Green Bonds, Carbon Taxes, and Market Failures
THE gathering dangers of global warming for life necessitate that humanity collapse its dependency on fossil fuel energy (FFE). Ecological fiduciary responsibility requires shifting balance from political restraint to action. The challenges of managing a drawdown of FFE’s in concert with economic security, while significant, are often exaggerated. Recent research and analysis show that oil and coal-fired power plants exact pollution damages larger than the economic value they add. For example, accounting for the gross external damages (GED) from coal would add ~17.8¢ per kilowatt-hour (kWh) of electricity generated. In 2012, German utilities will obtain rooftop solar on long-term contracts for ~23¢/kWh. Large projects will receive just 18.7¢/kWh. This makes it very likely that solar electricity will be cheaper than that from coal by late 2013 in Germany. And as a result of California’s clean air bill A.B. 32 it will not be far behind. It is clear that GED considerations further strengthen the economic argument for decarbonizing our economy and that the trend of lower cost cleaner energy is accelerating. This can be contrasted with growing purchase and societal costs, often going unpaid, of FFEs.
What would a program similar to the Germany’s do for market and external costs in the U.S. market? More abundant sunshine in the many areas of the US (29% in Minneapolis and up to 70% in Los Angeles) makes parity with Germany easily attainable. Americans could buy solar energy on long-term contract fors 18.6 ¢/kWh in Minneapolis and just 15.4 ¢/kWh in Los Angeles, taking into account only current subsidies. Factor in the federal 30% solar tax credit, and solar could be had for 14.3¢/kWh in Minneapolis and 11.8 ¢/kWh in Los Angeles.
Impediments remain to growing solar as percentage of US energy sources. For example GEDs and Energy Return on Energy Invested (EROEI) of solar modules are different. Solar cells are built in Europe with its mix of electricity generation of nuclear, wind and other sources and must be compared to building solar cells in China, which has mostly coal-generated electricity and higher GEDs. A more robust body of research for Life Cycle Analyses (LCA) of solar plants is needed as they are increasingly built at scale.
But, what about financing and scaling across the US? The existential challenges of deploying renewable energy (RE) sources to address global warming can be met like those of the Great Depression, World War II, and space exploration: 21st century versions of War Bonds and Patriot Taxes integrated with coherent public-private partnerships to develop RE sources and infrastructure. Two of the world’s largest economies in Germany and California are leading the way. Yet fossil fuel marketers still dominate the debate contending that higher (FFE) prices hurt the public economy and that renewables are impractical despite the evidence to the contrary.
Ambitious politicians assure the public they can control the cost of energy and low energy prices. They argue that there is no need or, indeed, no substantial benefit from clean energy investment subsidies but support ~12x more subsidies for FFE over RE . Meanwhile, public investment in RE projects that benefit the economy and ecology are to be found everywhere, and financial, technological, and policy innovations instantiate sustainable growth. Both Germany and California are ahead of schedule for supply from their RE investments. Yet Germany is planning to cut its subsidies via its Feed-In-Tariff (FIT) while RE plants in California come online. So more hard work to implement policy to accelerate deployment and remove market barriers lies ahead.
Growth found with FFE’s is problematic for its unpaid costs as well as low reinvestment rates in society. When gas prices spike, oil industry profits soar. They are rarely reinvested in the nations and people whose lands provided the fuel product. Such growth can be said then to be parasitic of itself and its host — cancerous. Increasingly, underlying issues of the unsustainability of FFE dependence inform serious concerns from unexpected quarters. OPEC stated last month in London at Chatham House:
Greenhouse gas emissions and global warming are among humanity’s most pressing concerns. Societal expectations on climate change are real, and our industry is expected to take a leadership role.
The “drill, baby, drill” consensus of Congress and the administration is about to hit a wall. FFE extraction methods, such as fracking, drive unit and externalized societal costs higher than advertised. When the true costs of FFE’s are born by the drillers rather than the public, losses will mount for drillers. This economic analysis must take place against a backdrop of resource constraints: many observers worry that the world is now drawing nearer to a new energy crisis. Oil demand now exceeds supply by as much as 500,000 barrels per day. Wide open production even at $105 dollars per barrel is not adding enough new supply. Building new refineries for this resource is a short term solution — but its no substitute for preparation. Public subsidy to refineries for a peaked resource that poisons our planet should be phased out on public health and economic grounds.
