Talking ethics: CBDCs can protect the environment - but should they?
1 Introduction
A new monetary system with Central Bank Digital Currencies can support in protecting the environment by setting new rules how people use money and what they can use it for. This article focuses on a specific dilemma societies might face when we consider its introduction: taking action for the pressing environmental challenges versus the potential relinquishment of privacy and liberties.
1.1 Abstract
This article deals with the current status of the introduction of Central Bank Digital Currencies and their alleged positive impact on environmental challenges.
While there are many considerations how CBDCs can be used to save the environment, two main considerations shall be reflected in this article:
1.2 Environmental challenges and calls for solution
In 2015 global leaders committed to the 17 Sustainable Development Goals by the United Nations. (The United Nations, 2015) The sustainable development goals were built on rationales, including those related to the planet and the environment. Global leaders acknowledged that poverty was the greatest global challenge to the world, however four other challenges related to the environment have been acknowledged, too: (The United Nations, 2015, p. 3)
·?????? Sustainable consumption
·?????? Sustainable production
·?????? Sustainable management of natural resources
·?????? Urgent action on climate change
Details about the sustainable consumption and production had already been developed three years earlier in the 10 Year Framework of Programmes on Sustainable Consumption and Production Patterns (10YFP). (UN Environment Program, 2012). As part of this program, six action fields were defined, which give a more concrete insight into the measures related to the topic: (One Planet Network, 2023 a)
The One Planet Network lists a number of projects, which shall not be explained in detail as part of this article. In order to assess the potential positive impacts of Central Bank Digital Currencies on the environment, this article looks among other aspects exemplarily into the question how the potential monetary system of the future can support the development of the circular economy, a topic which is often dealt with in the various initiatives of the One Planet Network. (One Planet Network, 2023 b) or (One Planet Network, 2023 c)
For the purpose of this article, the definition by the European Parliament of a Circular Economy is used:
“The circular economy is a model of production and consumption, which involves sharing, leasing, reusing, repairing, refurbishing and recycling existing materials and products as long as possible. In this way, the life cycle of products is extended.” (European Parliament, 2023)
Given this definition, a circular economy can be considered as an important part for a sustainable production and sustainable consumption, which is why it plays an important role for this analysis.
Following, the current status of the introduction of Central Bank Digital Currencies (CBDCs) is explained.
1.3 Current status of CBDC introduction
With the transformation to a more digital economy Central Banks all over the world have been doing research on the introduction of digital currencies. (BIS Innovation Hub, 2023) A Central Bank Digital Currency is a digital representation of a sovereign currency which is issued by a central bank and for which it is liable. (Kiff, 2023) Compared to privately issued crypto currencies, the central bank is a guarantor of the security, stability and convertibility of such a currency. The two potential types of CBDC have been defined as CBDC for wholesale purposes (wCBDC) or such for retail purposes (rCBDC). The Bank for International Settlement visualizes the different types of physical and digital money in their money flower.
Source: (Bank for International Settlement , 2017, p. 60)
CBDCs may become the foundation of a digital monetary system as more than 100 central banks worldwide are currently working on a potential introduction. (Mikhalev, Burchardi, Struchkov, Song, & Gross, 2023) Compared to money issued by the banking system as bank deposits, CBDC offer the security of a central bank. As they are an equivalent to cash, which is a physical form of central bank money, the further digitalization of the society could potentially lead to CBDCs replacing cash in the future, although a replacement is neither being planned or perceived realistic in the Euro area, (European Central Bank, 2023a) in Great Britain (Bank of England, 2023) nor in the USA. (Board of Governors of the Federal Reserve System, 2023)
1.4 How CBDCs can potentially solve environmental issues
The connection between sustainability and the issuance of CBDCs is not obvious on the first sight. However, there has been scientific research on the question how CBDCs can help solving sustainability issues, a question which is going to be briefly discussed in this chapter.
In a move to support sustainability, central banks have been working on solutions how they can help tackling environmental problems. One of them is the European Central Bank (European Central Bank, 2023b) It can be argued by critiques that the additional objects related to environmental issues are a pretension and enlargement of competencies, going beyond the initial mission to maintain price stability. (European Central Bank, 2023c) However, as there is a high level of consensus that the various environmental issues are of concern for the entire planet, underlined by the 17 Sustainable Development Goals, contribution of all involved parties is an understandable reaction.
