Was Biden’s Climate Law Too Friendly to Wall Street?

To the extent that they’re aware of it, American progressives are generally pretty happy with President Joe Biden’s flagship climate law, the Inflation Reduction Act.

The I.R.A. is slated to cut U.S. greenhouse-gas pollution up to 40% below its all-time high. It’s the centerpiece of Biden’s unprecedented experiment to revive industrial policy with a climate-friendly bent.

But what if it will have a tragic and unforeseen consequence? Earlier this week, Brett Christophers, a geography professor at Uppsala University in Sweden, argued in The New York Times that the I.R.A.’s green subsidies will backfire. The law will “accelerate the growing private ownership of U.S. infrastructure,” he warned, “dismantling” FDR’s legacy and leading to a “wholesale transformation of the national landscape of infrastructure ownership.”

Christophers is particularly worried that the law will enable a group of companies called “alternative asset managers,” who are the subject of his new book, Our Lives in Their Portfolios. These secretive firms own hundreds of billions of dollars’ worth of highways, tunnels, water systems, and power plants worldwide, and Christophers argues that they wield a huge amount of control over our daily lives.

I am sympathetic to his argument — the creeping privatization of America’s roads, tunnels, and water systems is a big problem — but I am far less sure than he is that the I.R.A. will affect that trend. The climate law’s subsidies will mostly go to the energy and industrial sectors, and those parts of the economy are already overwhelmingly privately owned. For the first time ever, the I.R.A. includes “direct pay” subsidies that will allow governments and nonprofits to receive federal money when they build renewables.

I called Christophers to discuss his concerns about the I.R.A, why it might accelerate asset managers’ power, and what a better option might look like. Our conversation has been edited for length and clarity.

The argument in your Times piece fits into this broader argument you make in your book about the power of asset managers. So I wonder if you can start just by sketching what you’re saying in the book and why asset managers matter so much to the I.R.A.

So I was trying to make three arguments — and they span not just the book that’s just come out, but another book I’ve been working on about the political economy of the energy transition.

The first thing I was trying to get across in the piece is an argument about the growing influence of a particular set of financial institutions — asset-management institutions.

These are crucially not necessarily the types of asset managers that everyone talks about. Typically, the conversation is all about the BlackRocks, the Vanguards, the State Streets, which are the big holders of large proportions of basically every company that exists. Most of the funds that those big entities manage are passive index funds, which invest in proportion to the scale that companies represent within particular market indices. So if Exxon represents 1% of an index, then 1% of the fund is invested in Exxon, and so on. That's where most of the attention is focused.

What my book’s about is a completely different corner of the asset-management world, which are the active asset managers who increasingly own real assets. The ones I focus on in the book own housing of all shapes and sizes, and then everything that comes under the umbrella of infrastructure — transportation infrastructure, hospitals and schools, municipal water systems, and then all types of energy infrastructure. BlackRock dabbles in this, but the really big players are companies like Brookfield, Macquarie, and Blackstone.

My argument is that, actually, these are the guys that are much more consequential for people’s everyday lives. They determine what sort of condition these infrastructures are in — how much we pay in terms of water rates, or tenants pay in rents, or so on. These are the guys we should be focusing more on, but they’ve been kind of ignored.

Are these publicly traded companies? Like, is Macquarie public?

Some of them are public, some are private. But even if they’re public, finding out much about what they’re doing is very difficult because all the investments occur through private funds domiciled in the Caymans or Delaware or Luxembourg. It’s a very, very secretive business.

So part of what I’m trying to do is literally just make people aware that these guys are out there and that energy is an important part of what they’re doing. [The asset manager] Brookfield, for example, probably has the fastest growing renewable portfolio in the world right now.

What’s the second argument?

The second argument is that the approach that the world has right now to climate change — which is to put the energy transition in the private sector’s hands, albeit with subsidy and government-support mechanisms — is not working and will not work.

There’s various ways of substantiating that it’s not working. The International Energy Agency says that we need to go from $300 billion of clean-energy investment to $1.3 trillion straight away, and keep it there for the next decade. And it’s increasing now, but only in $50 billion a year chunks, rather than what we need.

