Green infrastructure requires freer markets
Climate ambitions are off the chart this Earth Day as policymakers explore the last hope of bipartisanship: infrastructure.
The Biden administration has called for an eye-popping $2 trillion infrastructure investment. It would also mandate complete energy grid decarbonization by 2035. Meanwhile, the audacity of climate announcements from the business community is staggering. Infrastructure transformation is achievable only if policymakers aim to energize the greening of the private sector, not to promote symbolism over results.
Market-led decarbonization requires three things: motivation, quality information, and efficient regulation.
The environmental hunger of private capital, buoyed by domestic, sustainable investments eclipsing the $17 trillion mark, is not in question. That’s one-third of U.S. assets under management, and the number is rising quickly. As for the energy grid, private spending is not lacking: According to S&P Global, energy utility capital expenditures are on track to break records in 2021 after increasing annually for nine of the last 10 years.
But motivated businesses are hitting a roadblock: investor and consumer confusion. Verifying the effects of sustainable investing has proven difficult and controversial. The Biden administration could be on to something big with making environmental reporting more consistent and comparable. However, as it pursues things such as climate disclosures, it must be careful to ensure regulatory changes improve transparency and disseminate useful information rather than create new corporate liabilities such as excessive financial litigation and audit risk.
While motivated and well-informed markets are key, the final ingredient is the most difficult: reforming regulation that hampers efficient private investment. A recent report by Americans for a Clean Energy Grid calls for an overhaul of grid regulation, as the current system is “causing a massive backlog and delay in the construction of new power projects.” Various consumer groups note that electric transmission regulation stifles competition, rewards inefficient investment, and deters innovation, all to the detriment of clean energy and grid reliability.
Fortunately, grid reforms have been a beacon of alignment between pro-market and environmental groups. Both principled conservatives and liberals support reducing barriers to clean power generators and leveling the regulatory playing field between new entrants and incumbents. This approach infuses competition into transmission procurement and clarifies that federal regulation should not attempt to “fix” state subsidies. Further alignment requires green environmentalists to recognize that private development is a friend, not a foe.
Green dissonance has blossomed as the environmental movement pivots from an anti-development posture to a selective pro-development agenda. Early signs emerged under President Barack Obama, who faced resistance from environmental groups for exempting clean energy projects from review under the National Environmental Policy Act. This evolved into the clean energy industry supporting the act’s reforms under President Donald Trump, though key environmental groups opposed them. Now, the Biden administration knows it needs to reduce the act’s reforms and other red tape but faces a green community divided on the acknowledgment that less regulation would be better for the environment.
Biden is calling for complete decarbonization of the grid in under 14 years, despite facing the same red tape that haunted infrastructure under Obama. Democratic Sen. Joe Manchin has expressed skepticism over the plan’s feasibility, and for good reason. Under current regulation, we will be in the 2030s before today’s planned infrastructure even gets built. Why subsidize or mandate what the private sector wants to pay for but cannot because of archaic regulation?
But subsidies have proven the path of least resistance. New tax credits for transmission developers is a policy du jour in recent green infrastructure negotiations. No doubt the industry will happily accept other people’s money, but it’s the wrong medicine for the disease. Subsidies do not remedy the root causes that constrain infrastructure investment, and their burden on taxpayers outweighs any benefits. Even worse, tax credits favor monopoly utilities and are inaccessible to other industry players, such as rural cooperatives. Although subsidizing monopolies is politically expedient, it is neither economically nor environmentally justifiable.
As President Joe Biden huddles with Republicans to explore a bipartisan infrastructure package, subsidies will assuredly be appealing. But that’s not what America needs. We need markets, not mandates and monopolies. Policymakers should focus on greater transparency and overhauling regulation to let competitive enterprise flourish in the energy grid of the future.
