The dramatic move on the part of public and private pension funds to pull billions of dollars of their investments from the fossil fuel sector and related industries and reinvest them in the smart green economy marks the coming of age of social capitalism. Socially responsible investment has migrated from the margins of investment decisions to the very core of market activity, providing the groundswell for the most fundamental of transitions—the exit strategy to leave the fossil fuel civilization behind.
What has precipitated this leap in socially responsible investment from the periphery to the center of capitalist investments? The bottom line! Although the notion of socially responsible investment first emerged with the worldwide movement to rethink investments and divestments in industries in apartheid-era South Africa, it came home to America in the late 1970s in a more generic way, with the opening up of a conversation around worker-owned pension funds being used to undermine the workers’ economic security and the well-being of their communities. Proponents of the SRI concept argued that it needed to be factored into the equation in evaluating how retirement benefits were being invested.
Milton Friedman, the late Nobel laureate economist who presided over what’s referred to as the “University of Chicago Neoliberal School of Economics,” shot back, arguing that any notion of exercising social responsibility in how pension funds should be invested would ultimately undermine the performance of capitalist markets, with Big Government subjecting the flow of capitalist investments to ideological constraints. The Friedman position laid down a dictum that was followed religiously by most pension fund trustees in the management of the growing pool of workers’ social capital in the ensuing decades.
On the surface, Friedman’s dictum seemed to hold sway, at least through the early years of the new millennium. Under the surface, however, younger generations of baby boomers, Generation Xers, and millennials pushed for measuring investments by their environmental, social, and governance practices (ESG) in shareholder battles and in the administration of workers’ pension fund investments.
A new phrase entered into the public dialogue around economic investments: “doing well by doing good,” a line borrowed from Benjamin Franklin. The idea was that there need not be, nor should there be, a sharp division between morally and socially good business practices and the bottom line. Rather, it was argued that this was a false dichotomy—that in reality, doing well by doing good enhances the bottom line.
With this counternarrative, unions and NGOs continued to put forth shareholder resolutions at companies’ annual meetings to factor SRI into their practices. Their successes led to socially responsible investments accelerating after the dot-com bust in 2000, at the hands of a younger generation that was not shy about shaming morally irresponsible and unacceptable corporate behavior, often using social media and reputation sites to embarrass, prod, and enforce changes in corporate practices.
Today, SRI has gone mainstream. According to a report prepared by Morgan Stanley, 86 percent of millennials are interested in socially responsible investing, differentiating their cohort from its elders.1 Reflecting this emerging shift, SRI in the United States has topped $12 trillion, much of it proffered by pension fund trustees.2 Although SRIs run the gamut and can be found across every industry and sector, the deepening concerns over climate change, the environment, carbon footprint, and the geopolitical influence of Big Oil have catapulted divestments out of the fossil fuel industry and into reinvestments in renewable energies and green industries.
The new thrust has given rise to “impact investing,” providing seed money to businesses that embed ESG into every aspect of their operations. In surveys conducted across the asset market sector, Morgan Stanley repeatedly heard from interviewees who expressed their strong conviction that the very nature of investment decisions is at an inflection point in the industry due to a shift in the kind of investments clients demand. “Doing well by doing good” has become the new mantra.
Is the enthusiasm justified? A spate of in-depth studies over the past two years, including studies prepared by Harvard University, the University of Rotterdam, and Arabesque Partners and Oxford University, show that companies with a strong ESG presence across their value chains tend to outperform their competitors, in part due to their commitment to greater aggregate efficiencies, less waste, circularity built into their supply chains, and a low carbon footprint, all of which increase their bottom line profit, and each of which is tied to their shift away from a fossil fuel civilization and into a green era.3 Rather obvious.
Every aspect of the economy is made out of or moved by fossil fuels. They have been the lifeblood of the First and Second Industrial Revolution infrastructures that make possible every economic and commercial endeavor. Without this carbon infrastructure, businesses and, for that matter, society as a whole, could not exist. The point is, the fossil fuel infrastructure has been, up to now, the foundation of society’s prosperity and well-being.
Given that fossil fuels are the lifeblood of the current global economy, does anyone anywhere believe that we are in the sunrise or even the crest or plateau of the fossil fuel era? And what then of the infrastructure that underlies a fossil fuel culture? Can anyone claim that the infrastructure is still robust? Clearly, this period of history is closing.
Infrastructures are like living organisms. They are born, grow, mature, and begin a long period of decline, eventually ending in death, which is exactly what is happening with the carbon-based Second Industrial Revolution. Fortunately, a digitally interconnected postcarbon Third Industrial Revolution infrastructure, which is at the heart of a Green New Deal, is ascending, along with new aggregate efficiencies, higher productivity, and a dramatic reduction in carbon footprint. In turn, new businesses and workforces will be required to build out the green economy and manage it in the twenty-first century.
As to whether low-carbon investments might indeed be socially responsible but financially poor investments, S&P Dow Jones analyzed index exposure to carbon risks for a number of versions of the S&P 500 Index and concluded that “the low-carbon versions actually outperformed the benchmark over the five-year period in most cases.”4
We saw in chapters 2 and 3 that the key sectors that make up the Second Industrial Revolution infrastructure are each decoupling from a fossil fuel civilization—ICT/telecommunication, electricity, transportation and logistics, and the building stock—and recoupling with the incipient Green New Deal Third Industrial Revolution infrastructure around the world. If trustees of pension funds are looking to maximize the lifetime financial interests of their pensioners and their beneficiaries, it would be difficult to conceive how this might be done by locking investments into a dying Second Industrial Revolution infrastructure with its stranded assets and declining business models.
The Green New Deal is all about infrastructure: Broadband, Big Data and digital communication, near-zero marginal cost, zero-emission green electricity, autonomous electric vehicles on smart roads powered by renewable energy, and nodally connected zero-emission positive power buildings, the linchpins of a Green New Deal infrastructure, are going to have to be built out and scaled up in each region and connected across every region, enveloping landmasses around the world. This infrastructure transition will have to move quickly and be at least partially in place in the coming years if we are to hold the increase of temperature on Earth to 1.5°C or below.
How much investment are we talking about to mend parts of the Second Industrial Revolution and decommission other parts that move into the stranded assets column? And how much investment will we need to spend on the smart new zero-emission Third Industrial Revolution infrastructure? Oxford Economics reports that the nations of the world will need to increase the proportion of GDP to infrastructure from the 3 percent per year expected under current trends to 3.5 percent per annum—certainly doable.5
Some countries are stepping up quickly while others are crawling woefully behind. McKinsey reports that the United States ranks an embarrassing twelfth on the list, having invested only 2.3 percent of GDP on infrastructure from 2010 to 2015, and its ratio of investment to GDP continues to fall with each passing year.6
At least the public around the world seems to understand the importance of infrastructure to the general well-being, with 73 percent of respondents in a recent international survey saying that “investing in infrastructure is vital to [their country’s] future economic growth” and 59 percent saying that they “do not believe enough is being done to meet their country’s infrastructure needs.”7
Now, the United States may be on the verge of catching up. Infrastructure spending has risen from near invisibility in political circles to become a controversial red-hot public issue with the growing realization that the nation’s crumbling infrastructure is now at a breaking point, costing the American economy literally hundreds of billions of dollars in losses, and becoming a matter of national security. The problem is compounded by the damage inflicted by climate-related disasters on already weakened infrastructure.
