Financing the Green New Deal

This is joint work with Albert Pinto.

Democratic Presidential hopefuls have increasingly been cornered into supporting a Green New Deal. AOC’s Resolution in Congress demands ‘global reductions in greenhouse gas emissions from human sources of 40 to 60 percent from 2010 levels by 2030’ and ‘net-zero global emissions by 2050’. The freshman Congresswoman has been so successful in changing the conversation that presidential hopefuls have started referencing her resolution as “the GND”. This is presumably why Warren’s “Green Manufacturing Plan for America” goes back and forth between speaking of “a GND” and “the GND”. The nerdiest of the lot is Jay Inslee’s plan which runs into many hundreds of pages. Apparently, campaign staffers are hard to find in Seattle. The other explanation for the intellectual diarrhea of the Inslee team is that our man is simply angling for a Climate Czar gig in the next Democratic Administration.

The peculiar thing about the candidates’ plans to get out of the planetary impasse is that while Inslee’s goes furthest in responding to the challenge by promising to mobilize all the instruments available to the United States government, he is quite niggardly compared to Warren. So where Warren promises $100bn in international assistance for a Green transformation (earmarked for buying American Green products), Inslee would provision no more than 2-4 percent of $100bn that the Obama Administration had committed the United States to in Paris. But this is not a symptom that he is not serious about seeking a global solution. Rather, it reflects the influence of Obama-era negotiators who I am told have flocked to Inslee.

Still, Jay Inslee is the only candidate so far who seems to appreciate the full implications of the planetary impasse. The problem, of course, is that he is a single-issue candidate who seems to have no idea that Americans face other challenges — above all, the vanishing of broad-based growth. Elizabeth Warren gets it. Not only does she get it, our entire understanding of financial precarity comes from her original work. My wager is that she can win against Trump because she is virtually the anti-Clinton. No one can claim that she is in the pockets of the bankers. Of course, Wall Street is deadly opposed to her; even more than Sanders. But as we’ve explained before, the Street can be quietly made to see the light.

President Warren’s plan is based on a triad. The Green Apollo Program promises $400 billion over the next decade for Green R&D; the Green Industrial Mobilization is “a $1.5 trillion federal procurement commitment over the next ten years to purchase American-made clean, renewable, and emission-free energy products”; and the Green Marshall Plan will provide the aforementioned $100bn to other nations so that they can buy all the cool, new Green stuff we’re going to make in America.

But there is a deep disconnect between the scale of the challenge and the scale of the plan. She recognizes that drastic measures are necessary to get off the hockey stick:

To meet the emissions goals in the Green New Deal and the Paris Agreement — and avoid the most devastating effects of climate change — global greenhouse gas emissions would need to reach net-zero by roughly 2050. To stay on that course, we must cut projected global emissions by more than half by 2030.

Spending $2tn in procurement, R&D and international assistance sounds like a lot. But it is only $200bn-a-year. It does not even pass the laugh test. The problem is obvious. Warren is trying to do this straightforwardly through the public purse. If the taxpayer is to pay each dollar of finance necessary, of course, you can’t throw around many trillions that are actually required for a solution to the physical problem. That’s why her plan is constrained to be modest and ineffective.

We argue that there is a better solution to the problem of financing a GND. The basic idea is simple. The United States should not pay for the transformation directly from taxes but rather leverage tax dollars to provide a public backstop. For in this manner a multi-trillion dollar overhaul can be financed by private investors. In other words, the government should act as an insurer of last resort and let private parties do the heavy lifting as far as they can. Our plan mines the structure of global financial intermediation to construct an effective financing mechanism for a Green New Deal. Put another way, we want to bring the unparalleled risk-bearing capacity of market based financial intermediaries to bear on the problem of financing the GND.

The key working components of our plan are threefold.

(1) FDA for Green Finance: An independent civil authority on the model of America’s most respected institutions (Fed, FDA, SEC, etc) — whose sole responsibility would be to examine the impact of specific projects and stamp them Green if they meet exacting standards in terms of  viability, market risk, and contribution to decarbonization. These projects may be initiated by anyone—firms, free associations, NGOs, cities, municipalities, and states.* The point of the independent civil authority is to ensure the the integrity and legitimacy of the process. In order to ensure that it is absolutely necessary that discretionary authority be exercised by independent experts who are disconnected from the influence game and not at risk of capture by special interests. We expect thousands of scientists, economists, engineers and other experts to man the agency. Their mandate will be to ensure that the credit of the United States government backs only genuine solutions to the planetary impasse without posing undue risks to the taxpayers’ fiscal capacity to pay, without waste, and without cronyism.

(2) Insurer of Last Resort: Approved projects will be financed by private GND bonds backed by the full faith of the United States government. The goal would be to make Green bonds comparable to agency MBS and other Treasury equivalents. Investors will still bear duration risk, inflation risk and some credit risk (and earn the yields to compensate them for these risks) but they will not run the risk of an outright capital loss. Taxpayers will be on the hook for actual payouts only in a trivial fraction of cases precisely because Green bonds will be safe assets by construction. US taxpayers made a profit on the bailout of the financial system. Recall also that on the day of the Lehman bankruptcy hundreds of billions of dollars worth of Tbills and agency MBS still served as collateral for secured lending in the rehypothecation flywheel at the heart of the dealer ecosystem. GND instruments will perform a similar function. Due to the scarcity of safe assets in the system, the principal consequence of a GND financial regime along these lines will be to stabilize the system.

(3) Green Liquidity Provision: The Federal Reserve will be mandated to act as a dealer of last resort for the GND bond market, just as it now functions for Treasuries and quasi-Treasuries. This provision is important to guarantee that both broker-dealers and real money investors regard GND instruments as safe, liquid and attractive instruments interchangeable with other high quality collateral in global financial intermediation.

This is unabashedly a market-based solution. Because it is market-based, it can respond much more flexibly to price signals, exogenous shocks, and innovations. In particular, it will allow the financing to be scaled up (and down if necessary) depending on the state of the world. We envision that by mid-decade the scale of outstanding GND instruments will be of the order of $5-10tn, perhaps even more depending on how successful the United States is in exporting this model abroad.

We are not opposed to public financing. Indeed, some projects will simply not be attractive on a net basis to firms, NGOs, and local governments. Here the US government may have to step up and there should be no hesitation about it; especially given the fiscal room enjoyed by the world’s largest safe asset provider. But if the US government tries to carry the whole thing on its fiscal shoulders, the scale of the financing required for a real solution to the physical problem of decarbonization could potentially bust the bank. It’s best to conserve fiscal capacity for where it is genuinely required. Taxpayers’ capacity to pay should be largely held in reserve for the difficult times ahead. 2020 is bigger than Kennedy’s moonshot in 1960. Recall that the cost of delay is exponential in the length of delay. Kennedy was responding to Sputnik and the arrival of Soviet ICBMs on the horizon. This challenge comes from the fact that we are on track to add enough of the forcing variable — CO2 — to bake-in planetary catastrophe in the next two decades.

We can go much further by leveraging taxpayers’ risk-bearing capacity than by numerical spending commitments.

President Warren, are you listening?

*Donation-funded institutions can get donors to commit to a steady flow of small (say $5) donations to furnish the cash flow to back the bond. This can be made legally binding, like we do with phone contracts.

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