.

Local Energy Companies
A Local Energy Company is not an organisation – there are enough of these already – it’s simply an agreement between existing local stakeholders to create new energy infrastructure.- a local Natural Grid. The aim of an LEC is energy independence (and hence, energy security and resilience) for a locality.

As with all pre-1855 Companies – particularly those incorporated to build civic infrastructure – these Companies would not have limited liability the reason because with all stakeholders as members there is simply no need to limit liability. Neither would the Company have share capital, because any necessary investment is raised by selling energy credit obligations (ECO) to investors to create energy loans.

There are three stakeholder associations/clubs: energy users & producers (who use the energy infrastructure); energy investors; energy service providers (developer/managers). In addition there will be custodian members. Energy service users and investors delegate development & management, while retaining veto rights of governance. The ultimate veto, is held by custodians in the public interest so that infrastructure is held in common in perpetuity. In this participative governance model, no stakeholder has dominant rights to impose his will on others and for that reason I call such an agreement a Nondominium.

The LEC agreement shares costs and surplus, particularly from development of new assets. It also shares risk through a mutual guarantee with shared (Fintech) accounting/clearing of acceptances by one supplier of ECOs issued by another. There is nothing new about such associative agreements: Scottish farmers innovated machinery rings and now compete on quality but collaborate on costs. Ship-owners have clubbed together globally for over 140 years in Protection & Indemnity (P&I) Clubs to cover risks that the insurance middlemen of Lloyds of London will not take. And so on.

What is the role of banks in such an energy market system? Since banks are not energy suppliers they cannot issue ECOs, but there are two important financial services which banks can provide: firstly, as risk managers overseeing ECO issuance and clearing and secondly, in advising and bringing ECO energy investors together with ECO energy loan investments, both for new and completed assets..

Local Energy Companies may be networked through membership of Energy Companies covering a greater locality: so by way of example the Linlithgow Energy Company would simply be a member of the West Lothian Energy Company and so on. LECs may be founded and incorporated at any time, and are complementary to the existing fragmented and commoditised energy market.

ECO energy credits are independent of location; implementable bottom up, rather than top down; have no nationality; and lead directly to energy independence and an energy economy. Scottish economic decisions made on the basis of least resource cost rather than least £ cost will lead to the creation of a Scottish Natural Grid. As energy services markets spread by local implementation, it leads to a broader international Natural Grid as the energy market evolves from a transactional commodity market.

However, while focusing exclusively on objective energy cost may be the dream of technocrats, it leads to nightmares for everyone else. So while score should be kept of finite physical resources in objective energy terms, the minimisation of human cost and the maximisation of happiness, beauty, care and amenity requires subjective measures.

So we shall also need new Scottish institutions and instruments to mobilise relationships between Scots, and between Scots and the land in which we live: that is another story, of Scottish housing, food, care and health services and independence.


Caring for Scotland

There are plenty of ‘wicked’ problems in UK and Scottish public policy of which the crises in care and affordable housing are perhaps the most intractable.

My generation – at the tail end of the Baby Boom – benefited through no effort on our part from massive unearned gains in land values due to successive booms driven by unconstrained bank credit for mortgage loans and the transactional land development model I have come to think of as the ‘Four B’s’ – Buy, Borrow, Build and B…er Off.

It is an everyday occurrence when visiting London to talk to Londoners whose homes have ‘earned’ more than they have during  their career. But land-rich Londoners are increasingly finding themselves care-poor, unable to look after either themselves or increasingly decrepit and cold homes on crazily valuable sites, while carers themselves are priced out of living in London.

On the other side of the land divide is my sons’ generation, who are care-rich but land-poor with little chance of anything other than a minimum wage job if that, still less any chance of affording anywhere to raise the next generation.

Housing Policy

The unwritten and unspoken organising principle of Westminster housing policy is simple: it is at any cost to keep the banking system afloat. House prices consist of the capitalised future rental value of land/location (which does not depreciate), and that of the buildings and improvements on the land (which do depreciate). So if rental values become genuinely ‘affordable’ ie fall significantly to what is known as a ‘social’ rental level then this will reduce the value of the land which secures bank mortgage loans, and the UK banking system will essentially become insolvent in terms of assets and liabilities.

This same systemic problem of bank solvency now prevents the modern day introduction – as was suggested until maybe 100 years ago by classic Liberals such as Winston Churchill, J S Mill, and back through Adam Smith to Tom Paine – of a tax on land rental values which is once again surfacing as a policy proposal.