President Trump is championing a $1.5 trillion infrastructure rollout over ten years—mainly to mend the aged twentieth-century Second Industrial Revolution infrastructure. All is not as it seems. The White House is offering up only $200 billion in federal financing, mostly in the form of tax credits, with the bulk of the financing to come from the states.8 The Democrats are calling for a $1 trillion infrastructure package financed by the federal government, which would include mending the Second Industrial Revolution infrastructure and overlaying the build-out of a smart digital green Third Industrial Revolution infrastructure that can take the country into a zero-emission society and address climate change.9
In reality, the Trump plan is paltry but not a radical departure from the federal government’s share of financing the country’s infrastructure, which in recent years has averaged around 25 percent of the total cost, with the rest of the infrastructure commitment left to the states. Moreover, the federal tax breaks the president is promoting are more in line with what the government customarily does to assist the states and stimulate market forces that accompany infrastructure-related projects. But, unfortunately, the tax breaks the White House has in mind are almost universally connected to bolstering the antiquated fossil fuel infrastructure, much of which is quickly becoming stranded assets. The wiser course of action would be for the federal government to provide tax credits, tax deductions, tax penalties, grants, and low-interest loans to encourage a Green New Deal transition and let both the marketplace and the states use the incentives to quickly speed the transition from a fossil fuel civilization to a zero-carbon emission society.
However, the federal government should take a significant responsibility, along with the states, for financing some of the build-out of the national power grid, which will serve as the backbone of the Third Industrial Revolution infrastructure. There is precedent for this. The backbone of the Second Industrial Revolution infrastructure was the Eisenhower-era National Interstate and Defense Highways Act of 1956. This public works project connected the country, created the suburbs, and established a totally integrated mobility and logistics infrastructure across America. The infrastructure cost the federal government an estimated $425 billion (in 2006 dollars) to lay out thousands of miles of roads over a period of thirty-seven years.10 The federal government covered 90 percent of the financing, paid for by a slight increase in the gasoline tax, and the states covered the remaining 10 percent of the bill.11 The smart national power grid in the twenty-first century, providing seamless digital interconnectivity to enable the sharing of electricity from renewable energy sources across every region of the country, is analogous to the build-out of the Interstate Highway System, which provided a seamless interconnectivity for mobility across the country in the twentieth century.
Or taking the analogy one step further, KEMA, a former leading European energy, electricity, and engineering consultancy, made the point years ago that the “smart grid is to the electric energy sector what the Internet was to the communications sector and should be viewed and supported on that basis.”12
There is another parallel between the Third Industrial Revolution’s smart digital infrastructure and the Interstate Highway System. President Dwight D. Eisenhower was keen on erecting a vast interstate highway system, in part because of his own personal experience in the military. In 1919, when he was a young colonel in the army, he participated in a motor convoy across the continental United States on the historic Lincoln Highway—at that time the first road across America. The journey was designed to focus attention on improving America’s highways and took over two months to complete. Later, in an autobiography, he quipped that “the trip had been difficult, tiring, and fun,” but the memory of all the delays across the country stayed with him during his military career. In World War II, General Eisenhower pondered his earlier experience after observing the German Autobahn—at that time the world’s only national highway system—and later remarked that “the old convoy had started me thinking about good, two-lane highways, but Germany had made me see the wisdom of broader ribbons across the land.”13
When Eisenhower became president in 1953, he already had in mind “the grand plan” for an interstate highway system connecting all of the American economy and society. Defense and security issues were a constant companion. He was particularly concerned about the possible mass-evacuation of urban populations in the event of a nuclear attack and the need to move military equipment, where needed, in the case of an invasion, and saw an interstate highway system as critical to national security and defense. This was not the only reason for engaging in an interstate mobility infrastructure project. In his speech to the National Governors Association in 1954, the president listed a number of other objectives, including public safety on the roads, easing traffic congestion, and improving logistics in the production and distribution of goods and services. However, in his speech to the governors, he again emphasized that defense issues were also a priority and warned the elected officials of “the appalling inadequacies to meet the demands of catastrophe or defense should an atomic war come.” The final piece of legislation was called the Federal Aid Highway Act of 1956, but is popularly known as the National Interstate and Defense Highways Act.
Like the Interstate Highway System, the emerging smart national power grid is digitally connecting the American economy and society and increasing the nation’s efficiency, productivity, and economic well-being, and, when finished, will also address security concerns that, at least in part, gave rise to the Interstate Highway System. In the 1950s, the threat was nuclear war. Today, the threat is cyber war. On the upside, the smart national power grid is managing an ever more diverse and complex energy infrastructure made up of literally millions of players in dense relationships on ever-shifting platforms. Yet, the very complexity of the current system makes it increasingly vulnerable to cyberattacks. Nor is this merely a theoretical issue. The nation’s power grid and electricity system has already been hacked by agents of foreign countries, and there is growing concern that hostile powers as well as rogue terrorist groups are turning their attention to disabling our large electricity transformers, high-voltage transmission lines, electricity generation plants, and electricity distribution systems. If electricity were to be disabled across an entire region or the whole country over weeks and even months, the economy would collapse, society would crumble, and government would be virtually inoperable at every level.
This prospect keeps elected officials, the military, and the business community up at night wondering if and when a cyberattack might occur, knowing that we are wholly unprepared at this point in time across the entire national electricity grid. Hurried discussions are now occurring at the local, state, and federal levels and within the power and electricity industry on how to quickly harden every aspect of the emerging national smart grid, from the large power transformers and long-distance high-voltage transmission lines to the final distribution of electricity to end users. There is at a minimum an agreement on one factor—that is, the key to cybersecurity rests in deepening resiliency and, that, in turn, requires an expansion of distributed power in every community.
The installation of microgrids will be our nation’s frontline insurance. Were a cyberattack to happen anywhere in the country, homeowners, businesses, and entire communities would be able to quickly go off-grid, reaggregate, and share electricity neighborhood to neighborhood, which would allow society to continue functioning. It would be difficult for anyone to argue that the threat of cyber warfare against the nation’s power and electricity grid is any less a national security issue.
Just as the ever-present threat of a cyberattack demands continuous vigilance, so too does the threat of catastrophic climate events that are escalating exponentially across the country, resulting in tens of billions of dollars in damage to local ecosystems and loss of property, human life, and commerce. Cyberattacks and climate disasters are both going to escalate in the years ahead, making the questions of both cybersecurity and climate resilience the highest priority national security issues facing the country.
With the interstate highway precedent in mind, let’s run the numbers to get a tentative sketch of the areas that need to be funded to lay down a smart, zero-emission Green New Deal infrastructure to address climate change and transform the American economy and society. How much funding is each area likely to need, and how will the costs be divided between the federal government and the states? It is interesting to note that the $476 billion price tag that the Electric Power Research Institute projected for building the national smart grid is nearly identical to the cost of the interstate highways, and it, too, is projected to result in economic benefits far beyond its cost.14 Over the initial ten-year build-out of the national power grid, the federal government would only have to invest approximately $50 billion per year.
