Return on investments: it doesn't add up

The fundamental problem with relying on markets to solve our environmental problems is extremely straightforward. No investment will be made unless market conditions – prices, profits and prospects – justify it. If there is no profit to be made – and a profit that beats the alternatives – then no investment will be made. The environmental consequences are obvious, and easily illustrated with a simple practical example.

T. Boone Pickens, the Texas oil billionaire, has been planning to spend $10-20 billion on a vast wind farm in the American Midwest. But like all business investments, this was really a gamble, in this case based on the assumptions that oil prices would stay high and subsidies would be on hand. Neither assumptions has proved correct, and the projected 25 percent return on investment he had predicted now looks highly implausible. So – few investors, and little prospect of his wind farms seeing the light of the Texas Panhandle for the foreseeable future. In other words, a planned four gigawatts of environmentally friendly electricity will not now come on stream by 2014.

Now it is essential that we invest in alternative energy and other solutions to our environmental problems absolutely as soon as possible. The vicissitudes of the market, however, which are driven by many factors apart from environmental impact, can never be relied on the deliver substantive solutions to serious problems.

Pickens’ dilemma is only one example of a very general problem of capitalist economics that will make it extremely hard to make a rapid transition to a low-carbon economy. A second, even bigger problem refers to the simple question all attempts to move to a different ‘installed base’ for any major sector such as energy generation, food production or manufacturing must answer. If we are going to move to a different technology, who will pay for the technology I already have installed? After all, most currently installed systems – coal-fired power stations, fossil-fuel powered cars, fertiliser and plastic plants, and all the rest – has been paid for by loans from banks and other investors who will still want their money back, regardless of what new systems we plan to install in future. In many cases, the financial commitments go on for decades into the future, and cannot be significantly changed without a massive dislocation to our economy.

Hence the problem with Robert F. Kennedy’s otherwise sensible suggestion that the United States could quickly cut its greenhouse gas emissions by a simple change in the way it manages its existing power generation systems. Apparently US generator capacity is managed to ensure that coal-powered stations are used in preference to gas-powered stations, but if this situation were reversed and gas-powered plant was given preference, then

Mothballing or throttling back these plants would mean huge savings to the
public and eliminate the need for more than 350m tons of coal, including all 30m
tons harvested through mountain-top removal. Their closure would reduce US
mercury emissions by 20-25 per cent, dramatically cut deadly particulate matter
and the pollutants that cause acid rain, and slash America’s CO2 from power
plants by 20 per cent – an amount greater than the entire reduction envisaged in
the first years of the pending climate change legislation at a fraction of the
cost. (Financial Times, 19/7/09)

It seems simple, and from both an environmental and an engineering point of view, perhaps it is. But from an economic perspective, the problem is obvious: who will pay for the existing capacity then? Largely unused but still indebted, these other, high-carbon power plants still need to be paid for. If the income from their electricity will be moved to other, more environmentally friendly gas generation plans, one can only ask, from where? And this is only one instance of a problem that pervades any capitalist economy: investments demand returns, and if returns are not forthcoming, then either economic activity stops or undesirable indirect methods, from lobbying to subversion, start.

Nor could we expect investors to simply accept the losses caused by a sudden technological change – and in this case, sudden means ‘in less than the several decades we need to recoup our investment on existing power stations’ – as their contribution to society’s battle with global warming. These are after all not a minor factories and power plants out on the edge of the economy; to a very large extent, these vast investments are the economy. To stop paying for them would be economically catastrophic in about the same proportion that it was environmentally beneficial. Conversely, we can scarcely turn to these same investors to ask them to pay for the new, environmentally friendly investments we need for a low-carbon environment: in the absence of continuing, reliable returns on their existing investments, where will they get the money from? We could of course subsidise them, but where are we going to get the money from? Money is after all the lifeblood of the capitalist economy, and if the owners of existing ‘investments’ find that what they really own is a vast collection of liabilities rather than assets, then making this environmentally essential switch will lead to a near-instant collapse in returns on investment, profits, employment, tax revenues, industrial capacity, credit (for everyone) and a viable economy.

Or at least, so it is while we carry on playing to capitalism’s rules.