As lawmakers debate the size and scope of President Biden’s proposed infrastructure-related stimulus plan, not enough attention is being paid to some of the details. Consider the roughly 1% of the $2.3 trillion spending package designated to create a “Clean Energy and Sustainability Accelerator,” which would “mobilize private investment” in the “clean energy economy.”
Cut through the greenspeak, and the administration is proposing to establish a bank with a direct line to the U.S. Treasury that would serve as a permanent financing conduit channeling tax money to support and subsidize politically favored clean energy projects.
Competing bills are already working their way through both houses of Congress to set up such a new federal entity, variously referred to as a “United States Green Bank” and a “National Climate Bank.” Since Democratic lawmakers are effectively negotiating with themselves, the bidding has started higher than the White House’s request—$50 billion up front and $100 billion over time under one Senate version. The potential cost to the American public of such a green government spigot could easily increase nearly 40-fold over the $27 billion currently penciled into Mr. Biden’s American Jobs Plan.
The argument for a federal green bank is flawed in many respects. For one, there is a truth-in-advertising problem. Banks are conservatively managed, highly regulated financial institutions that mainly engage in deposit-taking on the liability side and lending on the asset side of the balance sheet—neither of which would be central to the business mix of a federal green bank. Rather, in the Democrats’ imagining, a federal green bank’s core capital-providing business would include such high-risk activities as taking noncontrolling private-equity stakes in green energy ventures and funding research on new breakthrough clean technologies.
The green bank’s investment decision-making would be largely driven by noncommercial, political factors, including the requirement that 40% of capital flows be directed toward “disadvantaged communities facing climate impacts” and the need for bank-financed projects to pay prevailing union wage rates.
Providing grants for building weatherization and solar-panel installation, purchasing emissions-reducing equipment outright, paying regulated electric utilities to shut down coal-fired power plants immediately, and accepting philanthropic donations from green-minded billionaires would also form part of the mandate.
It is unlikely that a national climate bank would provide any meaningful incentives for incremental third-party private-sector capital for green investments, given the lack of underwriting expertise of a new, politically driven financial institution. Most of the bank’s senior managers, directors and advisers wouldn’t be required to have any banking, lending or investment experience; labor, environmental and nonprofit credentials would rank higher on the qualification list. As such, there would be no “halo effect” for bank-supported green projects as is often seen with superpriority lending by the World Bank and other supranational and sovereign credit agencies.
And while a federal green bank wouldn’t enjoy the full-faith-and-credit backing of the U.S. government, being equity capitalized by the U.S. Treasury and having the secretary serve as chairman would create a moral hazard for this nonguaranteed quasifederal agency—especially if the bank were to issue debt in its own name, which would appear to be the plan. In fact, most of the “private capital” that would be catalyzed by a federal green bank would comprise bank borrowings to leverage its equity capital base by roughly seven to eight times, implying a nearly $1 trillion balance sheet within 10 years.
The combination of weak underwriting standards and an implicit U.S. government guarantee should call to mind the
and Freddie Mac mortgage bailouts during the 2008-09 financial crisis.
Contingent green bank liabilities would also become a growing problem for state and local governments given the Democratic vision of a national climate bank as the linchpin for a new federalist system of green banks across the country—building on the 21 already operating in 15 states and the District of Columbia.
Finally, there is no pressing financial market gap that needs to be filled by a new federal green bank. The sustainable or ESG (environmental-social-governance) investment movement sweeping Wall Street—spurred on by global financial regulators—is already driving a significant amount of capital toward green and renewable projects of all sizes and levels of commercial and technological development.
In 2020, capital flows into sustainable funds (most with an environmental bent) totaled some $350 billion, while global commercial bank lending to renewable energy projects totaled roughly $100 billion. Since 2007 more than $1 trillion of green bonds have been issued by corporate, municipal and sovereign borrowers, with the institutional market for such bonds growing at an average annual rate of about 95%.
With the Federal Reserve suppressing interest rates for the foreseeable future, borrowing costs are now at historic lows, providing a significant boost to the underlying economics of any green investment project. In sum, there is no shortage of private capital for economically sound clean energy projects, and thus no market need for a federal green bank.
But economic and financial arguments are beside the point when it comes to the politics of climate change. If the past is any guide, a national climate bank is likely to be stapled to broader infrastructure legislation and passed through reconciliation with only Democratic support. Eventually, the green bank bill will come due for the American people.
Mr. Tice works in investment management and is an adjunct professor of finance at New York University’s Stern School of Business.
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