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Wednesday, October 27, 2010

Should We Borrow from the Future to Pay for Clean Energy Innovation Today?

Originally posted at the Breakthrough Institute

Here's an interesting argument from our friends across the pond at the UK-focused Political Climate blog, making the case that despite rising deficit concerns and austerity measures in the UK and elsewhere, borrowing from the future may still actually be an appropriate way to pay for clean energy innovation today:

Against this background, it may sound mad to argue for more public borrowing in order to pay for investments in low carbon technologies and infrastructure, but that is what I am going to do in this post.

Let's start with the rationale. ... The starting point is that in advanced economies successive generations tend to get better off over time. For example, at the depths of the 1930s depression Keynes observed that despite the general gloom, he was confident that 100 years in the future, people might be eight times better off in real terms. And indeed average GDP per capita in the UK is now already about 5 times what it was in the 1930s. By extension, we would normally expect future generations to be better off than us in GDP terms.

... [Furthermore, if] we in this generation mitigate climate change, we will allow future generations to have a higher standard of living than they would have if we did nothing. We are very slowly beginning to do this, with policies being introduced to encourage us to invest less in conventional capital (e.g. fossil fuel power stations) and more in investments that effectively maintain natural capital (like renewable energy).

At the moment we are paying for these more expensive investments through reduced consumption, in the form of higher energy bills. If instead we were to borrow a certain amount of money from future generations (who will have to repay through their taxes) and use this money to pay the extra cost of renewables, carbon capture and storage and so on, then the theory says it should be possible to make both our generation and future generations better off. ...
Political Climate's team makes the point that long-term government financing rather than bank loans is the right way to do this kind of borrowing, with fifty-year terms for government bonds that can be paid back over time by (now richer) future generations.

Here in the United States, we financed much of the electrification, irrigation, and development of the American West (and the Tennessee Valley in the southeast) through precisely this kind of long-term government-backed borrowing. The hydroelectric dams and reservoirs, power lines and irrigation systems, clean and affordable energy, productive farms, and burgeoning new cities that resulted from these debt-financed investments paid off many times over, making generations living today far better off than if this debt hadn't been incurred.

A similar case could be made for innovation investments as well, since the benefits of new, innovative products and technologies -- be it better clean energy technologies or pharmaceutical drugs -- will accrue most to those living in future times, who can harvest the rewards of today's investment in research and innovation.

This also brings to mind the old idea of a capital budget for nation governments...

Thought provoking piece at least. What do you think, dear reader? Despite rising national debts, would national governments be wise to borrow today to fund investments in infrastructure, clean energy, and innovation to be enjoyed by -- and paid back by -- a richer, more well-off generation tomorrow?

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