For decades, clean energy advocates have argued for policies that specifically boost clean energy and arguably benefit the economy. But things have changed. Basic free-market policies that benefit the entire economy will now especially benefit clean energy and efficiency. Since clean technologies are cost-competitive, a level-playing-field accelerant will grow the market share of clean energy more than it would for fossil fuels and will grow it more quickly than conventional subsidies.
For instance, Wayne Winegarden and I have proposed CoVictory Bonds & Loans (CVBLs—private, tax-exempt debt) as a COVID recession recovery policy that would boost and be very useful for the entire economy. We framed it this way, and did not even bother to mention climate or clean energy, because both Republicans and Democrats have made it clear they want the stimulus to focus on economy-wide recovery, not handouts for each sector. CVBLs meet that litmus test. Nevertheless, CVBLs will be especially powerful and cost-effective for all project finance and private infrastructure, which includes clean energy.
As a leveraged tax cut, CVBLs not only lower the cost of debt, which reduces the cost of products (such as clean energy), but they also raise the return on equity. This is particularly important in project finance for clean energy projects, such as wind and solar—where entrepreneurs form a new business entity, raising both new debt and new equity for each project. CVBL’s give up tax revenue where the revenue is low, but attract investment to the equity, where the returns and tax revenue are high. Since typical equity returns are roughly 350% higher than average debt returns, such projects financed with 50% CVBLs/50% equity will generate roughly 350% more tax revenue on the equity than they save on the tax-exempt debt.
Wayne and I estimated that $1 trillion of such debt with a 5-year term, would reduce government revenues by only $30–$40 billion—much more cost-effective than anything in the CARES Act. But that’s not all: on the above 50% debt/50% equity clean energy projects, $1 trillion of CVBLs would mean a total of $2 trillion of investment and positive tax revenues of roughly $105–$140 billion on equity returns. The net positive tax revenue on $2 trillion of such projects is $75–$100 billion.
In this week’s webinar, Jigar Shah, Abby Smith, and I explored CVBLs and other free-market proposals for clean energy.
Question 1: For entrepreneurs and financiers, how would you use CVBLs for your business? Do you have suggestions for how to improve the concept?
I would not use them. A fact of life is that most new enterprises fail. I live in Silicon Valley, where that fact of life is well understood and accepted.… Read more »
Roger, it is not clear to me what kinds of businesses you have financed recently. But CVBLs are not meant for early stage speculative clean energy startups that seem to… Read more »
Rod, you’re right, and I’m glad you made those points. I realized, not long after posting, that I was fixing on the high risk tech start-up model. That’s what I… Read more »
There are many small companies that are developing projects in mature clean energy asset classes — think solar and wind farms. They currently can only access local bank debt and… Read more »
Roger, when I first read your posts, I realized you were a kindred spirit: the kind of guy who will argue with a lamp post. Me too, so I suspected… Read more »
One can do worse than lamp posts as debating partners. They never get defensive, and they often do shed light on the subject. I have, er, reservations, about our fractional… Read more »
Question 2: Do you see CVBLs as politically viable? What would you suggest as the best way forward?
It’s not their political viability I would worry about. It’s their practical utility. Bond buyers — and particularly buyers for municipal or other tax-free bonds — tend to be individual… Read more »
First of all, you are forgetting the loans. Many businesses large and small use and ever prefer loans because of superior flexibility vs bonds. Every project that uses loans –… Read more »
Thanks. Good answers.
Question 3: How would entrepreneurs view tax-exempt debt differently from municipal governments, and how will their resulting investment behavior differ in response to the option to use tax-exempt debt?
Tax-exempt investors would probably view these bonds as similar to PCR/IDR (Pollution Control Revenue/Industrial Development Revenue) bonds which are tax exempt bonds issued by for profit entities like utilities to… Read more »
Question 4: How would tax-exempt debt change the participation level of smaller investors and entrepreneurs, versus conventional tax equity subsidies like the PTC and ITC for renewables?
I’m all in favor of phasing out PTCs and ITCs. PTCs distort wholesale power markets and encourage waste and inefficiency. (Well, “encourage” isn’t quite right. It’s that they undercut the… Read more »
I couldn’t agree more.
Question 5: Are there other free-market policies that would also help accelerate clean energy and environmental benefits?