And that’s because at root, renewable energy — the ownership and operation of renewable-energy-generating facilities — is actually just not a great business in terms of profitability. Their revenues and profits are very volatile because of the volatility of electricity prices. And if you talk to not only renewable developers, but also the people that finance new solar and wind facilities — the banks that put up the $300 million to buy the turbines — then you hear that the volatility of [electricity] pricing exerts a very kind of chilling effect on investment.

So when everyone obsesses about the fact that renewables are now cheaper than conventional generation, they’re looking at the wrong metric. Price is not what we should be looking at, profit is. And these businesses are just not very profitable.

What’s the third argument?

So then the third argument is that of all the private-sector actors, asset managers are the very worst to rely on. They are particularly inappropriate owners of essential infrastructure that society relies on.

Why is that?

To cut a long story short, a basic reason is that the investment that Macquarie and Brookfield undertake is through investment vehicles that have a fixed-term life.

Oh, so they’re like venture-capital funds — they have to roll up the fund and sell its underlying assets within a certain number of years.

Yeah. When they buy these infrastructure assets, the only thing they’re thinking about is how they can sell them quickly, so that they can return the capital to the pension fund that gave them the money to invest in the first place. Because of the way the industry works, they’re disincentivized to carry out long-term capital expenditure — there’s inherent short-termism.

I was trying to compress all these things into the piece, which I obviously failed to do, but to the extent that it gets people talking about these problems, then I feel like I’ve succeeded.

No, that makes sense, and I understand the difficulty of compressing that into 800 words. [Laughs.] What I’m trying to understand is how the I.R.A. makes it worse.

You argue in the piece that the I.R.A. will “accelerate the growing private ownership of infrastructure.” What is the mechanism there, as you understand it?

That’s a good question. My basic answer is that the word “‘accelerate” is a very important one. As you’re no doubt aware, specifically in the energy realm, in energy-generating facilities, it’s not like privatization is a new thing there, right?

Right.

This has been going on for a long time. I guess it comes back to a strong belief I have, which is that the ongoing and accelerated privatization of these types of assets is generally not a good thing.

As you said, a lot of energy infrastructure is private — in the United States, 80% of energy infrastructure is privately owned.

At the same time, there’s a trend of asset managers buying up more and more of the economy. I agree with you that roads, highways, bridges, tunnels, waterworks — these are all things that have historically been owned by the public. It’s bad when that changes, and to the extent that policy encourages their privatization, it’s bad.

But energy has always been privately owned. So if asset managers are buying things up anyway, why is the IRA making that any worse? Say we didn’t have to transition and could run a fossil-fuel grid forever. Wouldn’t asset managers just wind up buying up coal and gas plants, then, too?

I would say two things to that. The first is that, we’ve obviously been at an important conjuncture in the U.S. for the last couple years, where the existing [renewable and EV] credits were being wound down. At the same time, there were proposals for a Green New Deal on the national level. So it felt like there was a possibility — arguably even the last possibility — of a different political economy of energy. So in a way, the IRA hammered the nail in the coffin of a substantially different future.

Second, in many other countries, energy has been more publicly owned than it is in the U.S. And the experience of other sectors and other parts of the world shows that the more you concentrate ownership in the hands of private entities, the more that those players increase their capacity to dictate the terms of what’s going on in the sector. They can influence — if not decide — the way that markets are constructed in the sector. You only have to look at the work of the legal scholar Shelly Welton, who has shown how regional wholesale power markets in the U.S. are still dominated by fossil fuels. What we think of as neutral mechanisms of market operation, the algorithms that award capacity and so on, are shaped by particular interests.

I hear that. It’s funny because you hear the same criticism from the coal and nuclear people when they talk about the electricity grid. They say that the grid favors highly dispatchable fuels like natural gas. But I don’t disagree that energy is a type of infrastructure and that renewables will live or die based on the rules of these wholesale electricity markets.