The ten-year federal government infrastructure commitment should also include an additional $50 billion a year in the form of tax credits, tax deductions, grants, and low-interest loans to spur solar and wind installations, the adoption of electric and fuel-cell vehicles, and other aggregate efficiencies that will take America’s businesses, workers, and families into the green era. By way of comparison, in 2016 federal tax preferences in the form of tax credits for renewable energy were an estimated $10.9 billion, while an estimated $2.7 billion in tax preferences were given over to energy efficiency or electricity transmission.15 The estimated tax credit for plug-in electric vehicles between 2018 and 2022 is projected at $7.5 billion.16
Federal tax credits and other incentives have been instrumental in encouraging the installation of solar and wind technology, creating the market for green energies in the United States. The Solar Energy Investment Tax Credit allows homeowners to deduct 30 percent of the cost of installation of solar panels from their taxes. As of 2018, more than five million homes were powered by solar electricity. Wind power has equally benefited from tax credits, with enough wind now being captured in America to power 17.5 million homes. While past tax preferences helped spawn the solar and wind market, increased energy efficiencies, and the introduction of electric vehicles, to get to scale in a wholesale transformation into a green energy era, these tax preferences need to be at least tripled over the next twenty years.
Finally, the federal government should set aside $15 billion per year to retrofit the nation’s residential, commercial, industrial, and institutional building stock. A comprehensive study undertaken by the Rockefeller Foundation and Deutsche Bank estimates that the retrofitting of residential, commercial, and institutional buildings will cost approximately $279 billion over a ten-year period. That study was conducted in 2012. It’s likely that today the costs will exceed $300 billion. Moreover, our global team estimates that the scope and magnitude of the retrofit is likely to take upward of twenty years to successfully complete.
The Rockefeller/Deutsche Bank study projected that this critical investment alone will result in $1 trillion of energy savings over a ten-year period, which is a savings of 30 percent annually on all the spending on electricity used in the United States. A nationwide retrofitting of the building stock would also create 3.3 million cumulative job years of employment and reduce the country’s global warming emissions by 10 percent.17
In total, the federal government’s initial ten-year infrastructure plan would amount to $115 billion per year: $50 billion per year in the partial financing of the national power grid; $50 billion per year in tax credits, tax deductions, grants, low-interest loans, and other incentives to stimulate solar and wind installations, the purchase of electric vehicles, the installing of charging stations, and other green components of an emerging Third Industrial Revolution infrastructure; and $15 billion per year to retrofit the nation’s residential, commercial, industrial, and institutional building stock to speed the transition into a zero-carbon emission economy. The total federal budget for the ten-year infrastructure deployment would ring up at $1.15 trillion. This would give the country at least a “bare bones” national smart grid and accompanying infrastructure that is up and functioning. The price tag is not much more than the Pentagon’s annual budget in 2019 alone.
Can it be done in ten years? The Brattle Group says that “major transmission projects,” which are the key component of an integrated national power grid, “require 10 or more years on average for planning, development, approval, and construction.”18 So yes, it’s possible.
Still, the federal government’s commitment of $115 billion annually over a ten-year period represents only a partial down payment on what the country will need to do to transition into a fully operational smart zero-emission green economy. Significant additional dollars will be required to build out the Third Industrial Revolution infrastructure. As alluded to earlier, the burden of financing the transition is going to fall primarily on states, counties, and municipalities. In all the debate currently swirling in Washington political circles about the role of the federal government in building out and managing a smart new national infrastructure, the reality is that the federal government plays a small role in maintaining the nation’s infrastructure. It’s worth noting that state and local governments—and not the federal government—own 93 percent of the country’s infrastructure and pay 75 percent of the cost of maintaining and improving it.19
Assuming that the Green New Deal infrastructure transition will roughly follow that same 75/25 state/federal split, this would require a commitment of around $345 billion per year on the part of the states to match the $115 billion per year commitment by the federal government, for a combined total of $460 billion per year in infrastructure spending over a ten-year time period. Recall that the Brattle Group estimates that between 2031 and 2050, an additional $40 billion in new investment annually will be required for just the scale-up in “transmission investment” for the smart grid to keep up with electricity demands. Other studies will include additional infrastructure costs in the scale-up over an extended period of time.
It needs to be reemphasized that the current infrastructure proposals being debated in Congress have a ten-year timeline. While it would be possible, in the best-case scenario, to build out a juvenile Third Industrial Revolution infrastructure within ten years, a mature, integrated, and operational zero-emission smart green infrastructure will require an additional ten years to be fully established. What we’re talking about here is a twenty-year generational transformation into a nationwide Third Industrial Revolution paradigm. Assuming a continued combined investment by the federal government and states at the same level for an additional ten years, we are looking at approximately $9.2 trillion in funding over a twenty-year time period.
Even assuming that the US GDP doesn’t continue to grow but remains around $20 trillion per year—the GDP for 2018—the total investment comes out to around an additional 2.3 percent of GDP annually above and beyond the 2.3 percent currently invested in just mending and maintaining the old twentieth-century infrastructure. That’s 4.6 percent of GDP annually to lay out and deploy a state-of-the-art, smart, zero-carbon emission digital infrastructure to manage a twenty-first-century resilient economy. Lest the powers that be blink at a doubling of our current dismal 2.3 percent of GDP to 4.6 percent annual spending on infrastructure, it should be noted that the People’s Republic of China spent an annual average of 8.3 percent of its GDP on infrastructure between 2010 and 2015.20
These numbers tell us what is likely in store for the United States and how its position in the world economy will be affected in the coming half-century if its annual investment in infrastructure remains so far below China’s. What we’re saying here is that if we want the United States to continue to be among the leading nations of the world, doubling our annual spending on infrastructure is reasonable, and the twenty-year timeline to transition into a smart zero-carbon Third Industrial Revolution economy is possible, but only if all the stars align. Again, these are estimates in a rapidly changing technological landscape, and are likely to be continuously revised and updated as the country moves through this historic infrastructure transition.
This $9.2 trillion projected cost of the smart national power grid and accompanying infrastructure scale-up over twenty years is slightly lower than cost projections in some other studies. That’s because the exponential plunge in the costs of solar and wind energy technology, battery storage, and electric and fuel-cell transport, plus the accompanying aggregate efficiencies that come with the Internet of Things built environment, will likely continue unabated over the twenty-year span, dramatically reducing the overall cost of a nationwide smart green infrastructure deployment. Then, too, across-the-board tax credits, tax deductions, grants, low-interest loans and other incentives, as well as graduated penalties, working alongside falling costs, are likely to accelerate the adoption of the infrastructure in homes, businesses, and neighborhoods, and across communities. This has certainly been the history with the introduction of solar and wind energy technology, and it soon will happen with electric transport.
