Panel: The three crises: oil prices, climate change and international debt

The inevitable and imminent decline in world oil and gas production will solve the climate crisis if, and only if, world coal production is controlled. However, the chances of controlling coal production are greatly reduced if the world's monetary system stays as it is.

This is because, at present, if any economy fails to expand, it will probably go into a recession as a result of the way that its money was put into circulation. The political and social pressures to continue economic expansion are therefore immense. And, because economic expansion almost certainly entails greater energy use, this need for continuous expansion is the main obstacle to tackling the climate crisis. It's simply that, as things stand, if a country is facing a choice between the possible collapse of the world's climate in 50 years' time and the certain collapse of its national economy this year, it will act to save its economy and break, or stay out of, any agreement not to mine more coal.

But if we change the way money is created, we can remove the need to expand. The reason that economies get into difficulties if they fail to grow is that surplus capacity, the product of previous years' investments, begins to appear if demand fails to rise by as much as was expected. Companies therefore cut back on further investments. They borrow less, with the result that the money supply, which is based on borrowing, begins to contract. Less money in circulation cuts profits and makes trading more difficult, so further investment cuts are made. In addition, the people who would have worked on the companies' cancelled projects lose their jobs and spend and borrow less too, which also cuts the money supply and the level of economic activity. More jobs are lost, and the economy risks slipping into a spiral of decline.

The solution to this problem is to replace a money supply which begins to contract whenever new borrowings exceed loan repayments with money that is spent into existence by the state and stays in circulation until it is taken out by being paid back to the government in tax. An economy with such a currency would be very stable and controllable, and well able to cope with the changes that reduced fossil fuel consumption will bring.

A new money system is also required at the global level to ensure that the overall level of world trade is compatible with the energy supply and hence the emissions target. This currency is the ebcu ­ the emissions backed currency unit ­ which would be issued once and once only by a new international Issuing Authority and given to governments on the basis of their populations. The issue of this currency would also solve the debt crisis because highly-indebted poor countries would be able to use their ebcu windfall immediately it arrived to clear their foreign debts.

Ebcus would replace the dollar, the pound, the euro and the other reserve currencies for all international trade transactions, including the trade in the emissions permits issued by the Fossil Energy Buyers' Cartel. Their use would remove one of the great distortions in the world economy at present ­ the ability of the US, and to a much smaller extent, Britain, to pay for their imports in money that both countries have created themselves and then borrow that money back and pay interest on the loan in yet more self-created money. This ability has enabled the US to run a deficit on its balance of payments current account for over twenty years. It is the reason that it is a superpower. America is currently importing $600 billion worth of goods each year, a third of its imports, without having to pay anything for them. And the debts it has run up through this process ­ which amount to half the world's savings ­ may never be paid. Replacing the dollar with the ebcu would remove this US advantage, one which the eurozone is trying very hard to acquire.

Before the ebcu was issued, the Issuing Authority (IA) would announce that, if ever the price of emissions permits rose above a certain price, it would offer more permits for sale but remove the ebcus used to pay for them permanently from circulation. As the volume of world trade that it is possible to carry on is determined by the amount of international currency available to finance it, the loss of these ebcu would restrict international business. This, in turn, would reduce global energy use and hence the demand for emissions permits.

On the other hand, if the price of emissions permits was tending to fall, the IA could either get the Cartel to issue fewer permits the following year or it could buy permits itself, thus putting more ebcus into circulation and increasing world energy demand.

It would therefore be a very simple matter to keep the ebcu price of emissions permits at a constant level. This would give stability to the entire world economy. Indeed, as the ebcu price that the fossil energy producers would receive would be fixed too, everyone would always know exactly how many ebcu they were going to have to pay for their energy.

What they wouldn't know is what the price of ebcu would be in terms of their national currencies which would have a floating exchange rate with the ebcu, one determined by supply and demand. Countries which converted quickly to renewable sources of energy and consequently did not need to buy so many emissions permits, or gave themselves extra to sell, would do well. Their currencies would be strong and they would find that imports were cheap. Other countries would find that it was costing them more and more in national currency terms to buy their imported energy, which would give them a very real incentive to switch to renewable sources of energy too.

To sum up: without monetary reform at both national and global levels, the pressures to continue to use more fossil energy each year to ensure that one's national economy does not collapse will be immense, and probably irresistible. As a result, it would be almost impossible to introduce an effective global climate emissions-control agreement and, if one was introduced, it would be much more likely to break down.

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