Energy Bonds: A New Financial Market
One of the most daunting but necessary challenges faced by the U.S. is getting to other side of this energy crisis, both by migrating away from fossil fuel-based energy and building new infrastructure. But this is a challenge that requires billions of dollars, money that has to come from somewhere.
As a country, we have become locked in a consumer debt mindset. Few people adequately prepare for their retirement. Savings rates have dropped to all-time lows, while federal and consumer debt has ballooned to record levels.
But there might be a way to fund these massive clean energy public works projects, promote long-term savings and sanity in public finance, and in the process, educate citizens about how government and financial markets work.
We all hate taxes. As the saying goes, the power to tax is the power to destroy. So instead of creating a tax, we should create a national savings program that invests in national clean energy infrastructure projects. Here’s how it might work. (Keep in mind this is a simple example; in the real world, it would include exceptions):
A new line item appears on your payroll tax for a so-called “Federal Investment Bank” (or whatever it gets named). Five percent of your gross pay is automatically invested, say, $250 per month. This is not a tax, however, but a debt instrument, backed by the Treasury and carrying a 10-year maturity; whether you cash it in or reinvest it is up to you. As with private retirement accounts, incentives reward you for staying invested over the long term.
This fund would provide cheap, long-term capital for public works projects and would pay investors/taxpayers a guaranteed rate. To qualify, a project would need to be fiscally sound and provide a public good or service. Clean energy and public transit infrastructure are two good examples of facilities that both serve the public and require large-scale, long-term capital investment.
This fund would either loan money directly to projects or to specialist banks and agencies that focus on specific types of projects. These would not be grants, but traditional loans with long-term repayment schedules, collateral, etc. The government, as it does with the Federal Reserve, would serve as the bank’s bank, and act as a source of cheap and reliable capital.
You’d be able to see how much you had contributed, which projects had been funded with your bonds and expected rates of return. Would you view this as a tax, for example, if you knew that this year, your $3,000 helped fund a $100 million wind farm in Arizona, and that you’d expect to receive an average annual return of between 4 and 5 percent on that loan over 10 years?
However we tackle it, migrating to a national clean energy infrastructure is, by itself, a trillion-dollar challenge. Maybe we can continue borrowing that money from foreign countries, or maybe we should be investing in this ourselves. Sure, most of us would like to have more take-home pay, but if these funds are invested in public facilities that benefit everyone, one could argue that not only are you making money in the long term, you’re receiving benefits in the short term (for example, because investment in clean power farms is sheltering you from spikes in energy bills, local re-investment, etc).
Even for less sophisticated investors, most people will understand a statement that tells them their account balance, how much interest they’re earning and what’s available to withdraw or re-invest as their bonds mature. And of course, there’s no sophistication required to notice when gas prices are going down.
This would be great until the government poured it into the next corn/barley ethanol scheme.
Well, the problem with any scheme like this is there is NOBODY you can trust with all that money. Half the country thinks the government is a bunch of incompetent crooks, the other half thinks big business is a bunch of incompetent crooks.
Agreed that the amount of investment required is staggering, and the idea of killing two birds with one stone is a good one.
This idea has been floating around political circles in Canada for the past year or two. Blogged about it back in May –
http://tyler.blogware.com/blog/_archives/2008/5/28/3717596.html
Personally, I like the idea but have some of the same concerns raised above. Who manages it? Where does the money go? How can I control whether it goes into a nuclear plant or not? That said, projects such as commercial building or home retrofits, or the deployment of renewable energy systems with long-term paybacks, could be done on the kind of scale we need to make a significant dent on emissions. Too many building owners, municipalities, etc… are afraid to take the plunge, even though the payback can be three or five or 10 years depending on the path chosen. Part of the reason they’re afraid is because the upfront capital required will take away from other, more pressing concerns — i.e. replacing aging sewer infrastructure, schools, drinking water systems, etc… A green bond would create a fund that allows us to plunge into purely cleantech/energy projects, create green-collar jobs, and stimulate the economy on the kind of massive scale we need.
Obviously there is a risk that funds will be mis-spent, but that risk also exists in purely private markets. The main risk in a system like this is that the agency will issue bad loans to flawed projects.
I would expect that any real world version of this would be a public/private system, with the government acting as a collection agency and bank’s bank, while the actually underwriting and lending would be done by specialists who are tasked to evaluate projects based on technical and financial criteria less subject to political whim.
If lenders are further rewarded for issuing good loans and penalized for defaults, as they should be, a system like this should function pretty well.
Of course, if you don’t accept risk, you’re also guaranteed not to invest in projects that generate great returns. So it’s all about finding the right balance that allows for the right amount of experimentation.