This is a key point that needs to be emphasized. We traditionally think of infrastructure as overarching centralized platforms financed at considerable expense by governments and laid down for use by the public at large—road systems, electricity and telephone lines, power plants, water and sewage systems, airports, port facilities, etc. All well and good.
While the Third Industrial Revolution infrastructure requires a smart national power grid—a digitally managed Renewable Energy Internet—that can mediate and manage the flow of green electricity coming and going between millions of players in their homes, automobiles, offices, factories, and communities, many of the actual infrastructure components that feed into and off that grid are highly distributed in nature and are paid for and belong to literally millions of individuals, families, and hundreds of thousands of small businesses. Every solar roof, wind turbine, nodal Internet of Things building, storage battery, charging station, electric vehicle, etc., is likewise an infrastructure component. Unlike the bulky, top-down, and static one-way infrastructures of the First and Second Industrial Revolutions, the distributed and laterally scaled infrastructure of the Third Industrial Revolution is, by its very nature, fluid and open, allowing literally billions of players around the world to assemble and reassemble, and disaggregate and reaggregate, their own component parts of it where they live and work and while they commute, in continuously evolving blockchained platforms.
Much of the smart infrastructure, then, is going to come online because of the generous tax credits and other incentives combined with the exponentially falling cost curve of the infrastructure components and processes. In the Green New Deal, infrastructure is potentially participatory and democratized and always metamorphosing into new patterns if overseen by commons governance rather than private corporate governance in each region. The $9.2 trillion price tag reflects the way this digital distributed infrastructure is likely to emerge and evolve in the coming decades.
When all is said and done, let’s not forget that all these infrastructure improvements will add $3 to the US GDP for every dollar invested and create millions of new jobs.21
So, where is the money going to come from to finance a federal and state government rollout of a $9.2 trillion twenty-year Green New Deal infrastructure across America? Let’s begin by weighing in at the federal government level.
With a changing of the guard in the US Congress and at the White House, it might be possible to initiate a higher graduated tax rate for the super-rich, which America had in the 1950s and ’60s, the period of our country’s greatest growth and prosperity. That is certainly reasonable and justifiable, especially given the deepening gulf between the super-rich and an ever-more impoverished American workforce. According to Mark Mazur, director of the Urban-Brookings Tax Policy Center, if a marginal tax of 70 percent were imposed on the income of the super-rich—individuals making $10 million a year or more, and then only after the first $10 million in income—it would bring in an additional $72 billion in revenue per year for the federal government.22
Bill Gates, the second-richest individual in the world, worth $90 billion, and Warren Buffett, the third-richest, worth $84 billion, agree that the super-rich should be taxed at a far higher rate and have publicly advocated a change in the laws to address the growing inequality between the super-rich and the rest of the population.23 In a February 2019 interview with Stephen Colbert on CBS, Gates was unequivocal on the issue, saying, “I think you can make the tax system take a much higher portion from people with great wealth,” adding that “these fortunes were not made from ordinary income, so you probably have to look to the capital gains rate and the estate tax if you want to create more equity there.”24 Buffett agrees, saying, “The wealthy are definitely undertaxed relative to the general population.”25
The revenue raised from increasing the tax rate on the super-rich could and should be used to help fund a Green New Deal to rebuild the economy, which would create new business opportunities and the mass employment that go with the green infrastructure shift. Still, this new source of revenue won’t be enough to get the job done.
We could also redeploy some of the billions of dollars that go into the Pentagon budget. That, too, seems more than reasonable. The American Society of Civil Engineers estimates that the United States will need an additional $206 billion a year beyond what we are already spending on infrastructure build-out just to get the nation up to a passing B grade.26 This seems like a small amount of money to begin the transition into a smart green Third Industrial Revolution infrastructure to rebuild the American economy and address climate change—especially when in 2017 alone, the cumulative damage from climate disasters in the United States cost $300 billion.27 That’s just for one year!
For those raised voices saying that the US government can’t afford a significant upgrade in the nation’s infrastructure, consider that the defense budget for just the year 2019 is $716 billion, one of the largest in US history.28 According to the Congressional Budget Office, funding for weapons systems takes up about one-third of the budget of the Department of Defense (DoD).29 The United States’ defense budget is larger than the total combined military budgets of China, Russia, the United Kingdom, France, India, Japan, and Saudi Arabia.30 Surely there’s something terribly wrong in the way the federal government is allocating funds to protect “the national security” of the homeland. We ought to consider reallocating at least a small part of the DoD’s priorities from ever more costly expenditures on weapons systems we will never use to the military’s new paramount role in protecting the country against cyber wars and managing climate-related disaster response and relief missions, which will increasingly be seen as the most important national security issues facing our communities and country in the decades to come. An additional $30 billion could be garnered for the federal government’s contribution to the Green New Deal by simply cutting 12.6 percent of the overblown and outsized weapons systems budget of the DoD, which amounts to only approximately 4 percent of the total military budget for 2019. If we’re not even willing to reprioritize this tiny fraction of the current DoD budget to secure a resilient smart national power grid to address cyber war and catastrophic climate events, then we’re putting the country in deep jeopardy.
Additional federal revenue can come from terminating the nearly $15 billion in federal subsidies given to the oil, gas, and coal industries each year.31 There is no longer any justification for subsidizing the fossil fuel sector, whose assets are quickly becoming stranded.
Just adding up the above numbers, here’s what we get. The federal government could raise $70 billion per year on new taxes on the super-rich, $30 billion by cutting 12.6 percent of weapons development and procurement, and an additional $15 billion by ending subsidies for the fossil fuel sector, for a total of $115 billion in revenue per year available to finance the federal government’s portion of the transition to a zero-emission green infrastructure.
Of course, this is just one of many potential scenarios for raising the funds necessary to deploy the federal government’s contribution to a Green New Deal scale-up over the next two decades. There are many other possible combinations that could be brought to bear. For example, a small percentage of the proposed universal carbon tax revenue could be used to help finance both the federal and the state governments’ contributions to the Green New Deal rollout, with the rest of the revenue being distributed to American families so that the burden of carbon taxes remains in the hands of the fossil fuel industry. But the point is this. All of these numbers are readily actionable without significant compromise to the vast wealth of the super-rich, Pentagon preparedness, and the financial well-being of millions of American families.
That said, the other, equally promising place to look for the money, at least in part, is the trillions of dollars in public and private pension funds that are just now turning their eye to the vast investment opportunities that accompany a wholesale transition into a green Third Industrial Revolution. Pension fever is already in the air in the United States and on the lips of politicians in both political parties. In February 2019, The Hill, the publication that keeps elected officials, the federal bureaucracy, and lobbies abreast of happenings across the government, published an opinion piece by Ingo Walter, professor emeritus of finance at NYU’s Stern School of Business, and Clive Lipshitz, managing partner of Tradewind Interstate Advisors, titled “Public Pensions and Infrastructure: A Match Made in Heaven,” suggesting that the giant national pool of workers’ public pension funds is sparking a romance with government that will help finance an upgraded twenty-first-century infrastructure.32 Some of this financial pool is going to come onboard and invest in the rollout of the national power grid and in the greening of federal government–owned physical assets. This is a certainty. Figuring out how to strike the proper balance between the federal government’s direct funding of the infrastructure shift and financing the build-out with pension fund capital and other sources of private capital will likely be the central dynamic that plays out in Congress and the White House between the Democratic and Republican parties. The deliberation could bring both political parties together across the aisle to get on with the inevitable transition into a zero-emission economy.
