Democrats are trying to solve a public policy riddle with stakes that couldn’t be higher. The party’s $3.5 trillion reconciliation bill is the last best chance for America to tackle the world’s rapidly escalating climate crisis. But moderates, led by Sens. Joe Manchin and Kyrsten Sinema, whose votes could single-handedly tank the legislation, have demanded deep cuts to the package’s price tag that would make it nearly impossible to spend enough tackling global warming while also addressing the party’s other priorities, such as child care and health care. Their position has enraged progressives, particularly young leftists like Alexandria-Ocasio Cortez who see climate as their top priority. If recent murmurings from Capitol Hill are to be believed, the conflict is at this point threatening to sink Biden’s whole domestic agenda.
So: How can Democrats put together a deal with a cost Manchin and Sinema will accept without ditching half their policy priorities or consigning America to climate chaos?
Here’s one way they might be able to thread the needle. When it comes to climate, Democrats should concentrate less on spending and more on lending and investing. Lawmakers ought to think of themselves less like parents trying to cram everything they want into a family budget and more like financiers trying to leverage up their cash.
What would that mean in practice? Rather than simply relying on traditional funding approaches like tax credits for green energy, Congress can instead put money into capitalizing big new loan programs or government-sponsored entities like public banks that have the power to turn one dollar of federal appropriations into many, many more dollars of investment. That way, lawmakers may be able to simultaneously shrink the reconciliation bill’s top-line budget number on paper while supersizing the resources for a green transition. It’s a public finance hack that could make all sides happy—the one weird trick that might bring climate warriors and penny-pinching moderates together
America has a long, successful track record of using its fiscal power like an investor or creditor sponsoring long-term projects rather than a household with a checking account buying necessities. Congress created the first Bank of the United States in 1791, financing not only the government’s needs but also tons of private commercial activity. Woodrow Wilson established not only the Federal Reserve, which acts as a lender of last resort to the financial system, but also the Federal Land Bank system, which provided direct long-term credit to farmers. FDR kicked similar initiatives into hyperdrive with the New Deal: The government chartered an Export-Import Bank to finance overseas projects that used American exports. Fannie Mae provided a pipeline of cheap credit to homebuyers by purchasing and securitizing mortgage debt. It also reformed the Herbert Hoover–created Reconstruction Finance Authority to take direct ownership stakes in banks and extend credit for all kinds of fixed investment projects, from farms to the Tennessee Valley Authority, a publicly owned utility that electrified much of Appalachia and exists to this day.
Federal loans have already played a starring role in the country’s efforts to combat climate change, as well, thanks to the Department of Energy green lending initiative in Barack Obama’s 2009 stimulus, which kick-started the U.S. renewable sector. When Obama took office, there were no utility-scale solar plants in the U.S.; eight years after the 2009 stimulus passed, there were 28. You probably remember that Republicans tried to paint this program as a failure because one loan recipient, the solar company Solyndra, went bankrupt, but the program made a profit for the Treasury.
There’s one magic word that lets lending programs and government-sponsored enterprises, or GSEs for short, make the money Congress gives them stretch so far: leverage. For a federal loan program, the appropriation only has to cover administrative costs and losses from defaults. As a result, $1 from Congress can typically turn into $10’s worth of lending, because most borrowers ultimately pay the money back. If the loans earn more from interest and fees than the program loses in defaults, then they produce a net gain to the federal budget over time and the program can keep going indefinitely. Take the 2009 green loan program: It was seeded with $6 billion, but more than 12 years later, it has made $36 billion worth of loans while only booking $1 billion in losses. The program can keep going until it logs $5 billion more in defaults.
A government-sponsored corporation can do even more. It can leverage federal funding with additional borrowing at the negligible rates enjoyed by the government, using the appropriation as collateral. Then they can use that cheaply borrowed money to make loans at interest rates higher than those paid by the Treasury but lower than private sector banks charge, acquire assets that generate revenue and appreciate in value, and reap profits that can be further reinvested.
