Green savings bonds

Jeffrey Simpson of the Globe suggests (behind a pay wall) that the next federal budget might create “Green Bonds,” federally backed securities aimed at providing financial support for cutting-edge green technologies, particularly in the energy sector:

Green Bonds would be marketed privately, through financial institutions, and supervised by an arm’s-length group. The government would guarantee a rate of return akin to that of [Canada Savings Bonds] to reduce investor risk, because there would be high risk involved.

The target, Simpson writes, would be technologies that can get seed funding from government programs and venture capitalists but need more support to get to market. This would make them nearly the opposite of traditional federal government bonds, which are inherently safe because governments have access to a nearly unlimited resource: tax revenues. If things go terrifically out of whack with government finances, governments that borrowed money from their own people can just hike taxes.

For investors looking for a safe way to make a few bucks, Green Bonds would be perfectly sensible. As an environmental measure for a government, they’re downright bizarre.

The government (through an “arm’s-length group” of the party-in-power’s cronies) takes risks with private investors’ money, but guarantees them a miserly rate of return no matter how badly they screw up, so it’s supposed to be OK.  The whole point would be to support ventures that traditional sources of capital are unwilling to touch, keep in mind.

If a government wanted to do such a thing, why not just spend the money directly in subsidies? The government could, if it felt it needed to, filter the cash through the same arm’s-length crony council. Why the extra step? Green Bonds would plunk that vast ocean of security behind otherwise high-risk investments because … uh, apparently because they’d be popular. In what I’m sure is a total coincidence, a news release binged into my box this afternoon from Nanos Research, trumpeting the factoid that “eight of ten Canadians support or somewhat support the concept of a Green Savings Bond.” (Numbers here, PDF.) Six in 10, Nik Nanos finds, would consider buying one.

Worse yet, the government itself would be in a position to influence the returns on such bonds, in how it regulates the carbon market Environment Minister John Baird is pretending to want to set up. On environmental grounds, getting the government entangled in Green Bonds would give it an incentive to be tougher on carbon restrictions, pushing the return on green investments up. On financial grounds, of course, that would make Green Bonds a worse investment for individuals looking for somewhere to put their money, since the government would presumably cream off the excess.

Presumably part of the appeal for the government is that Canada Savings Bonds aren’t needed as badly as they used to be, given that the feds are running surpluses so high they’re stuffing cash into every mattress and under every rug they can find. Voters like government-backed investments, but now the Canadian government needs to find a new mechanism for providing them. Green bonds would fit the bill.

Simpson himself is lukewarm on the idea:

Green Bonds would be a niche product. No one should oversell their capacity to wean an economy from carbon. But the idea is intriguing.

Only as a gimmick. In sum, Green Bonds would add even more complexity and government involvement in a sector already horrifically complex and dominated by government, and create vested interests for governments to meddle even more.

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3 responses to “Green savings bonds

  1. To The Editor,

    There are a number of inaccuracies and mistaken assumptions in your response to the Jeffrey Simpson article on Green Bonds, which we feel need to be addressed.

    You state that the targeted technologies are “ventures that traditional sources of capital are unwilling to touch” but “can get seed funding from government programs”. This is not the case, and misses the point behind the Green Bond entirely.

    The point of the monies raised by the bond is to increase demand for already-developed renewable technologies by providing low-cost capital for their installation. The point of increasing demand is to increase the rate at which those technologies penetrate the marketplace. This is an environmental necessity.

    An example: bio-gas businesses currently need to borrow money at high commercial rates (10-12%) to build a large-scale energy plant – this is because the technology has not been deployed at commercial scale long enough – roughly 5-10 years – to allow the notoriously conservative commercial banks to lend capital at rates close to prime or below. A coal plant can borrow at prime, a bio-gas plant borrows at rates that are significantly higher. This makes it very difficult for bio-gas (or geothermal, or solar thermal, etc) to compete with traditional fossil-based energy sources.

    The basic idea behind the bond is to lower the risk-rate faced by renewable energy infrastructure technologies in order to increase the pace at which those already-developed technologies are installed. The Green Bond helps generate demand for renewable infrastructure by lowering the cost of borrowing.

    The Green Bond will “plunk that vast ocean of security behind otherwise high-risk investments” not because “they’d be popular”, but because there is a clear and immediate environmental need to accelerate the installation of these technologies, such that they are installed at a faster rate than the free market – driven by commercial lending rates – currently demonstrates. Green Bonds are not a “gimmick”, rather they are designed to address particular technologies for a specified time-period, until such a time as other legislative frameworks are in place (such as appropriately priced carbon).

    The government being in a position to “influence the return on such bonds” just ensures that both the investing public, and the government, are actually on the same side on this issue – and both happen to be on the side of the greater public good in providing incentives to reduce carbon. The government would not “cream off the excess” but, as Simpson explicitly states, the return on the bond can be higher if linked to the price of carbon. Thus, it is the bond-holder that would benefit from the price of carbon, not the government.

    You are right to say that the government could simply raise the money itself and inject it into the fund we are proposing. That said, we believe it is of significant benefit to directly engage the public and give them a direct stake in this policy project. Green Bonds will inaugurate a compelling nation-building project. Just as people bought Victory Bonds during the Second World War, we believe the public will purchase Green Bonds to fight a new war on carbon.

    Please contact us if you have any questions or concerns.

    Kind Regards,
    Tom Rand, B.A.Sc., M.Sc., M.A. P.Eng.
    Project Manager
    Action Canada, Green Bonds

  2. (The editor? All there is is me.)

    Thanks for the thorough rebuttal, though I’m not at all convinced I’m wrong. I think we disagree on a basic premise — whether this is the sort of policy instrument governments ought to use — rather than on technical details. I have no doubt at all that green bonds are well intended, or that they’d do some good; I just think the potential for unintended evils is far too great. That potential is bad enough when the government spends money directly — adding this much complexity makes it much worse.

    One quibble. You write:
    The Green Bond will “plunk that vast ocean of security behind otherwise high-risk investments” not because “they’d be popular”, but because there is a clear and immediate environmental need…

    I was talking about a major reason green bonds would appeal to a government, not about why you’d propose them.

  3. If a carbon tax or cap and trade system are implemented will Green Bonds fly? Or will we have a “I already gave at work” type phenomenon happening?

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