This “match made in heaven” comes with an important caveat. Any use of unionized pension funds in green infrastructure investments and related projects must include unionized workforces in the roll-outs, wherever possible, so that workers’ pension capital isn’t used, once again, to finance companies that are anti-union and that consciously eliminate union jobs on their worksites. Since only 11 percent of the American workforce is currently unionized and there will be green infrastructure projects that can’t fill workloads with sufficient unionized workforces, there will need to be at least a guarantee that protects the rights of workers to organize and collectively bargain, if they so choose.
The matchmaker in the coming together of public and private pension funds and the green infrastructure build-out is green banks. Their mission is to provide a percentage of available capital for the express purpose of financing large-scale build-outs of the Third Industrial Revolution green infrastructure. Over the past decade, the UK, Japan, Australia, Malaysia, and other countries have created green banks that have invested in green energy to the tune of $40 billion or more.33 As early as 2012, the International Trade Union Confederation weighed in, urging the creation of green banks that could act as clearinghouses to bring together the vast pool of workers’ global pension funds with green infrastructure investments.34
In the United States, Chris Van Hollen, then a congressman and now a senator from Maryland, introduced the Green Bank Act of 2014, the first of its kind at the federal level. (Chris Murphy of Connecticut introduced its Senate companion bill.) It authorized an initial $10 billion issue of US Treasury bonds to capitalize a bank that would provide “loans, loan guarantees, debt securitization, insurance, portfolio insurance, and other forms of financing support or risk management” to finance green infrastructure-scale projects and jump-start the transition into a green infrastructure.35 Van Hollen’s bill was never enacted into law, but he succeeded in breathing life into the idea of green banks in America. By 2016, New York, Connecticut, California, Hawaii, Rhode Island, and Montgomery County, Maryland, all had green banks up and running, and other jurisdictions were in the process of establishing them.36
Since states are responsible for most of the infrastructure, it became clear that any federal initiative to institutionalize a national green bank would have to modify its modus operandi to adjust to the many state green bank initiatives already well underway. So, when Van Hollen reintroduced legislation calling for a national green bank in 2016, the new bill did not allow the federal government to directly finance green infrastructure; rather, it mandated that the US green bank be restricted to lending funds to state and municipal green banks, who would then be responsible for directly underwriting green infrastructure initiatives.37
By 2019, the establishment of green banks had spread around the world. In March of that year, officials from twenty-three mostly developing countries, representing 56 percent of the world’s population and accounting for 26 percent of global GDP and 43 percent of global CO2 emissions, held a Green Bank Design Summit in Paris with the purpose of establishing their own green banks.38 Institutional investors were at the table, and pension funds and other investment funds were ready to scale.
The new push to establish green banks in developing countries and transition into a smart Third Industrial Revolution infrastructure is a clear sign that the Green New Deal vision is universal in appeal. Interestingly, there is a growing consensus that this smart green infrastructure revolution can move even more quickly in emerging nations, for the simple reason that their liability is also their asset. In other words, lacking infrastructure, developing countries are finding that they can move more quickly to deploy a virgin green infrastructure accompanied by the appropriate codes, regulations, and standards than highly developed nations that have to decommission or build on an older Second Industrial Revolution infrastructure. Solar and wind installations are mushrooming across the developing world.
Back in 2011, Dr. Kandeh Yumkella, then director general of the United Nations Industrial Development Organization (UNIDO), and I began a conversation on how the developing countries could begin embracing and deploying the smart Third Industrial Revolution vision. We jointly introduced the concept in 2011 at UNIDO’s biennial General Conference. Yumkella declared, “We are at the beginning of a Third Industrial Revolution,” and then asked, “How do we share knowledge, share capital and investments around the world, to make this revolution really happen?”39 UNIDO took up the challenge of bringing the UN and developing countries into a green postcarbon narrative and infrastructure deployment.
Green banks are proliferating in developing countries and industrialized nations. However the financial mix is put together, pension fund capital will be a driving force in the transformation. It’s a win-win for the Green New Deal deployment.
Tens of millions of workers will invest their pension funds in their countries’ future, ensuring unionized workforces when possible, protecting the rights of workers to organize, securing reliable returns on their pension funds, addressing the issue of climate change head-on, and spurring the vast new business opportunities and employment that accompany a transformation of their nations’ infrastructure in the emerging green era.
Here in the United States, irrespective of whatever green national bank bill might be enacted into law, public pension funds, and even a growing number of private pension funds, are going to do some of the heavy lifting in financing a Green New Deal at the federal level. Still, their primary interest is going to be in underwriting the much bigger green infrastructure investment at the state and local levels, to the tune of $345 billion annually over the next twenty years.
But first, there is a spoiler at the party that needs to be addressed. Let me explain. Since infrastructure is, by its very nature, a public good that every citizen needs to access and use, infrastructure services were always thought of as a public service provided by local, state, and national governments. However, a shift has taken place at the state and local levels, with more and more existing public infrastructure being sold off or leased as concessions to the private sector and new infrastructure being privatized from the get-go. These are called “public-private partnerships.” Part of the explanation for the shift lies in the change in the political landscape that began in the early 1980s with the ascent to power of Margaret Thatcher and Ronald Reagan, both of whom embraced privatization and deregulation. The rationale was and still is that government agencies overseeing and operating government-financed and -managed infrastructure, without competition biting at their heels, eventually become lethargic bureaucracies, slow to innovate, and poor managers when they finally do so.
This is part and parcel of what has become the neoliberal ideology that favors privatizing these key infrastructure services and letting the “open marketplace” take a run at managing them henceforward. I should add, in passing, that no good evidence was ever provided to back up this claim that infrastructure would be better served in private hands. The rail service, the electricity grid, the postal service, the public health service, public television, and other government services seem to function very effectively, at least in the more developed nations. Still, the politicization of public infrastructure captured the public’s attention, at least enough to embolden neoliberal governments, from Thatcher and Reagan to Blair and Clinton, to hand over many of their traditional infrastructure responsibilities to the private sector and the whims and caprices of the marketplace. I suspect that if ever an extensive history of this period were done, we might find that the private sector, already sated in the conventional markets, was anxious to grab hold of these potentially lucrative public infrastructure services that came wrapped up with a built-in captive audience that had little choice but to use them—a princely proposition for the marketplace.
In more recent years, there has been a second wave of privatization of infrastructure, primarily in response to an increase in public debt and, in some countries, the public desire to reduce tax commitments in an era where wages, especially among the middle and working classes, have not kept up with the cost of living. It’s not surprising, then, that local and state governments have looked to privatizing more and more of their public infrastructure. However, private companies overseeing infrastructure are often far more aggressive in squeezing profits out of what they regard as more of a business than a service, which often leads to what industry watchers call “asset stripping.” This is a common problem, experienced over and over again, with privately run prisons, toll roads, schools, and the like.