GSEs and loan programs are best suited for pursuing public projects that bring in revenue or prevent financial losses. Happily, this describes much of what America needs to do in order to reduce emissions and adapt to a changing climate. Think publicly owned renewable energy utilities in the tradition of the Tennessee Valley Authority that charge customers for power, the proposed “Ike Dike” that would protect the economic powerhouse of Houston from extreme stormwater surges that could devastate its tax base, or investments in new sustainable industries.
So congressional leadership should make this deal with Manchin and Sinema: For every two, four, or however many dollars the moderates cut from the top-line reconciliation figure, the Democrats will add one dollar to the capitalization of lending programs or public corporations. Using a 4:1 formula of appropriation cuts to lending and GSE capitalization, and a leverage ratio of 10:1, a cut of $1 trillion from total appropriations with $250 billion put into lending or GSE capitalization could produce $2.5 trillion in actual public investment.
What might these programs look like? Right now, there are two proposals with a shot of making it into the reconciliation bill that could leverage their appropriation to pursue climate goals.
The House Energy and Commerce Committee’s bill contains a $27.5 billion Greenhouse Gas Reduction Fund, which could provide loans, grants, and technical assistance available to states, localities, and nonprofits who would each create “national climate investment institutions”—essentially, their own climate-related GSEs. These local institutions could leverage the federal money by using them as collateral for bonds, or by pooling them with other sources of funding, and grow their capital as projects like new solar plants generate revenue that can be reinvested. If that $27.5 billion appropriation gets multiplied 10 times through bond issues or sales of stock in new utilities, it turns into $275 billion in investment.
Sen. Mark Warner, meanwhile, wants to include his Infrastructure Finance Authority, which has a long history of approval among both parties but was cut from the bipartisan infrastructure bill passed by the upper chamber earlier this summer. It would create a wholly owned government corporation to fund “hard” infrastructure projects like rail, transit, ports, stormwater barriers, and more with loans and loan guarantees. The bill isn’t primarily pitched as climate legislation, but it could clearly fund exactly the kinds of projects like transit and levees that are crucial to reducing carbon emissions and adapting to extreme weather. Warner’s staff says his bill would turn a $20 billion appropriation into $200 billion worth of loans, which recipients are required to push yet further with additional money from private sources, potentially including bond or equity issuance.
Currently, neither of these proposals get enough money where it needs to go: Environmental economists and climate activists insist that over the next 10 years we need to spend more like 5 percent of our roughly $20 trillion GDP just on climate—a trillion dollars a year for a decade, compared with a potential total of $475 billion from the Greenhouse Gas Reduction Fund and the Infrastructure Finance Authority. But then again, the entire climate plan House Democrats have put forward currently falls far short of what’s needed to address the ecological crisis we’re now facing. If the two warring camps of Democrats can strike a deal where they cut the official spending total in the reconciliation package but blow out the size of these programs, it’s possible the bargain could lead to more spending on greening the economy than now planned.
One advantage to this approach—aside from that it could spin a small amount of seed funding into a giant heap of green energy spending—is that it might appeal to Democrats across the ideological spectrum. The Greenhouse Gas Reduction Fund is a pet project for left-leaning lawmakers. Warner is more of a moderate. Other lawmakers, like Rep. Maxine Waters, the progressive idol from California, and Chris Coons, the middle-of-the-road senator from Delaware, have also proposed expansive ideas for public finance authorities that unfortunately haven’t yet gained traction. Status quo–loving centrists and the left may be at war at the moment, but they both appear to like the idea of leveraging up federal cash.
There could be technical challenges that make it tricky to include a big new financing authority in the reconciliation bill. The Federal Credit Reform Act of 1990, for instance, significantly restricted the ability of the government to operate “revolving funds” that reinvest loan repayments or leverage their initial capital with more debt like a private sector financial institution or the Reconstruction Finance Corporation. But crafty legislators will probably get around those hurdles. And considering the programs’ power to amplify investment while basically paying for themselves, progressives should offer to shrink the size of the reconciliation package if Manchin and Sinema agree to blow out the funding of programs like the Greenhouse Gas Reduction Fund, the Infrastructure Finance Authority, or existing loan facilities like the one run by the Department of Energy. It’s the least they can do in exchange for the headlines about how they cut the left’s spending plans down to size.