What countries could benefit the most from a transition to CBDC from hard currency, and what CBDC design features would maximize those benefits?

Key Points:

• Currency distribution and ATMs are the largest contributors to CO2e emissions from maintaining hard currency systems.

• A CBDC that can be administered fully remotely will most dramatically reduce transport emissions in countries with challenging geography.

• Reducing ATM emissions will require widespread adoption that eliminates significant demand for cash points.

Minimizing emissions from currency distribution: CBDC design features

As we’ve seen, greenhouse gas emissions from distributing hard currency can be a meaningful component of a country’s carbon footprint. The greater distances banknotes travel in Canada lead directly to higher relative CO2e emissions compared with the UK, highlighting the importance of a country’s geographic features in its circulation of hard currency. By extension, countries with the following traits could reduce cash-distribution-related emissions by adoption of a CBDC:

a) Low population density with high smartphone penetration (Russia, Australia).

b) Significant transport challenges, e.g.: archipelagos (Indonesia), mountainous regions (Nepal), countries with many remote communities and poor transport infrastructure (Brazil).

c) Outdated vehicles with poor mileage and high emissions (Iran).

For these cases, a CBDC could be effective if designed with several key features. First, it would need to be a retail CBDC, with digital accounts or wallets for individuals at the central bank, accessed via smartphone at the point-of-sale – in practice, effectively the same as current retail payments via debit or credit card. One BIS-proposed alternative for countries with low smartphone use or poor network coverage is pre-loaded central bank “debit cards”. However, these would still require distribution to end-users, and plastic cards would be heavier than paper banknotes, requiring more energy to transport. Transactions via smartphone would remove the need for physical distribution of CBDC cards, and individuals could have balances “saved” onto devices which could be used to transact in areas with poor service or during network outages.

A second necessary CBDC feature would be seamless and free peer-to-peer payments. A core function of cash in many countries is the ability to facilitate transactions in the informal economy. While user-to-business smartphone transactions are well established with solid technological foundations, any successful CBDC designed to replace cash and reduce distribution emissions must be capable of instantaneous, free, peer-to-peer payment. There are examples of such services currently operating on existing digital payment infrastructure (e.g. Venmo in the U.S., M-Pesa in Kenya), however they rely on network access to verify balances and execute transfers. A key technological challenge will be maintaining functionality while users are offline. Additionally, the BIS has highlighted the importance of user privacy on digital payments networks, and the potential for exploitative data silos to encourage anti-competitive practices among market participants in the digital payments space.

Minimizing use emissions: essential CBDC design features

ATM energy consumption is the core source of CO2e emissions during the cash use lifecycle stage. While a more direct method for making these machines less environmentally damaging would be to modify how they consume electricity (at both the grid level and the unit level), using a CBDC to minimize these emissions would need to target decreasing the number of ATMs in use by lowering the demand for hard currency in favour of a digital alternative. In a 2020 report by the BIS on design features of a successful CBDC, the bank lists prerequisites for wide adoption:

“[A] CBDC must be convertible, convenient, accessible and low cost. The underlying system should be resilient, available 24/7, flexible, interoperable, private and secure for the general public.”

Convertibility here means that any CBDC could be converted into cash at parity. A convenient, accessible, and low cost CBDC would be available to all citizens through a commonly used medium (i.e. smartphone) at no or negligible expense. And the technology or “underlying system” must be as reliable as the infrastructure for physical cash – no outages, usable anytime for any type of transaction, and interoperable with practically all systems within the economic and financial ecosystem. To the degree that a CBDC can achieve these goals it can function effectively as a cash substitute, reducing the demand for hard currency and the need for a CO2e-intensive ATM network.

Conclusions

Greenhouse gas emissions related to physical currency vary by the features of the country within which that currency circulates. Geographically large currency systems expend more carbon-based energy transporting cash than compact ones. Economies which can generate more of their energy from cleaner sources will see fewer emissions from the use of cash – specifically ATMs.

Designing a CBDC to accommodate these features can lower aggregate CO2e emissions, but will have varying degrees of impact based on each country's unique qualities. A CBDC that can be administered fully remotely will most dramatically reduce transport emissions in countries with challenging geography. Reducing ATM emissions will require widespread adoption that eliminates significant demand for cash points.