Why Isn’t The Market Signaling the True Cost of FFE?
Stabilizing the amount of Carbon in the atmosphere at around 450 ppm by 2020 is a very big challenge. Simply eliminating oil subsidies would halve global warming. FFE costs us much more when health and environmental costs are added tripling the average unit cost in the case of coal. Economists writing in the American Economic Review conclude that this a market failure to set a real price. In cases of market failures, we know that government intervention increases efficiency. For example, when competition in a market is limited, antitrust laws that prevent monopoly are intuitively and empirically known to be helpful.
If consumers were paying the true cost, they would use much less electricity from fossil fuels – maybe even none, depending on the alternatives. Some say its all textbook economics. Externalities like pollution are classic market failures. Economics 101 says that this failure should be remedied through pollution taxes or marketable emissions permits. When numbers are put to these basic propositions — the effects are substantial and real. This would then, by the logic of free market economics, argue for pollution taxes. In the absence of such, the public turns to clean energy subsidies. Subsidies have brought about the advent of many key industries in U.S. history – railroads, oil, aviation, and the internet among others.
While a straight Carbon Tax is preferable to address the market failure, its politically impossible in the US at present. FFE marketers fight regulation and subsidy as inefficient, but by looking at GED measures we can see the opposite is true.
Solar Subsidies and FIT’s: Public RE Investments Advance Societal and Private Interests
Solar subsidies in practice can help inform policy making aimed at limiting carbon emission and pollution. An informative example of subsidies and tax policies at work for Solar RE was published in the the New York Times in 2011. NRG Energy built a solar array on its California Valley Solar Ranch that will produce enough electricity to power about 100,000 homes. Taxpayers and ratepayers are providing subsidies worth almost as much as the entire $1.6 billion cost of the project.
Government support generally consists of loans, grants, and contracts that require electric customers to pay higher rates. Such programs largely eliminate private investment risk and assure large profits for years out. Goldman Sachs, Morgan Stanley, General Electric, utilities like Exelon and NRG, Google – all are beneficiaries. There are open questions as to whether the public shares equitably in the return beyond a cleaner environment and increased public health. And subsidies for FFEs are phased out, more accurate costs will emerge in the marketplace. Taxes on pollution and carbon will then allow for more accurate societal cost accounting for FFE relative to REs.
The Solyndra bankruptcy was an exception proving a rule: US taxpayers have done well with RE venture finance. The private sector has done well with little risk undertaken. From 2007 to 2010, federal subsidies jumped to $14.7 billion from $5.1 billion. In the European Union (EU), 62% of all new energy coming online is from renewable sources. Yet, many point out that current yields from photovoltaic (PV) solar barely scratch the surface of supply needs. In Germany for example, $100 Billion (this number also assumes the liabilities of FIT contracts 20 yrs out) worth of investment has brought PV solar up to only ~3.9 its energy supply mix at 7.5 Gigawatts.
Critics contend that Germany produces more thanworld combined from solar RE’ and the amount of carbon thereby removed is negligible. This tragedy of the commons, where one large constituent fails to act and thereby encourages inaction by others. And, this is why unified international action is so important. Already, both California and Germany, two of the world’s largest economies, are providing society a road map for RE transition. Both are ahead of the projections for power and return and still have not begun taking FFE’s sources offline. It will be a while before we can score the carbon costs of their efforts. FIT’s may be good, yet different methods and policies may prove better at reducing emissions and securing economies. And, further increases in R&D funding are essential.
Either way, as the study undertaken by Google.org found, policy breakthroughs must to be matched with technological ones for maximal de-carbinization rates. Beneficiaries of public support should re-invest some portion of their windfalls into R&D for cleaner and renewable energy sources.
