How to Energize a Real Green New Deal: Part One of a Three Part Series

Both climate denial and the Green New Deal (GND) fail to solve the crucial challenge of our era: how will we create and implement a plan for reaching net zero greenhouse gas emissions that is effective, practical, affordable, and rapid. Denial is obviously not a solution and leaves society with the enormous cost of coping with the worst impacts of climate change. On the other hand, the GND offers solutions that are heavily reliant on federal government control, borrowing, taxation, and spending. And it includes social goals which extend beyond climate change and are destined to become mired in side issues and political gridlock. Neither approach is viable. In this first of three installments, we present a model for an incentive-driven plan to reduce greenhouse gas emissions in ways that enhance social equity and job creation, while minimizing government regulation.

 

Key Goals, Objectives, and Incentives

As with all effective strategies, we must first determine our key goals and supporting objectives followed by the specific tasks needed to achieve them. In a market-based economy, the most pain free and effective way to achieve objectives is to create incentives for actions that support our objectives. To encourage a reduction in fossil fuel use, we need to set specific carbon reduction targets and outline an array of actions needed to reach the objectives. Offering a range of potential actions allows businesses and the public to choose a set of actions they can implement, consistent with their economic and personal situations. Finally, we need to be sure the actions have a positive return on investment. For example, if we want farmers to rebuild their soils to store significant amounts of carbon, they need to be economically rewarded to make this transition. If we want homeowners to install solar panels, their return on investment needs to be not only positive, but rapid.

Incentives can be extrinsic (coming from outside), based on regulations, taxes, subsidies, favorable financing, and tax breaks, or intrinsic (coming from within), based on a positive return on investment, or other less tangible benefits such as improved health and comfort. In most cases, all that is needed to get people and businesses to take action based on intrinsic incentives is to provide education and motivational appeal – a commonly recognized strength of the marketplace. Combining small extrinsic incentives to support intrinsic incentives may create the quickest and most effective road to significant change. State and local governments and utilities have a long history of creating successful financial rebates and educational programs that utilize this strategy to reduce energy use.

 

Defining our Goal

Unlike the numerous, diverse goals embodied in the Green New Deal, we should be laser focused on the one central goal that is the challenge of our era:

To incentivize individuals, companies and governments at all levels to bring greenhouse gas emissions low enough to keep global warming within 2 degrees C or lower. In the U.S., we will do our part to achieve this by reducing fossil fuel and other greenhouse gas emissions to zero by 2040 in a manner that promotes equity, good paying jobs and prosperity and that utilizes the minimum government involvement needed to leverage our free market system to rapidly reach this goal.

The following low- or no-cost approaches are minimally intrusive:

  • Market the intrinsic incentives already in existence, such as the lower cost of ownership and improved performance of electric vehicles and zero energy homes.
  • Shift tax breaks from fossil fuels to clean energy development, including energy efficiency in buildings and transportation, renewable energy sources, energy storage, and a smart electric grid.
  • Apply a modest tax to carbon-based fuels where they are produced, stored, or refined
  • Create attractive financing packages for making energy efficiency improvements and adding renewables to homes, businesses, and transportation
  • Build job growth and social equity into all greenhouse gas reduction efforts.
  • Pursue infrastructure improvements that directly address carbon reductions.
  • Enhance existing government R&D programs and develop new ones in conjunction with industries and universities to create or improve energy efficiency and renewable technologies.

Market Existing Intrinsic Incentives at Little or No Cost

The good news is that the intrinsic incentives for all players to move to zero greenhouse emission technologies and strategies already exist and are growing rapidly. One reason is that more and more people, small businesses, large corporations, and local governments are internally motivated to take positive steps to help avoid catastrophic climate change. More importantly, many technologies, such as zero energy homes, electric vehicles, solar panels, and large scale renewable electric power, give a greater return on investment and offer more benefits than the fossil fuel alternatives. Many of the actions advocated for in this series are intrinsically incentivized because they are good investments for homeowners, car owners, businesses, utilities, and governments. The return on investment and the improvements to people’s lives these new technologies offer will drive the market.