Even though renewable energy is now cost competitive with fossil fuels (FF), there is certainly no real free market for energy. FF continue to be subsidized tremendously with the biggest… Read more »
Hi Dan, As always, great to get your thoughts. I entirely agree that the cost of negative externalities should be priced in some way. But a couple of quibbles. First,… Read more »
I don’t find the distinction between “unfair” and “un-free” in this context particularly useful. Perhaps I’m missing something, but it seems to me that all it comes down to is… Read more »
I didn’t think I needed to spell it out, but actually we seem to agree that there is no such thing as a perfectly free market. If you notice, I… Read more »
Perhaps we’re closer in our thinking than I realized. There’s a lot of meat to chew on here, but I don’t know that this forum is the right place to… Read more »
Re principles. Yes, more scientific principals than moral principles… but there is a bit of a moral dimension to the laissez-faire principle. Morally, we really should let folks pursue their… Read more »
In this case (fossil fuels used for energy generation, transportation, etc.), the approach is hurting others (everyone, actually) and that hurt will continue for hundreds to thousands of years. So… Read more »
I don’t accept laissez-faire as a principle in the way we’re speaking of principles. Not a scientific principle that always applies. Not automatically the best policy response to a problem.… Read more »
PS — A final quibble: Carbon taxes or fees are market-based policies (they uses a few market elements), but not free market policy. Free market policies are policies that expand… Read more »
Rod: First, I agree generally with Roger’s comments about “Un-Free” and “Un-fair” markets. You present “Free” markets as something inherently “good” and something to be strived for. But those free… Read more »
Dan, “free markets have caused the biggest market failure in history and may very well cause the collapse of civilization” is overheated, over-the-top nonsense. The biggest market failure – scratch… Read more »
Rod: I wish you were right, but when it comes to death and destruction from totalitarianism vs. climate change, climate change wins hands down. I think you are confusing death… Read more »
I’ll side with Dan on this one. He’s referring to the failure of market to price in the negative externalities of our heavy use of fossil fuels. We’ve been conducting… Read more »
I always have to grit my teeth when I hear anyone refer to renewables as cost-competitive with fossil fuels. They are cost-competitive for applications that can use energy as and… Read more »
You’re correct that renewables have different availability characteristics than fossil fuels, but they are still far cheaper even if we need to adapt to those differences. We are used to… Read more »
That’s a really good TEDx talk. Clear and insightful. Thanks for the link. Here’s a link of my own. It’s to a short article I wrote back in June about… Read more »
I’m not dismissing the differences but I am saying that we can deal with those differences far easier than we can deal with climate change. And there are many ways… Read more »
Electric power markets in a number of states are not true free markets where independent power producers can supply clean electric power from various sources (e.g. solar and wind) that… Read more »
Please keep in mind that electricity per se is not a storable commodity, and that transmission and distribution are natural monopolies. (We can’t have and wouldn’t want every would-be supplier… Read more »
Thanks for your response Roger. The “optimized wholesale electricity competition” approach we propose in our white paper relates to electric power generation not transmission/distribution (which as you say are natural… Read more »
Henry, there are a number of groups in the Clean Capitalist Coalition that have dug into US power market issues around competition and opening up markets: the Energy Choice Coalition,… Read more »
Rod, we presented our white paper on transforming the integrated resource planning process of electric utilities in Arizona for the clean-energy era to the Arizona Corporation Commission (ACC) that regulates… Read more »
I don’t know Lynne or Michael personally. I have only read a few of their papers and am a fan, and they work with folks who work with me. But… Read more »
The other market distortion that isn’t discussed here are the $20billion in tax expenditures given annually to the fossil fuel companies. I am sure that number is lower today than… Read more »
I am very grateful to the “old NSF” for giving me experience from 1988 to 2014 on how to get maximum real technological change for minimum budgets. Bssed on what… Read more »
Paul, great comment. I could not open your link, however. Would love to take a look. To answer your question “…since 80% comes form electricity generation and transportation (primary energy… Read more »
First, it is more complicated than one paragraph. Loands and credit can have impacts in MANY subsectors, but it really is important to target those where it has more impact.… Read more »
OOPS!!! Rod tells me I did not give the right link for my IEEE paper which directly addresesd the many seroius unmet technical opportunities involving electrification and electricity in transportation.… Read more »