As Central Banks are working on the introduction of Central Bank Digital Currencies, there has been research by scientists how such a digital monetary system can contribute to a more sustainable development in general and, potentially, how it can support sustainable consumption and sustainable production alike. Ozili has been doing broad research on this topic with a focus on the circular economy. (Ozili, 2023)?(Ozili, Circular Economy and Central Bank Digital Currency, 2022) & (Ozili, 2021) Lee and Park worked on more general environmental implications related to the introduction of CBDC. (Lee & Park, 2022) The main conclusions are:
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2 Ethical dilemma
2.1 Definition
An ethical dilemma exists when there are two or more options to solve a problem, but neither of them is the best ethical or moral one. (Western Governors University, 2021) This definition describes the paradox in which decision makers sometimes have to make decisions.
2.2 Ethical Dilemma regarding the introduction of CBDCs
Regarding the question of whether or not CBDCs should hold attributes which allow them to tackle environmental issues as described in chapter 1.4, there is a big ethical dilemma. Technically, CBDCs can offer central banks options to address environmental issues, especially when it comes to tracking or even prohibiting allegedly harmful consumption by consumers as described by Ozili. (Ozili, 2023) They would also allow central bank to directly inject and thus subsidize businesses which produce environmentally friendly technologies or participate in the circular economy while access to credit could be reduced or prohibited for companies with a high-pollution business model. (Ozili, 2022) & (Ozili, 2021) Given these solutions, which are already considered as features for one of the first CBDCs in Nigeria by Ozili, it becomes obvious that central banks can have an enormously powerful tool to solve environmental problems on a large scale: individuals can be restricted with their consumption while environmentally unfriendly business will either be forced into a transformation or stop of their business activities as access to funds can be prohibited.
In brief, the ethical dilemma is a decision between a large-scale solution for the pressing environmental problems by restricting production and consumption with restricted individual liberties and a planned economy on the one hand and a market economy with a individuals and companies enjoying liberties and freedom and a largely missed chance for a large-scale solution for environmental issues on the other.
3 Solutions
Ethical theories can help finding answers for this dilemma. In a first step, a variety of ethical theories is being applied on this ethical dilemma to answer the question whether or not central banks should implement CBDCs with features to solve environmental problems on our planet as suggested by Ozili. In a second step, the author briefly discusses solutions based on this analysis whether adaptations can lead to more ethical decisions.
Solving ethical dilemmas in business is suggested to be done with the help of a “prism of ethical theories”. (Crane & Matten, 2016, p. 124) This model follows a pluralistic perspective to solve an ethical dilemma with a variety of ethical theories, resulting in a number of normative considerations which allow a balanced decision.
3.1 Shall CBDCs be attributed with environmental features?
Several ethical theories are taken into consideration to answer the question whether environmental features in CBDC shall be considered for the cost of individual liberties and a market-based economy.
3.1.1 Theory of Egoism
The contributors to this theory are Adam Smith and Milton Friedman. According to this theory, “an action is morally right if in a given situation all decision-makers freely decide to pursue either their (short-term) desires or their (long-term) interests.” (Crane & Matten, 2016, p. 93) Coming to the question of introducing a CBDC with environmental features, it would be wrong according to egoism theories to attribute environmental features to a CBDC because it would limit the freedom of individuals to pursue their short-term desires in many cases as their desires, such as desires to consume, could be limited due to sustainability aspects. Also, long-term interests of individuals could be limited by CBDC with environmental features because CBDCs could distort free market decisions and thus investment outcomes.
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3.1.2 Theory of Utilitarianism
This theory follows the principle of the “greatest happiness”. According to this second consequentialist theory, ethical decisions should be guided by the purpose to create the biggest possible pleasure while minimizing the pain for all involved parties. (Crane & Matten, 2016, p. 98 f.). For the question of this article, only some of the stakeholders can be taken into the consideration and only some of the pleasures and pains can be assessed. If we consider the current, the coming generation and companies as stakeholders, the consequences of introducing / not introducing CBDC with environmental features would lead to the following considerations:
Applying a utilitarianism analysis to this problem does not give a very clear answer which of the decisions should be made as both would imply an outcome of maximum pain for either the current generation in the form of strong limitations of liberties or for future generations in the form of a likely destroyed environment.