NRG sees the government’s largess as once-in-a-generation. This also is a problem. Such efforts should mark the opening of an era of public finance of RE with a contemporaneous draw down of such support for FFE. So really the question is whether to subsidize fossils or renewables and/or on what differentials. We can see that beyond the short-term increase in construction hiring, they say, cleaner air and lower carbon emissions from renewables will benefit the country for decades.
Public Finance Efforts Can Provide More Climate Leadership
PG&E will pay NRG ~$ 165 a megawatt-hour. At the time the contract was awarded, that was about 50 percent more than the expected market cost of electricity in California from a newly built gas-powered plant. Californians then are paying more for electricity, but are exacting a lower cost on their neighbors by avoiding the environmental costs of fracking and fission. They are also laying the groundwork for LCAs that can help identify overall rates of decarbonization and point to improvements.
NRG received about 1.4 billion and is projected to earn ~20% rate of return on equity. By 2015, NRG expects to be earning at least $300 million a year in profits from all of its solar projects combined. Its 290-megawatt Agua Caliente Solar Project, when finished in 2014, will produce enough energy to serve about 100,000 typical homes. It will prevent an estimated 5.5 million metric tons of CO2 emissions over 25 years. Consumers will receive its benefits earlier than expected since solar PV generates power in modular units. Unlike FFE and nuclear power, which can not be supplied before the entire project is completed, NRG is in much better shape with regard to future deliveries of clean energy than they would have expected just a year ago.
Taxpayers are uniquely capable of financing largescale clean energy deployment and should disproportionately share in the return given their ability to drive risk so low. Some analysts argue the industry could have delivered more for a lot less price, in terms of subsidy. In these cases, the public should fine tune its negotiations with renewable marketers. A menu of policy options should include:
- A US Treasury Green/Climate Patriot bond program
- Increase funding for technology and policy research and development
- Formal study of Carbon Tax outcomes in Australia and tracking of A.B. 32 results
- Incentivizing subsidy recipients to invest in quality employment creation and practice in the US and abroad as based on Human Development Index (HDI) measures
In all cases, the benefits of ensuring security based on clean energy and domestic jobs should be weighed against the costs of corporate welfare for fossil fuel marketers where few technological breakthroughs and little job security accrue to the public.
For example, the Energy Department blocked NRG from certain Treasury grants it was legally entitled to receive. In other cases, the agency required recipients to pay down part of the government-guaranteed construction loans instead of cashing out the equity investors. The concern was the extra subsidy would result in excessive profit. Why not explore allowing for the option of excessive profits in return for underwriting green bonds aimed at national infrastructure and/or building carbon markets? We can and should do this in order to further define the differences between public and private capital.
As the US updates its total exergy – a comparison to the depletion caused by producing the same good (or a different one) using a different set of natural resources – we can receive win-wins for country and private interests.
Public Engagement of Policymakers is A Must
The public must demand a discussion figuring all energy users about the future of US climate policy in as equals to energy marketers. By maintaining RE subsidies and phasing out ones for FFE sources. we can protect society and advance a healthier economy. This protects our wealth, health, and security. These actions must move us away from a unilateral energy policy towards “green growth” measures as taken by our neighbors and partners across the world. Such policy actions can bring about a dispositive move towards pricing and taxing carbon. A healthier and more productive future that puts people before politics. David Brooks wrote:
…the US public is polarized between ‘drill, baby, drill’ conservatives, who seem suspicious of most regulation, and some environmentalists, who seem to regard fossil fuels as morally corrupt and imagine we can switch to wind and solar overnight.
Yet, recent polls find the public accepts what the majority of the world’s scientists have concluded: the earth is warming and CO2 emissions are the main cause. It is policymakers that display the greatest polarization. Indeed, recent research suggests that political mobilization by elites and advocacy groups is critical in influencing climate change concerns. The public understands the threat of greenhouse driven global warming. Yet, it is many politicians and their backers that are out of touch. There are proven and burgeoning publicly funded successes for RE in the US and abroad. The public perceives that fossil fuel energy is cheaper, but in reality, we observe the opposite to be true. Plus, we are running out of oil.