Debt Is No Reason to Fear Trillions in Green Spending

(Bloomberg Opinion) -- President Joe Biden and other leaders are proposing large amounts of new government investment in order to decarbonize the U.S. economy. These plans will inevitably encounter deficit scolds who will balk at the amount of new debt required. But taking on debt to finance this particular kind of investment isn't dangerous.

John Kerry, the new Special Presidential Envoy for Climate, recently declared the transition away from fossil fuels will involve “so much economic investment made by people up and down the economic food chain that no future president can reverse it.” Biden’s climate plan calls for $1.7 trillion in federal investment over the next 10 years, or $170 billion a year.

First of all, this price tag isn’t even that high -- the total amount would be less than one year of pandemic relief spending — the first Covid-19 relief bill of 2020 came in at $2.2 trillion. And $170 billion a year is less than 1% of GDP, so it wouldn’t even bring government investment back to the level it was when we built the interstate highway system in the middle of last century:

But even if Biden were to increase the investment number substantially, the resultant debt wouldn't be worrying.

The simplest reason is that the big spending on green infrastructure will be temporary. Like the money the U.S. spent on World War II, or the highway system  — or pandemic relief, for that matter — the transition to post-carbon energy will be a one-and-done thing. You build new solar and wind plants to replace coal and gas, transition the vehicle fleet to electrics, create the required infrastructure, and retrofit buildings and factories to use zero-carbon technologies. Then you’re finished.

Unlike new entitlement programs or welfare state expansions or defense spending, green investment isn’t the kind of initiative that requires an open-ended fiscal commitment. And since the debt generated won’t be an ongoing deficit, investors probably won’t mind and won’t retreat from U.S. Treasury bonds.

But an even more important reason why it’s OK to borrow to fund green energy investment is that this investment will earn a return for society as a whole.

We often think of government programs in terms of redistributive transfers, where money is shuffled from one person to another without creating any economic value. But green investment is not that. When you build a new solar plant, you have a solar plant. It produces economic value going forward in the form of electricity. The same is true of an electric car, a factory that uses hydrogen for heat, an electrified building, etc.

Often, this involves replacing an old power plant, car or building. But it isn’t just a one-for-one replacement, since those old power plants, cars and buildings are likely to be partway through their usable lifetime, and thus substantially depreciated. The new, green replacements that get built will be shiny and new. Thus, green investment to some degree is just bringing forward investment that the economy would have made on its own anyway. There’s a little bit of inefficiency there, since left to its own devices the market would have waited longer to switch things out -- but in exchange, you get stuff that doesn’t belch carbon into the air and contribute to making the planet unlivable.

This is all the more true because of the incredible and ongoing drops in the costs of green energy technologies. Solar photovoltaic panels, for example, are more than 92% cheaper per watt than in the year 2000:

Batteries are on a similar track. Lithium-ion battery costs have come down by about 87% since 2010, and are still decreasing by double-digit percentages every year. Wind has seen substantial decreases as well.

That means that by switching to solar, wind and batteries, the U.S. won’t just be getting greener energy, we’ll be getting cheaper energy, period — far cheaper than fossil fuels. That will (literally) power all kinds of other advancements in technology, accelerating growth. And because deploying renewables at larger scale helps to push the price even further down, thanks to the learning curve, Biden’s investment plan would mean even cheaper energy in the future. For the first time since the beginning of the age of oil, humanity might transition to a more abundant form of energy; the potential for positive economic benefits is enormous.

These returns from green energy investment will be partially realized by the government, in the form of higher tax revenues. But most will flow to private individuals. And that’s completely fine. The resultant GDP growth will act to reduce the ratio of debt to GDP, meaning the government’s long-term fiscal position will improve rather than deteriorate.

So don’t fear the debt that will result from a big investment in green energy. This is a shift that is going to happen anyway, and doing it a little earlier is well worth it for both the economy and the environment.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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