By Reed Hundt
The National Climate Bank Act of 2019 calls for a deposit of $35 billion into coffers of a nonprofit dedicated to all the investment categories necessary to win the war against climate catastrophe.
Some say, okay fine but where is the money going to come from?
The question is meant to be perplexing. But it is easy. Here follows a bunch of explainers.
1. The Treasury Department borrows about a trillion dollars a year. Plus or minus. Here’s a chart showing the borrowing:
If the Treasury borrowed an extra $35 billion in 2021 to make the deposit in the Climate Bank the markets would not notice. I mean there would be no change in the interest rates that the government would have to pay for the totality of its borrowing. So there’s no reason even to ask where the money would come from.
It is true that government commitments to spend money over a long period of time, year after year, can add up. The defense department budget, health care expenditures, and social security are examples of persistent, annual, predictable expenditures that the creditors – institutions and people who loan to the government – do draw attention. Similarly a tax credit or other tax cut will deserve scrutiny. But a one-time payment of $35 billion is too small to make a difference in government’s cost for borrowing.
2. The government could delay funding something else in order to make the deposit. Two or three of the vessels pictured below cost in total about $35 billion. Deposit in the climate bank this year, buy the aircraft carriers next year. The Navy, by the way, would agree that climate change is at the top of national security concerns.
3. The Treasury could sell green bonds. Foundations, for example, could do their part to pay for the shift from carbon to clean by buying them. These bonds would probably have a lower interest rate than other government borrowing. I mean it would cost the Treasury less to borrow the money to make the deposit in the climate bank than its borrowing for general purposes. Private sector firms already sell green bonds (i.e., borrow money dedicated to green investment).
4. The cost to the federal government of coping with calamitous weather, due generally to climate change, has already increased by more than $35 billion a year over the last decade. Spending on reducing greenhouse gas emissions is an example of an ounce of prevention is worth a pound of cure.
5. It’s a mistake to think of this deposit as a mortgage loan. Pretend you want to buy a house. So you get a 30 year mortgage. The interest rate is pretty low. See this:
But you will pay principal and interest monthly for thirty years. Here’s that chart for a $100,000 loan:
The mortgage lender doesn’t know if you will hold a job for thirty years, or even if you will live that long. So the terms of the loan require these monthly payments.
This doesn’t work for the deposit into the Climate Bank. It needs to hold that money as security for the loans it will be obtaining, and the investments of equity and loans that it will make.
This was the point Tim Geithner made to Hank Paulson in the debate over TARP, the bank bailout bill. You can read about it in my book “A Crisis Wasted: Barack Obama’s Defining Decisions.”
Geithner explained to the Bush Treasury Department Secretary Paulson that the TARP money should go to buying stock. Then the stock sellers, the big banks, would have that extra capital to secure borrowing they would make and lending they would do. This is called leverage.
In fact the big banks fairly quickly bought out the Treasury Department, meaning they returned the money to the Treasury. Overall the government made a profit.
The Climate Bank might return the $35 billion more quickly than 30 years. But it might need to hold that money for the full three decades if the investment requirements of the climate emergency went higher than currently expected.
In any case, like the banks that got TARP money, the Climate Bank can be trusted to pay back the deposit.
The Climate Bank is going to be trustworthy for a simple reason: it will invest in projects along with gimlet-eyed private sector investors and they won’t put their money in excessively risky projects.
What the private investors will want, however, is a guarantee that the Climate Bank investment is reliable. They cannot trust that government will maintain a commitment to battling climate change for three decades. Why? Because the current Administration has backtracked on the climate goals of the predecessor Administration. So the government cannot have any legal right to call the deposit back for 30 years.
Is anyone surprised that private sector investors don’t trust the government to stick to goals on a long-term basis? But the Climate Bank will be barred by its own charter from changing its mission, and the web of borrowing and lending that it will facilitate will contain innumerable clauses tying it, as it wishes, to its commitments.
6. If it makes anyone’s accounting gene happy, please note that the government’s tax revenues from private sector investing will dwarf the $35 billion deposit. The government will make money by pump-priming, if you want to put it that way.
Private equity in the United States currently has about $1 trillion to invest. Let’s assume it poured all that money into the move from the carbon to clean platforms for the economy, and then earned 10% a year as a return on investment. Over a decade, that would be a profit of $1 trillion. Let’s further assume that the tax rate would be 20%. The taxes paid over the decade would be $200 billion. That’s more than the $35 billion deposit.
If you prefer, you can assume that the expected return is only 5% — then the taxes would be $100 billion. I like this assumption because it means the Climate Bank is attracting low cost private sector capital, and that in turn means that the end users have to pay less for electricity, since that’s where the profits must come from.
The conclusion holds. If the government keeps its hands off the deposit and lets the Climate Bank do its thing, then the private sector investment in the clean power platform will produce profits that vastly exceed the initial deposit.
7. The question of the provenance of the deposit usually comes with the additive “there’s plenty of private money available.” According to McKinsey, private financing accounts for about $6 trillion of assets under management globally. That’s a big number. However, McKinsey also reports that not nearly enough is dedicated to infrastructure to meet the needs of growing populations and rising standards of living, or at least expectations of rising standards. In other words, when it comes to infrastructure generally and clean power investing, there’s not plenty of money available. That’s why the Climate Bank has to exist. One among many reasons.
8. Investing in, and with the Climate Bank, is a smart move. Utilities make money. Like about 10% a year on capital invested. The private sector, is drawn into investing in a clean power version of the electric utility business, would do well. Some say too well. See this. But where does the money go instead? It goes into WeWork and $40 billion vanishes as that business model ventures into the category of fantasy, or worse. What? That company alone lost more money than the Climate Bank needs to save the planet. The point is that investors are willing to take much bigger risks, and lose much more money, than the Climate Bank’s proposals present. So if the Climate Bank sparks interest in the many dimensions of the clean power platform, then the money should pour from the private sector into the Bank’s missions.
9. The problem, the really big problem, is that staggering sums are invested annually in the exploration, extraction and use of carbon fuels. The Climate Bank has to attract capital for substituting clean for carbon. This is a conflict in goals. If the Climate Bank succeeds, as it must to save the quality of life for humanity for centuries, not to mention all other living things, then the trillion dollars invested annually in the carbon economy has to be replaced by clean investment. In a hurry. It’s almost too late already. Not too late. Almost. This report was in 2013. Read it and weep over the 2020 goal.
So yes, there’s plenty of money available for power. It goes in the wrong directions.
There are still more reasons to make the deposit in the Climate Bank. But isn’t nine enough for now?