The entrance of pension funds into the investment of infrastructure brings a new class of owners onto the field, different in many respects from private companies in how they relate to infrastructure. Pension fund trustees are more likely to see themselves as custodians or stewards, allowing them to take a more socially responsible approach to how they invest. Trustees of public pension funds in particular, but now private pension funds as well, have been among the trailblazers in adopting the ESG principles of socially responsible investing, prodded, in large part, by their members and union leaders. These pension funds bring a different mentality, potentially more responsive to investing “social capital” in infrastructure projects.
In the last several years, pension funds have begun to reposition their portfolios away from traditional investments in equities, which are viewed as overvalued, risky, short-term investments subject to gyrations between overheated bull markets and ever-deeper recessions. Pension fund trustees are becoming more interested in less volatile and more secure long-term investments in green bonds with predictable returns, and infrastructure fits the bill. A recent study conducted by PwC and the Global Infrastructure Investor Association (GIIA) titled Global Infrastructure Investment makes this very point, saying that “the last decade has seen a transformation in the world’s economic infrastructure … driven by an influx of capital seeking long-term stable returns,” with much of it coming from pension funds.40
For public employee pension funds, investment in public infrastructure is a no-brainer: the very employment of their members is in the public sector, and therefore, they have an intimate appreciation of the importance of public services. But both public and private pension funds are more likely to be responsive to investments in infrastructure, especially if it’s in the same region where members live and work, since the investment secures an additional benefit of improved infrastructure services for them and their families.
This is already occurring. The giant Quebec pension fund Caisse de dépôt et placement du Québec (CDPQ) assembled sufficient financial resources to develop and operate the light rail system in Montreal.41 Dutch pension funds have joined into partnerships with local engineering companies and invested in new road construction in their regions.42
In the long run, pension funds’ investment in public infrastructure is going to be a better way to go than global corporations privatizing infrastructure and running it as a solely for-profit business.
Now I’d like to get personal on why I’ve delved into such detail on the question of global companies privatizing infrastructure versus direct investment by pension funds in the build-out of public infrastructure. Recall the Google initiative in Toronto, where the company is hoping to privatize, build out, and manage a smart infrastructure that will eventually oversee the comings and goings of an entire population in a metropolitan region. Although disturbing, this is the next big market for the giant internet companies and ICT companies. Larry Page said it himself, apparently so enamored with digital technologies’ inherent efficiencies and benefits that he did not consider even for a moment that the public might be repelled by the notion. I can tell you, from experience working with regions across the EU in the deployment of their long-term green infrastructure roadmaps, that the privatization of public infrastructure in the hands of giant global companies, especially the internet, ICT, and telecom companies, is a universal nonstarter.
On the other hand, public financing of infrastructure comes with its own problems. Up front is the government’s need to minimize the ratio of debt to GDP on its books. It’s a requirement across the EU. In America, local and state governments are mindful of the same restraints and are aware that the kind of investment needed will not come just from a commensurate hike in taxes or a dive into deeper debt. How, then, do we navigate through the maze and find a pragmatic formula to finance a twenty-first-century smart green infrastructure? The message heard with more resonance across the financial community is that we should look to the trillions of dollars of investment opportunity coming from the untapped pool of public and private pension fund capital.
For their part, pension funds are willing and eager to invest. But there is a catch. The real problem is a lack of camera-ready large-scale Third Industrial Revolution infrastructure projects in which to invest. This is not unique to the American market. This is a problem around the world, where cities, regions, and countries are tinkering with thousands of small, unconnected pilot projects with little initiative to scale an infrastructure transformation. For example, in the UK, at present, there is only one mega-infrastructure project being deployed that is financed by a consortium of pension funds: London’s £4.2 billion “super-sewer,” known as the Thames Tideway Tunnel, billed as the “biggest overhaul of the capital’s waste plumbing system since Victorian times.”43
Chris Rule, the chief investment officer at the Local Pensions Partnership, which oversees a £12 billion Lancashire County pension fund, bluntly says, “My perception is that pension funds are quite receptive to investing in UK infrastructure. [The problem] is supply and demand. There is more money seeking investments than there are available. That is pushing down yields.” Adrian Jones, a director in the infrastructure debt team at Allianz Global Investors, echoes the theme heard by both pension investors and insurance companies, the other major players seeking investment opportunities in big infrastructure developments: “We don’t see that there is a need for radical reform to get more money into infrastructure. What we need are more investible projects.”44 The universal complaint coming from pension fund trustees is No more pilots! Give us some big-scale Third Industrial Revolution infrastructure deployments to invest in over a period of time with stable returns and we’re in.
To sum up, with municipal, county, and state governments across the United States uneasy about increasing their debt-to-GDP ratio or raising taxes to finance large-scale infrastructure projects, and pension funds eager to invest at scale, the conditions exist for a long-term collaboration that can transition regions across America quickly into a green zero-carbon public infrastructure.
There is another snag that needs to be addressed to get America to the starting line for a Green New Deal. Most of the infrastructure investment at the local level in the United States is financed with tax-exempt municipal bonds. This poses a problem. Local governments will often choose to finance infrastructure projects via public procurement, rather than enter into financial arrangements with private companies in public-private partnerships, because the up-front tax-exempt municipal bonds are cheaper and more palatable, and an easier sell to a public that is understandably skittish about privatizing infrastructure. But private companies, in turn, complain that they often can’t compete with cheaper investments made possible by tax-exempt municipal bonds and can’t justify the smaller returns on investments they would have to accept to win a public-private partnership deal.
Pension funds, however, have shown a greater willingness to invest in green municipal bonds, and even accept lower returns for the opportunity to become investment partners with local governments, because their primary interest is guaranteeing a stable return for their pension fund members. Nonetheless, they are not wholly sold on diving into the tax-exempt municipal bond market, because pension funds are also tax-exempt and therefore do not secure any additional value by investing in tax-exempt municipal bonds. Now, however, pension fund advisors are floating a new proposal that is gaining traction as cities and states attempt to lure the pool of public and private pension funds into the purchase of green public bonds. The idea is to provide an incentive to pension funds in the form of a tax credit for investing in green public bonds.
David Seltzer of Mercator Advisors introduced the idea at the National Conference on Public Employment Retirement Systems in 2017. Seltzer suggested that “pension funds could monetize tax credits attached to debt or equity investments.” He explained that “pension funds could convert nonrefundable tax credits to cash by applying them against their liability to the US Treasury to remit retiree withholding tax on paid benefits.”45
Unlike the numerous tax advantage schemes in the federal tax code that benefit global corporations, a slew of subsidized industries, the financial community, and the very wealthy, this tax credit, though small in comparison, is designed to merely provide a sufficient return to allow pension funds to invest in green bonds funding American infrastructure projects. The extra benefit is that if the tax credit were to be instituted to allow billions of dollars in pension funds to divest from the fossil fuel industry and reinvest in the Green New Deal Third Industrial Revolution infrastructure, it would not only help secure the retirement of 73 million American workers but also ensure the well-being of their heirs in a climate change world.
