Environmental Valuation & Cost-Benefit News

Link: https://www.dws-investments.com

Editorial and Executive Summary:

In their recently-published Investing in Climate Change 2009: Necessity and Opportunity in Turbulent Times, Deutsche Bank looked at the confluence of three key drivers:
1) The environmental impact of climate change;
2) Energy security;
3) The financial crisis.

These three drivers are interlinked....

The authors believe this confluence opens up an historic opportunity for a new US administration and Congress to take a global leadership position on the issue of the environment and energy security, while addressing current financial problems.

In the long-run, climate change mitigation requires a carbon price, and the authors believe that well-designed market mechanisms, such as a cap-and-trade regime, are the best way to price the carbon externality, and indeed have the potential to raise funds for climate change solutions. In the short run, the debate appears to be concentrated more on energy policy and energy security in the context of reinvigorating the economy through an infrastructure stimulus package....

The “sweet spot” for a “green” infrastructure stimulus brings together all three drivers, and is focused on projects in:
1) Energy efficient buildings – in tough economic times, these projects, which have long-term positive payback and are low-tech but labor-intensive, make even more sense;
2) The electric power grid – without a modern and optimized power grid, it is not possible for renewable power to scaleup. 7-9% of electric power is also lost in transmission, with significant potential savings from efficiency;
3) Renewable power – funding for technologically-proven renewables allows scale-up and the long-term shift away from fossil fuels;
4) Public transportation – reduces emissions and adds to efficiency of economy.

Other areas of particular interest for an infrastructure package include pipelines, energy efficient products (e.g. fuel-efficient automobiles) and water, each of which address at least two of the three critical elements. CCS is also a critical enabling technology that could move domestic fossil fuels into the “green sweet spot”, but more R and D is necessary before this can function as a true infrastructure stimulus.

One of the reasons that the “green sweet spot” is an attractive focus for an economic stimulus is the labor-intensity of many of its sectors. For instance, the Apollo Alliance estimates that every $1 million invested in the US in energy efficiency projects creates 21.5 new jobs, as compared to only 11.5 jobs for new natural gas generation. The University of California Berkeley’s Renewable and Appropriate Energy Laboratory also finds that renewable energy technologies create more jobs per average megawatt of power generated and per dollar invested than coal or natural gas. Finally, a 2008 Center for American Progress report states that a $100 billion investment in clean energy and efficiency would result in 2 million new jobs, whereas a similar investment in old energy would only create around 540,000 jobs.

In “green”-oriented infrastructure, there are economic stimulus options that would have an immediate impact on job creation, and those that would have a medium-term impact due to the planning horizons involved. These include:

-Immediate impact: Energy efficient buildings, energy efficient products, renewable power
-Medium-term impact: Pipelines, water, public transport and the electric power grid.

The authors believe a successful stimulus plan would include both immediate impact measures to confront the near-term economic challenge, as well as medium-term measures to prompt longer-term economic growth. Government funding on infrastructure has the advantage that it can also unlock private sector funding and partnerships, which will augment government spending.

There are three funding options for increased investment in “green” infrastructure:
1) Deficit spending, which offers immediate economic impact with long-term debt implications;
2) General tax increase, which is potentially unhelpful during difficult economic conditions;
3) Carbon price, cap-and-trade, which could entail auctioning of emission permits and link the carbon externality to funding.

In the long-term, we favor a cap-and-trade regime, which will fund “green” government spending. But in the current downturn, deficit spending is favored by many to reinvigorate the economy.

This leads to a number of opportunities in the US, core among them being the creation of a “green” National Infrastructure Bank, which builds on a number of existing policies, such as the Department of Energy’s loan guarantee program for Nuclear and Renewables, as well as major strands in President-elect Obama’s policy platform. This can be seen as part of an overall energy policy/climate change architecture.

The advantage of a “green” National Infrastructure Bank is that, among other financing options, it can enter into public-private partnerships, where the government partners with the private sector to scale-up infrastructure initiatives. The ability of a National Infrastructure Bank to tap into private capital through public-private partnerships, co-financing, loan de-risking by the federal government and other configurations will enable the government’s investment to be augmented – in effect providing preferential rates of financing to private-sector organizations engaged in the space. This is promising for long-term growth of opportunities that are past the demonstration stage and looking for commercialization and scale-up.
...
Globally, the UK Prime Minister has estimated that up to 25 million new “green” jobs could be created by 2050 with appropriate supportive policy in place. Based even on conservative estimates, this could result in between 5 and 10 million jobs worldwide over the next decade, an estimate in-line with President-elect Obama’s plan to create 5 million new “green” jobs in the US.

From a jobs perspective, a stimulus in the renewable energy sector is highly attractive, in part because of its labor-intensity and largely domestic nature.

The study presents a valuable summary table of studies conducted on the job creation potential of a “green” economic stimulus which includes the following

United Nations Environment Program (UNEP), 2008. "Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World."
-Wind and solar for countries where data was available - 470,000 (2006)
-Solar thermal for countries where data was available - 624,000+ (2006)
-Biomass for countries where data was available - 1,174,000 (2006)
-Geothermal and hydro for countries where data was available - 64,000+ (2006)
-Energy efficient retrofit jobs from €19 billion investment (Germany) - 145,000 (2006)
-Construction of natural gas buses (India) - 18,000 (2009)

University of California, 2008. "Energy efficiency policies Efficiency, Innovation, and Job
Creation in California."
-Resulting from energy (California) - 1,500,000 (1977-2007)
-Efficiency & climate-action jobs including innovation potential (CA) - 403,000 (2006-20)

US Metro Economics, 2008. "Current and Potential Green Jobs in the US Economy."
-Increasing renewable use and implementing efficiency measures (U.S.) - 750,000 (2006)
-Increasing renewable use and implementing efficiency measures (US) - 1,500,000 (2008-18)
-Increasing renewable use and implementing efficiency measures (US) - 4,200,000 (2008-38)

Political Economy Research, 2008. "A Program to Create Good Jobs and Start Building a Low-Carbon Economy."
- $100 billion public spending on “green” recovery program (US) - 2,000,000 (2008)

Barack Obama, 2008. Energy and Economic Policies.
-Based on $150 billion stimulus (U.S.) - 5,000,000 (2008-2018)

Gordon Brown, 2008. UK Renewable Progam.
-Based on £100 billion stimulus (U.K.) - 160,000 (2008-2020)
-Worldwide - 25,000,000 (2050)

by Mark Fulton 1, Bruce M. Kahn 2, Mark Dominik 3, Lucy Cotter 4, Emily Soong 5 and Jake Baker 5
1. Managing Director, Global Head of Climate Change Investment Research, New York
2. PhD, Director, Senior Investment Analyst, New York
3, Vice President, Senior Research Analyst, London
4. Research Analyst, London
5. Research Analyst, New York

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November, 2008