R Street Responds: The CLEAN Future Act
In addition to a variety of provisions to reduce greenhouse gas (GHG) emissions, the prior version of the CFA included a long-term goal for the United States “to achieve a 100 percent clean energy economy by 2050.” The new version adopts an interim national goal for the United States “to reduce GHG pollution by no less than 50 percent below 2005 levels by no later than 2030.” The choice of 2005 emissions levels as a baseline is significant, as emissions have already fallen by more than 13 percent. To achieve this goal, emissions would have to fall four times as fast in the coming decade as they have in the prior decade and a half.
This is a highly ambitious goal, which appears to be adapted from a report of the Intergovernmental Panel on Climate Change, and is based on what would be necessary to keep global warming to 1.5 degrees centigrade. Since global emissions are what matters, this presumes that reductions in the United States would be matched in the rest of the world. However, it is not clear whether the other provisions in the bill, if enacted, would achieve that goal.
It is no secret by this point that decarbonizing an economy that still gets 80 percent of its energy from fossil fuels is no simple endeavor, and certainly not a costless one. To that end, it is encouraging that the CFA has included some modest attempts to constrain costs and move its policies toward economic efficiencies. For instance, the bill contains a provision to allow for tradeable emission credits. Coupled with the cap on emissions, the bill then acts as a cap-and-trade bill. Such a mechanism eases the overall burden of the regulation, though it should be noted that economic estimates of prior cap-and-trade legislation assumed more lenient targets than what is proposed in the CFA.
The CFA also has a couple provisions aimed at easing the regulatory barriers to the adoption of clean energy (section 243 for hydropower, and section 411 for clean fuels). The attention awarded to removing barriers to electric transmission development, including siting and improved planning processes, is particularly encouraging (sections 212-214, 217). This at least acknowledges that regulations can do more harm than good, as they are not just a barrier to the deployment of carbon-intensive technologies but also that of emerging low-carbon tech.
While the CFA contains some good ideas and some bad ideas, it is important to note there are some particularly concerning provisions that risk serious economic impacts. For instance, section 811 aims to create an “Accelerator” for sustainable investment and a clean energy transition; however, rather than removing barriers to capital stock turnover or clean energy investment, the proposed Accelerator relies on redistribution. As written in the legislative text, the Accelerator would be comprised of a board of seven politicians, with three appointed by the president and four selected by the three appointees, who would then be given stewardship of $100 billion appropriated from the U.S. Treasury to invest as they see fit.
While the plan for an Accelerator may be well-intentioned, its fundamental premise is flawed due to a central planning bias. It could only avoid serious economic harm if the board members are better at identifying productive uses of capital than the free market. Even under the best of circumstances, it is unlikely that a politician can make broad decisions for the economy better than free choice dispersed among individuals, but in the case of the Accelerator it is particularly dangerous because the decision-makers will be selected for political reasons and will very likely reward investees that are politically connected rather than productive.
The economic harm of the Accelerator would come primarily from two aspects of the program. The first is that its $100 billion—an amount roughly equal to doubling tax-based energy subsidies over the next decade—would be extracted from the economy via taxes. Thus, any benefit created from the $100 billion of investment is offset by the harm of reduced investment elsewhere in the economy. Moreover, the default expectation of investment is that those who hold capital will seek out productive opportunities for further investment, but the Accelerator would have no such motivation, and bear no risk of failure. The net economic impact could at best be equal, but at worst represent the loss of $100 billion of alternative, more economically beneficial investment.
The second major economic impact from the Accelerator will come from what is called a “crowding out” of private investment. The CFA’s authors likely assumed that the $100 billion of investment would represent an additional $100 billion of investment in clean energy in the economy, but the truth is more complex. Since the Accelerator bears no risk, and has no incentives for returns on investment, it can always offer preferable terms compared to what a private financier would. As such, projects that otherwise would be able to draw private financing will still prefer to secure funds from the Accelerator, and incidentally private investors will leave the market as their opportunities for returns are instead taken by the Accelerator. Simply, the $100 billion of new public investment will be offset by at least some loss of private investment, and potentially that loss of investment could exceed $100 billion, meaning the Accelerator could reduce net investments in clean energy.
This idea is particularly buoyed by the recognition that the private sector has been extremely motivated to invest in clean energy. Renewable energy now contributes 20 percent of America’s electricity, and private investment in climate-related endeavors has been steadily increasing. Transferring the investment practices in this space from the free market to the purview of politicians could be disastrous. All in all, contrary to its name, the Accelerator would put the brakes on the clean energy economy in the United States.
While the CFA makes an interesting attempt at putting meat on the bones of a largely rhetorical discussion surrounding climate policy and decarbonization, some major missteps make it largely impractical. The CFA’s authors should instead focus on the more pragmatic components of their proposal, such as reforming regulatory barriers to clean energy, rather than bundling them with provisions that make passage of the legislation unlikely or potentially even net-harmful. While there is no shortage of politicians seeking massive “one-and-done” climate bills, the truth is that an incremental policy approach that is focused on the low-cost climate policies first creates better opportunities for durable progress.