Although tax credits would certainly draw hesitant pension funds to invest in green municipal bonds, there is still the issue of cities and states being saddled with increasing public debt. To temper the public debt, cities and states will have to entertain some form of public-private partnerships. But here again, horror stories abound of governments entering into agreements with private companies to privatize infrastructure—substandard performance and management, cost overruns, asset stripping to maintain profits, and bankruptcies. The overriding interest of corporations that are privatizing the public infrastructure is to look out for their bottom line first, which invariably means making cuts wherever and whenever they can in the name of reducing costs, but ultimately at the expense of the efficient operation of the infrastructure they are charged with building and managing.
There is, however, an alternative course that would allow Green New Deal public-private partnerships to flourish, and it has a twenty-five-year track record of success. The business model is the “energy service company” (ESCO). It’s a radical approach to conducting business that relies on what’s called “performance contracting” to secure profits and is a counterintuitive business method that upends the very foundation of seller/buyer markets—a key underlying principle of capitalism.
Performance contracts do away entirely with seller/buyer markets, replacing them with provider/user networks in which the ESCO takes 100 percent of the responsibility for financing all of the work and secures a return on its capital investment based on its success in generating the new green energies and energy efficiencies being contracted.
The emergent public-private partnership between governments and ESCOs puts the technical expertise and best practices of private enterprise at the service of the public, in a win-win mode, creating a powerful new dynamic between the public and private sectors. Pension funds, in turn, are the best partner to finance many of these public-private partnerships. The financing will come from the deferred wages of millions of American workers who will benefit from a stable and reliable return on their pensions, the prospect of millions of new jobs in the emerging green economy, and a near-zero-carbon green future for their children and grandchildren. For the first time, this new economic model brings together local and state governments, the business community, and American workers into a powerful partnership, each enabling the other to transform the very nature of the social contract.
Here’s how the new collaboration works. First, local and state governments issue a call for tender. ESCOs bid for the contract to build out part or all of the infrastructure, with the following conditions. The company that wins the bid is responsible for funding the infrastructure build-out. The ESCO’s return on capital investment comes from the revenue earned from the installation of solar and wind technologies and the generation of green electricity and the efficiency gains in electricity transmission in the build-out and management of the smart national power grid, as well as the energy efficiency gains brought on by other types of performance-contracting work: retrofitting buildings; installing energy storage equipment in and around facilities; installing IoT sensors to monitor and improve energy efficiencies; installing charging stations for electric vehicles; and reconditioning production facilities, processes, and supply chains to upgrade aggregate efficiencies at every stage of business operations; etc.
Governments and ESCOs can also enter into a variation on the performance contract. For example, the government agency can secure the financing for the performance contract with the help of the ESCO, which often has open channels to financing such projects. In this variation, the government agency is responsible for the repayment of the financing, but the ESCO is still liable for the savings guarantee that covers the payments and cost of the project. Any losses still fall on the shoulder of the ESCO. The appeal in this second route is that government agencies enjoy a tax exemption on their public projects, making it more attractive to both the ESCO and the government agency.46
Performance contracts can also allow for the client to begin sharing the benefits of the green energy being generated and the energy efficiencies coming online while the work is being done and before the ESCO’s investment is fully paid back. These modified performance contracts are called “energy savings contracts.” Generally, the ESCO will receive the lion’s share of the harvested energy as well as energy efficiencies attained—usually 85 percent—until the company’s investment is fully returned and the contract terminated, after which the client receives all future benefits.47 The city, county, or state, in return, ends up with a smart, efficient low-carbon infrastructure without liability for either the capital investment or any financial losses incurred during the project. Socially responsible pension funds committed to doing well by doing good are the appropriate financing mechanism for ESCOs engaged in green energy production and energy savings build-outs.
ESCOs operate in the private realm as well as the public realm. Privately held residential real estate and particularly low- and moderate-income housing, older commercial business districts, which are often in disadvantaged communities, and industrial and technical parks will have to transition their infrastructures into a green Third Industrial Revolution paradigm. The ESCO business model operates the same way whether in the government space, the commercial domain, or civil society. Generous tax credits and graduated tax penalties will need to be established for residential, commercial, industrial, and institutional infrastructure transitions in every municipality, county, and state to encourage the Green New Deal transformation.
Whether we are talking about transitioning the public or private infrastructure from a dirty fossil fuel–laden society to a clean green society, the overwhelming reality is that the poorest communities are the most vulnerable and least-considered in the process. And it’s here that the public-private partnership between local governments and ESCOs is likely to have the biggest impact, by helping these at-risk communities transition into the Green New Deal infrastructure and take advantage of the new business and employment opportunities that accompany it, while simultaneously addressing the growing public health emergency precipitated by climate change.
In a landmark county-by-county study on how climate change is likely to affect every community in America published in the journal Science in June 2017, the authors report that the nation’s poorest communities across the South and southern Midwest will suffer the most from rising temperatures, with loss of GDP by the end of the century that could be as much as 20 percent of their income. Solomon Hsiang, the lead author and professor of public policy at the University of California, Berkeley, warns that “if we continue on the current path, our analysis indicates it may result in the largest transfer of wealth from the poor to the rich in the country’s history.”48
Not surprisingly, climate change is also having a dramatic impact on public health in America, again affecting the poorest communities, whose populations have the least access to adequate health services and to the financial wherewithal to undertake remediation and adaptation initiatives brought on by climate change events. Already, the radical change in the climate is exacting an ever-mounting adverse effect on public health, with exposure to ozone and particulate matter pollution brought on by greenhouse gas emissions leading to diminished lung function, most notably asthma, and exposure to smoke from spreading wildfires; increased exposure to allergens with warmer seasonal temperatures; heat-related sickness and death, including heat stroke and cardiovascular disease; and increased exposure to vector-borne diseases brought on by a shift in the geographic range of insects; et al.
The inseparable relationship between climate change and a growing public health emergency has become real for the millions of people in the United States and around the world who have been subjected to the hurricanes, floods, droughts, and wildfires caused by climate change. Aside from the immediate threat to life posed by these disasters, there is the secondary effect caused by the contamination of water.
In many older communities across America, sewage systems serve a dual purpose, combining wastewater being sent along to wastewater treatment plants with stormwater drainage. But now, more severe storms and hurricanes are flooding the sewage/drainage infrastructure, forcing untreated sewage and storm runoff to back up and overflow into homes, businesses, neighborhoods, and local streams and rivers in many parts of the United States, posing a serious threat to public health. And it’s only going to get worse with the ever-changing climate.
Unfortunately, this is happening at the same time that the municipalities have been selling off their freshwater and sanitation systems to private companies which are often reluctant to upgrade antiquated water, sewage, and drainage systems for fear of declining profit margins.
Cities in the United States and elsewhere are becoming aware of the threat to public health and safety posed by the conjunction of dilapidated water, sewage, and drainage systems with climate change–induced floods and have recently begun to re-municipalize these critical infrastructures to gain back public control over what has traditionally been one of the most critical public services administered by government to safeguard public health.
