Cash and the Environment

Authored by John Winchcombe and Paul Blond, the paperSee Banknote paper. More explores how central banks and industry participants can optimize the cash cycleRepresents the various stages of the lifecycle of cash, from issuance by the central bank, circulation in the economy, to destruction by the central bank. More, minimise its environmental footprint, and boost efficiency through recirculationThe right to recirculate banknotes that have been checked for authenticity and sorted for fitness by banks and cash-in-transit companies. The right is normally based on rigorous rules established by the central bank. More and automation.

The Environmental Impact of Cash

According to the European Central Bank’s Product Environmental Footprint (PEF) study, 82% of the environmental impact of cashMoney in physical form such as banknotes and coins. More occurs after issuance. The primary contributors include:

• Electricity Consumption: Energy used by ATMs and cash-handling machines.
• Fossil Fuel Use: Emissions generated from cash transportation.
• Processing Inefficiencies: Energy waste in banknoteA banknote (or ‘bill’ as it is often referred to in the US) is a type of negotiable promissory note, issued by a bank or other licensed authority, payable to the bearer on demand. More sortingProcess of fitness sorting of banknotes by their condition of use. Through this process, used banknotes are classified as fit or unfit to return into the circulation. See Processing of banknotes. More and recyclingThe process of converting waste materials into new materials and objects. Banknotes are increasingly recycled after destruction, and the waste is often used for landfills, isolation material etc. Polymer notes are melted into pellets which are recycled into new products. Recycling is often incorrectly used instead of recirculation. See Recirculation. More operations.

Both central banks and private sector entities can mitigate these impacts by reducing cash transportation, transitioning to renewable energy sources, and investing in automation.

Who Should Lead Sustainability Efforts?

Sustainability in cash managementManagement and control of cash in circulation. More is a shared responsibility. While central banks wield direct and indirect control through regulations, incentives, and penalties, the private sector also plays a critical role. The UK’s Cash Industry Environmental Charter (CIEC) is a prime example of an industry-led initiative where banks, retailers, and CIT companies collaborate to reduce the carbon footprint of cash management.

How the Cash Cycle Is Changing

Historically, central banks managed the entire cash cycle—from issuance to destruction. Today, many aspects of cash distribution and recirculation are delegated to the private sector. Key trends include:

1. Delegation of Cash Processing: Central banks increasingly outsource cash processing to commercial banks and specialized cash management firms.
2. New Business Models: Technological advances enable automation and local cash recycling.
3. Sustainability as a Core Priority: Efforts focus on reducing emissions from cash transportation and lowering energy consumption in ATMs.

Key Tools for Sustainable Cash Management

1. CurrencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More Fitness Management

   • Clean Note Standards: Ensure that only high-quality banknotes remain in circulation, extending their lifespan and reducing waste.
   • Banknote Sorting Frameworks: Optimize fitness checking and authenticationThe process of proving that a banknote or security document is genuine. More for efficient recirculation.
   • Penalties and Incentives: Motivate commercial banks and CIT companies to manage cash responsibly.

2. Off-Balance SheetA piece of paper or substrate of 800 mm by 700 mm, on which banknotes are printed. The “sheet to sheet” printing technique is the most widely used in printing of banknotes, but the roller printing technique also exists. More Arrangements
   These arrangements enable financial institutions to maintain physical custody of cash while reporting it to the central bank, thereby reducing unnecessary cash movements. Benefits include:

   • Optimized cash stock management
   • Reduced cash transportation emissions
   • Enhanced liquidityDescribes the extent to which assets or rights can be converted into cash without causing a significant decrease in the asset’s price. Accordingly, liquidity is often inversely proportional to the profitability of the asset and involves the trade-off between the selling price and the time needed to convert it to cash. In finance, cash is considered the most liquid asset and cash is sometimes used as a synonym for liquidity (e.g. cash reserves; cash pooling…). More efficiency in the banking system
     Examples: The Bank of England’s Note Circulation Scheme (NCS) and the US Federal Reserve’s Custodial Inventory (CI) Program.

3. Local Recycling Initiatives
   By reusing cash deposits for local withdrawals, these initiatives reduce the need for long-distance transportation. Benefits include:

   • Lower carbon emissions through reduced CIT vehicle usage
   • Improved cash availability in regions with limited banking infrastructure
   • Cost savings for retailers and businesses handling large cash volumes
     Note: Challenges such as imbalanced denominationEach individual value in a series of banknotes or coins. More circulation must be addressed to ensure optimal cash flow management.

Case Studies: Innovative Approaches in Cash Management

Country-Level Innovations:

• Canada (Royal Canadian MintAn industrial facility manufacturing coins. More): Employs coinA coin is a small, flat, round piece of metal alloy (or combination of metals) used primarily as legal tender. Issued by government, they are standardised in weight and composition and are produced at ‘mints’. More recirculation to decrease new coin production.
• Netherlands (Dutch National Bank): Established a voluntary Cash Covenant to sustain cash infrastructure.
• Philippines (Bangko Sentral ng Pilipinas): Utilizes coin deposit machines and cash service alliances to optimize cash handling.
• South Africa (South African Reserve BankSee Central bank. More): Implements fitness-based cash sorting and strategic cash storage solutions.
• UK (Bank of England): Focuses on wholesale cash distribution reforms and collaborative industry efforts.

Industry Innovations:

• NCR & Diebold Nixdorf: Launched energy-efficient ATMs and self-service cash recycling machines.
• Bantas: Provides environmentally friendly cash services.
• Asian Cash Management Association (ACMA): Monitors and promotes best practices in cash handling across Asia.

Strategic Recommendations for the Future

To improve the environmental sustainability of the cash cycle, stakeholders should prioritize:

1. Implementing renewable energy solutions for ATMs and cash-handling equipment.
2. Transitioning to electric CIT vehicles for short-distance transportation.
3. Expanding local cash recycling networks to minimize transportation needs.
4. Standardizing packaging, tracking, and data-sharing protocols to optimize operational efficiency.

Further Considerations

The transformation of the cash cycle presents both challenges and opportunities. By embracing automation, sustainability initiatives, and collaborative efforts, stakeholders can ensure that cash remains viable, resilient, and environmentally sustainable. It is imperative for central banks, commercial banks, and industry partners to work together to develop a modern cash management system that balances cost efficiency with environmental responsibility. While sustainability is essential, it must not compromise the accessibility, availability, acceptance, and affordability of cash. Maintaining cash as an inclusive and practical payment methodSee Payment instrument. More is crucial.

Moreover, although the environmental footprint of cash is low, ongoing efforts continue to reduce it further. The true impact of cash—and digital payments—extends beyond the transaction itself to the nature of the purchase it facilitates. Evaluating whether a transaction promotes sustainable or unsustainable consumption (for example, supporting fast fashion versus buying locally sourced, eco-friendly products) provides a more comprehensive measure of sustainability. Investigating how cash transactions might encourage more sustainable consumer behavior could yield valuable insights into their broader environmental impact.

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• Cash and the Environment