Care Policy

As austerity and automation make inroads into the middle class, the attention of local Councils is increasingly turning to accessing equity in the homes of the elderly in order to cover the costs of what has become a rapacious private care industry. Rent-seeking in the care sector is rife, and inaptly named private equity investors who acquired portfolios of care homes and loaded them with debt to take out massive dividends are now being squeezed by Council cuts. Meanwhile carers are paid a minimum wage, if that, and this is a fraction of that charged by agencies and care homes for their services.

It seems to me that underlying both problems is a fundamental question: how can we make a transfer between a generation which is land-rich and care-poor to a generation which is care-rich and land-poor?

Promises, Promises

For thousands of years, the bedrock of economies was – and remains – promises or credit. If someone trusts me enough to give me something now in return for my promise that I will provide something of equivalent value in the future then he has given me credit, by accepting my promise.

But as the economist Hyman Minsky said anyone can issue promises or credits – the problem lies in getting them accepted. Institutions such as temples, government and now banks have long provided a role as a trust or risk middleman (intermediary) who essentially guarantees the performance and credit of the promissor.

It seems to me that the inter-generational transfer may be achieved through mobilising the value of land and care through creating a new framework for guarantee of care credits and land rental credits. But such a framework and system is at the moment only be an aim or aspiration: the question in terms of practical policy is always: “How do we get there from here?

Care Levy

Westminster has left Scotland with few tax options, none of them inviting, to the extent that the power to tax Scots’ income has not been taken up by the Scottish Government.

One of the interesting historical backwaters of UK income tax policy was Schedule A income tax, which was based on what is known as ‘imputed income’. This was based on the proposition that owner-occupiers receive an invisible economic benefit or subsidy from house occupation since if A rents out his  house to B who in turn rents his house to A then both A and B would be in receipt of taxable income. In other words, the proposition that home ownership should be a taxable privilege.

So the first part of this policy proposal is that a Care Levy may perhaps be raised as an imputed income tax in Scotland based on the rental value of residential land. This levy will raise a fund – a Care Pool – available for public investment in the creation of a networked Care service as a co-operative of co-operatives.

Care Dividend

The second policy element is for a Care Dividend then to be paid directly – administered professionally by service providers with democratic Council oversight – as a form of Universal Basic Income to all qualifying Scots. The innovation is that rather than being paid in £ sterling the care dividend will be paid in £1.00 care credits which are returnable in payment for the care levy.

Owner occupiers would be able to use the care dividend to pay their own levy, but if they wish, to use it to pay for care: tenants – many of whom will be carers – would be able to use the care dividend to pay their rent, because landlords would accept it in payment of their own obligation.

The above Levy/Pool/Dividend approach opens up interesting policy options .

Equity Release

Discounted prepayment of land rentals  is actually a simple form of Equity Release which is superior to existing forms of equity release in terms of cost and offers the potential for ‘Care Loans’, which the occupier could repay through buying back credits, or simply leave open until they move or until their death at home. Such discounted prepaid £1.00 land use credits are almost precisely how UK sovereigns funded themselves for 500 years from land rentals, taxes or duties.

This in turn enables anyone – including care home operators – who wish or need to refinance existing bank loans to do so at the same time as creating an optimal asset based on land values for long term investment by pension funds.

A Care Service

Initiatives such as the US Freelancers Union, based upon a need for health insurance, and the Independent Workers Union of Great Britain, which is recruiting members from courier companies such as Deliveroo, are opening up new methods of associating to a common purpose.  This leads to the possibility of what a hardcore Marxist I know in Berlin memorably termed Venture Communism – a new generation worker Co-operatives.

The care pool fund which results from the collection of a care levy could be used to provide the necessary development and working capital required to create a Scottish Care Service as part of the emerging sharing economy.  But as we may observe from  sharing economy platforms such as Uber, Shareholders don’t share value – they extract it. By  using simple collaborative agreements and instruments local councils may sponsor platform co-operatives to enable networked carer Coops to be supported by service providers without value being drained out by rent-seekers.

Independent Living & Resilience

In the same way that resource resilience and energy independence may be achieved bottom up  using simple mutual agreements and credit instruments, so it is that the land and people of Scotland may be mobilised to attain independence and  resilience through building capacity and delivering care for Scots and for Scotland.

West Lothian Questions have West Lothian Answers.