A rewards-based system for encouraging positive behavior is a nice, thought-provoking idea. The proposal in question may have its flaws, as many have pointed out, but the concept is worth considering.
Before we go on, let's make one thing clear: positive reinforcement is not a bad thing. On the contrary, it is a perfectly viable option, and successful applications of such reinforcement are found in such environments as the workplace (e.g., raises and bonuses), the classroom (extra credit), and on the road (lower insurance rates for a good driving record). It could come in handy here, as well.
The greatest issue with the suggested system is that it's punishment disguised as positive reinforcement. Rather than following rules to earn ranks, people instead do so for fear of losing their existing ranks. Do you see where the problem lies? The system serves to discourage poor behavior, rather than encourage good behavior. It's not at all a rewards-based system.
So, now what? We've established that a rewards system is fine, so let's consider alternatives that fit within the definition of positive reinforcement. The idea is not to take, but to give. Ideally, the system should be private and personal, taking into account concerns of status and superiority (i.e., no obvious indication that users received rewards). Some examples of how we can approach the problem in this way include:
X extra name changes for every Y months without a warning
X days of free donor status for every Y months without a warning
Also, it might be of interest to know that the staff have considered an achievements system at least once in the past. While I'm not sure if rewards for good behavior would be included, I think they could fit.
In any case, a rewards-based system has a lot of potential, and I'd be keen to see what effects it would have on the behavior of members and the workload of moderators!