The only action needed for these technologies to become the new normal is for utilities and the companies who offer them to harness the marketing powers of American free enterprise. Businesses can readily identify needs, research possible solutions, develop products and services, manage supply chains and distribution networks, set competitive prices, and advertise with gusto. The government’s role is to set overarching goals, provide adequate direction, level the playing field, offer strategic incentives, and build public infrastructure. Local, state, and federal governments can catalyze the formation of marketing alliances to mount effective campaigns that promote the intrinsic benefits of clean energy technologies to the general public. These alliances would include energy utilities, manufacturers of energy-related products, and committed non-profits. Utilities and manufacturers will benefit from business growth. The general public will benefit from positive financial returns. All this with no, or very low, cost to taxpayers.

 

Redirecting Existing Tax Breaks

Without creating additional tax burden, we can realign existing tax breaks and subsidies at the state and federal level to promote measures that will help us reach our net zero greenhouse gas emission goal. According to one estimate, over $20 billion a year in state and federal tax credits are going to the fossil fuel industry. Redirecting these tax credits could make this whopping $20 billion available to incentivize the industries and initiatives focused on greenhouse gas emission reduction while removing support for fossil fuels. The Clean Energy for America Bill, introduced recently in the Senate, would replace 44 different existing energy tax incentives with incentives for clean electricity, clean transportation fuel, and energy conservation. Passing this bill would be an important step in the right direction.

Tax credits should be designed to have the maximum effect on the market. Priority should be given to encouraging those projects where money invested in greenhouse gas reduction will bring a positive return on investment, such as zero energy homes and buildings, a smart grid, zero carbon electricity production, and electric vehicles. Because of their positive return on investment, incentives for these new technologies can be modest, effective, and quickly phased out when goals are met or market momentum grows. Tax credits should not be targeted at more expensive, less mature technologies such as electric or hydrogen planes, trains and ships, until R&D has reduced the price to a point at which incentives will promote rapid market acceptance.

Low- and middle-income households should be offered higher tax credits to purchase zero energy vehicles, homes, and buildings so they can reap the energy/cost savings and health benefits of these superior technologies. A national advisory board of experts should be created to adjust these tax credits based on market conditions and the evolution of prices in order to leverage the maximum return from each and reduce them as soon as sufficient market momentum is established.

 

A Modest Carbon Tax at the Source

The market can only make good decisions when it has good information. Unfortunately, the price of fossil fuels ignores many hidden costs, such as increased sickness, toxic spills, mining waste, air pollution and a rapidly changing global climate. Currently, carbon-dependent industries get a free ride with cheap access to public lands, a huge and unregulated dumping area for their waste, i.e., the air we breathe, and even direct government subsidies. These have a real cost to citizens and society.

To provide the free market with the information it needs on these costs so it can make rational decisions about fossil fuel use versus clean carbon alternatives, a modest, predictable and stabilizing carbon tax should be levied at the source of fossil fuel production or distribution. While it is not a complete solution in itself, a small carbon tax will begin to price in the hidden costs of fossil fuels, and will be the most cost-effective, least intrusive, and most equitable way to reduce carbon emissions to zero. It is a market-based approach that is supported by more than 3,500 economists, including 27 Nobel laureates.

An optimal carbon tax will add a very small but steadily increasing fee to fossil fuels at their source, which will create a predictable, long-term incentive to move toward clean energy. As it gradually increases, it will change the decisions made by citizens, business people, and government officials about cars, trains, aircraft, buildings, generating plants, manufacturing plants, agricultural operations, and military installations. Business and industry will respond to new opportunities, resulting in widespread carbon emission reductions. Electric and hybrid vehicles will become the new normal; all electric zero-energy and positive-energy buildings and homes will dominate the housing stock; clean-fueled trains, ships and airplanes will move goods and people; government and military facilities and operations will be more secure and resilient; and a non-fossil fuel-based, smart electric grid with battery storage will connect it all.

This tax can be easily be collected on oil, gas, and coal as they come through pipelines or at refineries or storage facilities. It can be adjusted by a formula to stabilize fuel prices during both price declines and price spikes. Over 30 years, it will very gradually increase the base cost of all fossil fuels. The scheduling of this gradual tax increase along with stabilization of prices gives businesses and families the predictability they need to plan for the future. Revenues from the tax, combined with internal and external incentives, can be used to jump start us on the path to zero in ways that create equity for low income people faced with higher energy costs.