3.1.3 Theory of Ethics of Rights
Theories of Ethics of rights go back to the British philosopher John Locke, who mentioned natural rights for humans, which should be respected. (Crane & Matten, 2016, p. 104 f.) These rights are the right of life, freedom and property and include nowadays, among others, the rights for free speech, fair legal processes and privacy.?(Cambridge Dictionary, 2023)
Ethics of Rights get the dilemma, which is described in this paper, to the point: some of these basic rights are conflicting with each other when making the decision whether or not a digital currency should be attributed with environmental components. The right of life is the foundation for all human life and protecting the natural resources of our planet can be equated with this right. In Germany, for example the right of life is protected by the constitution with §20a. (Bundeszentrale für Politische Bildung, 2022) Having a monetary system which prohibits actions harming the environment could thus be warranted with the laws of many democracies, in the case of Germany even with the constitution. However, as we have learned, considerations of such a monetary system by thought leaders like Ozili come with strong limitations of freedom and privacy, two other fundamental rights on which Ethics of Rights are based on.
As with Utilitarianism theories, the Ethics of Rights do not give clear recommendations for the question of this paper.
4 Potential improvements for a more balanced decision making: Discourse Ethics
The critical analysis of three ethical theories discussed in the previous chapter did not give a clear way out of the dilemma. Clear violations of fundamental human rights for either of the decision could lay the basis for little objective discussions, should the introduction of CBDCs include attributes to protect the environment in the future. On the one hand people who have been fighting for more actions by policy makers and who would see such a monetary system as a big progress towards a more sustainable world. On the other hand, civil liberty activists who would not negotiate liberties, no matter how pressing the problem to solve would be. Their keynote would be “when in doubt, choose freedom.” (Brandt, 2012)
In such a situation, discourse ethics might help to find a way out. Discourse ethics aim to generate norms which are acceptable for both sides. (Crane & Matten, 2016, p. 117 f.) As Horst Steinmann and Albert L?hr have mentioned, ethical reflection of a problem happens in real-life situations rather than in belief systems such as environmentalism vs. libertarianism. (Steinmann & L?hr, 1994) Looking at the real-life salutation could thus guide the way out of the dilemma.
To find a solution for the dilemma with the help of discourse ethics, the question to be answered is, how a mutually acceptable solution could look like. The answer could be found in an adaption of the environmental features of a CBDC. As the basis for taking urgent action towards a more sustainable world have been committed to by most international leaders, it can be concluded that there is a high level of agreement that environmental pollution in all its forms creates costs for the society – these costs can in a monetary system with digital money be calculated and made transparent. Consumers should understand their personal footprint. Governments could potentially set incentives for more sustainable consumption by applying different value added tax rates to environmentally friendly products or products which are part of the circular economy vs those with a big environmental impact. This would set massive incentives for companies to produce circular products and lead to higher market prices for environmentally unfriendly products without prohibitions. On the other hand, societies should urge policy makers in contrary to Ozili’s suggestions, to make it impossible to limit the freedom of use of a digital currency in a turn to protect human rights. (Ozili, 2023, p. 8) Including freedom of use of money and anonymity for its use could be even written into the constitution of countries. Furthermore, governments should guarantee highest levels of privacy. For the latter, Chaum et. al. suggested a design solution for digital currencies which would allow all participants highest levels of privacy and even anonymity as if they were using cash. (Chaum, Grothoff, & Moser, 2020) Further, recent developments in the field of "Zero Knowledge Proof" can become an interesting technological approach.
5 Conclusion
As our world becomes more digital, the digitalization of the monetary system is about to happen with the introduction of CBDC. Digital money could have a big positive impact on the environment, which is why some thought leaders suggest to limit consumption and direct investment into more sustainable production. Such interventions into the market raises an ethical dilemma, which can hardly be solved by most ethical theories. Discourse ethics, however, offered a solution by looking at the design of a new digital monetary system and asking the question what could be an acceptable solution for both sides. Central Bank Digital Currencies can lay the foundation for a more sustainable economy and use its design to set incentives for companies to produce more sustainably and for consumers to consume more sustainably alike. With a careful design and high consideration of individual liberties and privacy, CBDC can become an interesting tool to lead the world into higher levels of sustainability.
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