Busting the "Clean Energy Bank" (another problem with Waxman-Markey)
Buried within the controversial Waxman-Markey “cap and trade” bill to reduce greenhouse gas emissions (formally known as HR 2454, “The American Clean Energy and Security Act”) – a bill that may well reach the House floor for a vote before the July 4th recess – is another fairly arresting proposal: the creation of a federal “clean energy bank.” The idea (found in subtitle J, addressing “Nuclear and Advanced Technologies”) is to use federal tax dollars to provide subsidies (in particular, direct loans, letters of credit, loan guarantees, and insurance products or other credit enhancements or debt instruments) to private business in order to “promote access to affordable financing for accelerated and widespread deployment” of clean energy, energy infrastructure, energy efficiency, and manufacturing technologies.
The Senate is considering similar legislation in the form of S 949, “The 21st Century Energy Technology and Deployment Act,” but it would go further and also allow indirect subsidies as well, including securitization, indirect credit support, the acquisition or selling of debt or interest in the debt; and secondary market support through lending on the security of debt. That bill will likely be passed by the Senate Energy Committee this week as part of a larger energy bill titled ”The American Clean Energy Leadership Act.”
Consider subtitle J to be “exhibit B” in the case against Waxman-Markey (“exhibit A” in that case can be found here) and yet another bit of evidence that politicians suffer from short-term-memory syndrome. Few seem to recall that the federal government has tried variations of this idea time and time again and has little to show for all the billions of tax dollars squandered, save for long-forgotten reports documenting said squandering.
But before we get to that, let’s look a bit more closely at what exactly is being proposed.
The clean energy bank, which would go by the name “The Clean Energy Deployment Administration” (CEDA) is being sold to the Left as a means to pump yet more billions of tax dollars into the development of renewable energy. Both the House and Senate versions of the bill, however, include nuclear power and coal in their definitions of “clean energy technologies.” There are no stipulations regarding the mix of projects in the CEDA portfolio in the Senate bill, meaning that the most capital-intensive projects, such as coal-to-liquids and nuclear power, could well get a majority of the banks funds. The House bill, however, prevents any one technology from claiming more than 30 percent of the financial support available.
The suspicion that this is a nuclear subsidy project under the guise of a conventional “green” energy project is given substance by the fact that the House bill says that “conditional commitments” can be given to projects that do not have licenses. And what do you know … new reactor applications will not complete the Nuclear Regulatory Commission licensing process before 2012. The House bill does require that all necessary licenses and permits are obtained before the loan guarantee agreement can become final. The Senate version does not contain even this provision.
How much money we are talking about here is unclear. The Senate bill is accompanied by an initial $10 billion disbursement from the Treasury, while the House bill leaves initial appropriations to a subsequent appropriations bill. But that’s not the best metric by which to judge potential costs. The Senates bill grants CEDA the authority to hand-out as many loan guarantees as it wishes, as long as a certain amount of the monetarized risk associated with default (so-called “subsidy costs”) is paid for up-front by borrowers. The OMB will decide what that cost is, but the model employed by the OMB to determine subsidy costs is opaque and poorly understood.
The upshot is twofold. First, the Senate bill quite literally puts no limit whatsoever on taxpayer commitments – none! The bank itself will decide the extent to which the taxpayer will be put at risk. Second, if the subsidy cost for any of these technologies is under-calculated under either bill, the potential taxpayer exposure is quite literally unlimited. This is no idle worry; both the Congressional Budget Office and the Governmental Accountability Office argue that, in practice, subsidy costs are far more likely to be underestimated by government than overestimated.
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Both bills require that commercial lending for prospective recipients be insufficient as a condition for public support. While that seems reasonable enough (why commit public dollars when private dollars are available?), this stipulation means that taxpayers will only be parking money in projects that no private investor is willing to invest in. This raises a few rather important questions (questions explored more fully, by the way, here).
First, how many meritorious investments are there in the energy universe that are being suboptimally funded by private investors? Unless the economy is in a state of equilibrium (that theoretical state of economic nirvana that will probably never be achieved in the real world), we know that the number is above zero. But that doesn’t mean the number is necessarily very large.