 

Loans and Financing

Everyone agrees that energy-saving improvements pay off over time. The problem has been a that initial costs for these improvements act as disincentives. To overcome this first-cost obstacle, we must create clean energy financing vehicles that make the monthly payments for loans on building, transportation, and infrastructure improvements lower than the monthly energy savings. When the monthly earnings from energy savings exceed the monthly loan costs, it is called profit. When structured properly, loans for energy saving and renewable investments, provide a profit from the very first month, not only benefiting the borrower, but also benefiting suppliers, local economies, and the global climate.

Tax credits and/or income from the carbon tax can be used to encourage lenders of all types to offer or underwrite low cost revolving loans to low income people and small businesses for electric vehicles, for zero energy and positive energy homes, for solar panels, and for energy efficiency upgrades to existing homes. Similar low cost loans can be offered to small farmers and small forest landowners to provide funds to lower their carbon footprint and to sequester more carbon. Whether they are homeowners, landlords, farmers or small businesses, these revolving loans would be structured to make the earnings from lower energy costs exceed the financing cost so everybody wins.

 

Equity

The first priority for tax credits and some of the revenue from the carbon tax will be to create higher tax credits and rebates for low income people to make their homes energy efficient, install solar collectors, buy zero energy homes, upgrade to hybrid and electric vehicles, including used EVs.

Landlords of low and middle income apartment dwellers should be incentivized to upgrade the energy efficiency of their units and add solar panels provided they reduce their tenants’ energy bills or rents. Landlords should also be incentivized to provide EV chargers for tenants.

Helping lower income families acquire zero energy homes and electric vehicles will allow them to reap the benefits of low or no utility costs for their homes and reduced fuel costs for their vehicles, and can be a major factor in helping minimize the disproportionate impact of the carbon tax on them. A small portion of the revenue can be returned directly to very low-income individuals by means of a monthly check or a refundable tax credit, as the carbon tax gradually increases. But unlike the current carbon tax bill before Congress, which only uses the tax revenue to give all citizens – rich and poor alike – a check each month, a portion of the carbon tax revenue, along with other incentives, should be used to help lower income individuals reduce their fossil fuel consumption to zero. This approach would save them more money than if they were to continue using fossil fuels while receiving a check to cover some of the higher costs.

 

Infrastructure and Jobs

The market incentive provided by the carbon tax can be supercharged by devoting a significant portion of the funds to build out a carbon-free infrastructure. For example, revenue could be used to construct a network of highway rest areas with charging stations for electric cars and trucks, to incentivize utilities to convert to non-carbon-emitting energy sources connected by a smart grid, to finance the decommissioning and recycling of fossil fuel facilities that can no longer be used, to transform coal mines and power plants into wind and solar farms, and to retrain the workforce for new clean energy jobs. Fossil fuel companies can be rewarded for restructuring their energy businesses to become clean energy utilities, as Royal Dutch Shell is planning on, so they can enjoy continued success in business and save jobs. And where still needed, federal grants can be made to schools, hospitals, airports, rail lines, and local governments to incentivize building out their share of this carbon-free infrastructure. Using some of the revenue to build out a carbon-free infrastructure will create thousands of good-paying jobs that can’t be replaced by automation or exported.

 

Research and Development

Some of the revenue form the carbon tax should be used to increase the budget for R&D. To make that funding go even further, national research laboratories can be refocused to conduct more basic research and development to get us quickly and cheaply as possible to zero greenhouse gas emissions. This can be done in conjunction with university researchers and industry innovators to make it even more cost effective. Areas for R&D should include increasing solar PV and battery efficiency, developing electric and/or hydrogen planes, trains and ships, creating safer, more efficient, and less costly nuclear power, and a developing a highly-effective, renewable-powered smart grid with battery storage.

 

Where Do We Go From Here?

We have shown examples of how intrinsic and extrinsic incentives can be aligned with the desired greenhouse gas reduction behaviors necessary to achieve our stated goal in a way that sparks free enterprise to take the lead, and enhances equity and job opportunities. In the next two installments, coming in June 2019, we will show how these incentives and principles apply to diverse areas of the economy from utilities, industry, and government operations to housing, transportation, agriculture, and forestry, along with concrete examples and proposals.

This series is inspired by Chris Martinsen’s Deconstructing the Green New Deal