Here again, the poor are the most vulnerable because their communities generally have the oldest and most compromised infrastructures, the least access to adequate public health services, and are the least serviced by remediation and adaptation programs.
For all these reasons, ESCO intervention on the part of both local and state governments and the private sector should be prioritized in the most disadvantaged communities and among the poorest populations in the country. Performance contracting is as much about adapting to climate change, making sure nobody is left behind and ensuring the public health of the community by building resilience into every aspect of a community’s economic and social life, as it is about efficiency, productivity, and GDP. Indeed, in the context of performance contracting, they are indistinguishable.
This is a new breed of capitalism that blends a social commitment into its very business plan. The ESCO is continuously in pursuit of new technologies and management practices that will return its investment, and the community benefits from this in a number of ways: cheaper utility bills for their homes and businesses; clean renewable energy to power their homes and businesses at near-zero marginal cost; green electricity to power electric and fuel-cell vehicles; a less polluted environment to advance public health; and new business opportunities and employment, with the revenue and benefits recirculating back into the community to enhance its economic and social well-being.
Last but not least, the success of performance contracts is wholly dependent on the training and deployment of potentially millions of semiskilled, skilled, and professional workers who retrofit the residential, commercial, industrial, and public building stock across America, build out the national smart power grid, install the solar and wind technologies, lay the broadband cable, embed the IoT technology, produce the electric and fuel-cell vehicles, manufacture and install the electric charging stations and energy storage facilities, and lay out the smart solar roads across the country. Energy service companies operating in performance contracts equally benefit the ESCO, the workforce, and the community.
Performance contracting is not just a new sidebar of capitalism but rather a fundamental disruption of the capitalist model, forcing a paradigmatic transition in how society structures economic life in the twenty-first century. I remember my first day in marketing class at the Wharton School back in 1963. The marketing professor wrote on the blackboard the Latin phrase caveat emptor, “let the buyer beware,” and informed the students that if they learned nothing else in his class, they should remember this cardinal rule. The saying refers to what economists call “information asymmetry,” meaning that the seller never wants the buyer to know all the information he or she has on the product or service, including its real costs, actual performance, life cycle, and so on. This lack of transparency built into the system puts the buyer at a distinct disadvantage. Some of the asymmetry in the relationship is tempered by company warranties, but these inevitably fall short of protecting the buyer.
Performance contracting eliminates this bias of market transactions between sellers and buyers and, with it, the unequal and weighted advantage that always accrues to the seller, by eliminating sellers and buyers in markets altogether and replacing the traditional capitalist model with providers and users in networks.
It’s worth repeating that in performance contracting, the ESCO can only recoup its investment by ensuring its own performance. This means, for example, achieving sufficient gains in energy generation and aggregate efficiencies to make the investment pay off. The user, in turn, gets a free ride. Once the ESCO’s investment makes its return, the user enjoys a steady stream of green energy and energy efficiencies accruing from the equipment installed and accompanying efficiency processes put in place.
The underlying feature of ESCOs is that their services are designed to increase the aggregate efficiencies, productivity, and generativity of their clients’ business operations and, by doing so, reduce the fixed and marginal costs of their operations, reduce their carbon footprint, and hone circularity and resilience deep into every aspect of the clients’ business practices. Many ESCOs extend their services after the initial performance contract has paid out, especially in the commercial and industrial sectors, by managing the continuous upgrade of the services for their users.
ESCOs, to date, have played more of a niche role, often scaling small, siloed projects. Now, however, the urgent need to scale up a Green New Deal Third Industrial Revolution infrastructure across neighborhoods, cities, regions, and continents in less than a generation has ramped up the ante as well as the cachet of this new business model.
Navigant Consulting published a report ranking the current top ESCO performers in 2017. (Navigant is a partner in the TIR Consulting Group LLC consortium.) The top ten companies were (1) Schneider Electric, (2) Siemens, (3) Ameresco, (4) NORESCO, (5) Trane, (6) Honeywell, (7) Johnson Controls, (8) McKinstry, (9) Energy Systems Group, and (10) AECOM.49 Both Schneider and Siemens have participated in TIR Consulting LLC’s regional roadmaps over the past decade.
In 2013, Siemens CEO Peter Löscher invited me to the company’s annual meeting to talk with the board of directors, and later to have an extended conversation with the twenty global division leaders, on how to begin creating the business models and scaling opportunities for the build-out of a Third Industrial Revolution infrastructure. When I met with the division heads, it became clear that they were, for the most part, working independently from one another. Siemens’ divisions include IT, energy, logistics, and infrastructure, all key components for deploying a smart green infrastructure. The timing of the meeting was fortuitous, as the company was in the process of rebranding as a “solution provider” to help create smart sustainable cities. The infrastructure build-out provided the story line for the various divisions at Siemens to leave their silos and become a more cohesive and inclusive solution provider.
At the meeting, we discussed the ESCO performance-contracting model as a new business mechanism for scaling up smart infrastructure across metropolitan and rural regions. Five years later, Siemens was ready for prime time. The company invited me to New York City on February 8, 2018, to present the Third Industrial Revolution narrative to its assembled clients, customers, developers, members of infrastructure organizations, investment banks, and policy advisors. The conference was appropriately titled “Investing in Tomorrow: Digitalizing North American Cities.” Part of the conference was dedicated to performance contracting for Third Industrial Revolution rollouts.
Although Siemens ranked sixty-sixth among the Fortune 500 Global Companies in 2018, no single company will be able to go it alone and scale up a twenty-year construction site in every city, region, and country to transition the world economy into a zero-carbon Third Industrial Revolution paradigm. More likely, Siemens and hundreds of other large companies will join with thousands of regional, high-tech small- and medium-sized enterprises, blockchained in cooperatives, in an ESCO performance-contracting business model, financed by a consortium of global and national pension funds, working with local municipalities and regions to provision the scale-up of a smart Green New Deal infrastructure. This distributed ESCO blockchain model is likely to be the favored approach to quickly transitioning local and regional economies, given the tight fifteen-to-twenty-year time frame hovering over us.
Left at the wayside is the old neoliberal model of global companies going it alone, using conventional business practices to build out and manage the new green infrastructure as a private venture, giving them leverage and control over both the infrastructure and accompanying services.
The new performance-contracting model, by contrast, is a hybrid affair, in which both the control over the build-out of the new infrastructure and its ownership remain in the hands of municipal, county, and state governments as “commons” serving the general welfare of communities, while shifting responsibility to private ESCOs to shoulder the financial responsibility to ensure the success of the erection and management of the infrastructure. The “buyer beware” in seller/buyer markets gives way to the provider “doing well by doing good” in provider/user networks.
This is the essence of “social capitalism” and represents a pragmatic business model that can speed the transition into a near-zero emission era in the short time horizon before us. If the seller/buyer market was the appropriate business model for a fossil fuel civilization and the Age of Progress, ESCO provider/user networks engaged in performance contracts are the signature business model for building and managing a sustainable green civilization in the emerging Age of Resilience.