Prior to the recession at least, the near universal complaint among green energy investors was that there were far more dollars chasing green energy investments than there were good green energy investments to soak up those dollars. Investment in renewable energy and energy efficiency totaled a whopping $155 billion worldwide in 2008 ($30.1 billion in North America alone) – more than the $110 billion invested in conventional energy over that same period. Although green energy investments worldwide have plunged to $13.3 billion in the first quarter of 2009 (53 percent below the first quarter of 2008), that’s still a fairly arresting total, given pre-boom norms. The overwhelming majority of those dollars, moreover, come from the private sector.
The point here is that there is plenty of money being devoted to renewable energy and energy efficiency at present. It’s not as if that sector of the economy will be starved, absent some new federal clean energy bank.
Second, how likely is it that this clean energy bank will be able to reliably find the overlooked meritorious investments in the ocean of investment opportunities that lack merit? Keep in mind that the best informed and most motivated economic actors in the private sector have allegedly overlooked those investments, so identifying them is clearly not so easy. Also keep in mind that clean bank officers are unlikely to have as much expertise or incentive as private economic actors in the course of going about this task. In short, the Congress is entrusting billions of taxpayer dollars to a fund charged with second-guessing the investment decisions of people better qualified and more highly motivated than those charged with doing the second-guessing.
Third, to what extent will politics influence the decision making at the clean energy bank? In an ideal world, none at all; investments would be based on assessments of merit only. But in the hyper-political world of Washington, where politics infects virtually every governmental act of consequence, investments will not be made entirely on merit (see, for instance, ethanol). To the extent that political considerations play a role in deciding whether to support this technology or that, this firm or that, or this region or that, decisions are less likely to be based on merit and thus more likely to prove faulty.
Economists Linda Cohen and Roger Noll find that political considerations are so pervasive that publicly funded energy research and development has historically been a hopeless endeavor. In their review of the matter published some time ago for the Brookings Institution (tellingly titled The Technology Pork Barrel), they concluded:
The overriding lesson from the case studies is that the goal of economic efficiency – to cure market failures in privately sponsored commercial innovation—is so severely constrained by political forces that an effective, coherent national commercialization R&D program has never been put in place. The internal incentives within government organizations, the absence of a financial bottom-line, and the difficulty of measuring output work together to produce inefficiencies in government.
Fourth and finally, what evidence do we have that underinvestment in energy is a more serious problem than underinvestment in some other sector of the economy? Even if a clean energy bank could identify meritorious projects and fund them accordingly, money dedicated toward that end might be better spent elsewhere. For instance, if proponents of the clean energy bank are correct that a general “credit freeze” has starved meritorious clean energy investments of needed funds, the same complaint could be made for nearly every other sector of the economy. Given that public funds are not unlimited – even in the age of Obama – we need evidence that the economic gains that might be secured by a clean energy bank are greater than those that might be secured from loans and subsidies to other sectors of the economy.
Hence, while it is likely that a clean energy bank could in theory improve economic efficiency by using federal tax dollars to support suboptimally funded clean energy investments, it is extremely unlikely to do so in practice. Past experience bears this out. There is absolutely no evidence – none! – that public expenditures on non-defense energy R&D has ever produced economic gains on balance. As Thomas Lee, Ben Ball Jr., and Richard Tabors put it in a review of energy policy for the Harvard Business Press:
The experience of the 1970s and 1980s taught us that if a technology is commercially viable, then government support is not needed; and if a technology is not commercially viable, no amount of government support will make it so [emphasis in the original].
So what arguments are being forwarded by proponents to convince us that, this time, we can overcome the theoretical difficulties associated with a clean energy bank and the desultory results from previous stabs at this sort of thing? None whatsoever. The public case for the bank is divorced from any real consideration of the nature of the market failures allegedly at issue, any awareness of the dynamics that often lead to government failure to correct the same, any attempt to wrestle with past experience, or for that matter, any grown-up conversation at all. See, for instance, these utterly vapid arguments for the bank from John Podesta. All we hear are naked assertions about clean energy technologies being underfunded and off to the races we go with a government program that will right all wrongs and cure all ills because government, after all, has built roads and canals, established the TVA, won WWII, and created the Internet.
There is always the possibility that sheer chance will result in some public dollars going to worthwhile energy enterprises. But blind luck and politics is about the only thing that the bank has going for it.