But I think where this rankles Americans who support the [climate law] is that they go: Look, the die was cast on privatization when we first established wholesale electricity markets in the ‘80s and ‘90s. And before the IRA, even the renewable tax credits could only be used by tax-paying entities, so they required these arcane capital stacks to use, and nonprofits and local governments couldn’t use them at all. Those limits came from the same era. So hasn’t the IRA made this better, not worse?

I hear that. But I think it’s important to distinguish what I think from another high-profile criticism of the IRA. I very rarely look at Twitter because I don’t find it healthy, but one thing that I see there all the time is this blanket critique of the derisking of investment. [Derisking is a term for when the government takes on some downside risk from private companies in order to persuade them to make investments in something “good,” like renewables or EVs. -Robinson]

That’s not my position at all. Give me a choice between derisking and not derisking, and from a climate perspective, I would always choose derisking. I would much rather the investment happens and Blackrock makes a killing than the investment doesn’t happen and we get stuck with fossil fuels.

To me, that’s not the choice. I think the blanket critique of derisking is naive in the sense that it either magically assumes we’re going to get state ownership of energy, or that the investment will happen anyway without the derisking. My whole book coming out next year is a critique of that argument, because the investment won’t happen. It absolutely won’t happen if you don’t derisk because of the profit constraints. You absolutely need that derisking.

My argument is that even with all of the support from various tax credits, and even with the historic — and amazing — reduction in [renewable] technology costs over the last 20 years, the private sector is still failing. That’s my argument. That’s why I believe we’re not going to reach where we need to be as long as we stick with this capital-centric model. But if you assume that we’re stuck with a private-sector-led model, then absolutely the IRA is a good thing, absolutely it is. You need that subsidization; I don’t disagree with that at all. Does that make sense?

It’s really clarifying. I think it gets to an interesting place, because I think many critics would agree that the choice faced by the people putting the IRA together was not derisking versus total state control, right?

Exactly.

And they’d say, well, given that that’s the case, if we do want public entities to play a larger role in the green future, isn’t direct pay, which allows state and local governments and nonprofits to accept federal subsidies and build renewables directly, the way to build up that capacity?

You’ll get that, and I think you’ll get a modest amount of public-sector involvement, but in the big scheme of things I think it’ll be trivial. I think it will still amount to a transition that’s so much slower than we need.

I think the New York example is an interesting one, because I think in your view this shows the insufficiency of direct pay. In New York — which has, let’s say, distinctive local politics, but which is a blue state — it took two years for them to finally win public authority to build renewables. In your view, that shows how unwilling the government is to actually build out green generating capacity. What’s interesting is when you talk to activists, or talk to New York’s public power authority, they say, We couldn’t have passed this bill without the IRA.

For sure. If it wasn’t for direct pay, it would’ve been a nonstarter. I totally believe that.

So I just want to clarify, a lot of your arguments about the IRA are compared to a counterfactual where the state takes a larger role? It’s not that the legislation itself will accelerate the consolidation of energy infrastructure.

I think that’s fair. I guess I would put it a slightly different way. I think I’m comparing it to a counterfactual under which we — by which I mean globally, but also within the U.S. — build renewables at something closer to the rate that is needed. So the IRA amounts, politically, within the U.S. context, to a degree of success, but it’s a degree of success within a framework that is failing.

I think one of the tensions that you see in discussions around this is that progressive Americans who are trying to expand direct-pay rollout, are like, yes, obviously we don’t love the energy-generating system we have. But the IRA puts the system on such a better track. This allows for a voluntary expansion of state capacity so that we can build up the actual government entities that can take advantage of this and maybe play a larger role in the future.

And then, not to put too fine a point on it, but then folks from Europe come in and go, “This is so inadequate! Look at the system you currently have.” And Americans go, “Well, yes, but look at where we were before…”

I totally understand that. I think it comes down to what one’s counterfactual is. If your counterfactual is what was genuinely politically feasible in the U.S. context, then I can totally see that the IRA constitutes a significant success.

If your counterfactual is — and this may sound completely stupid — a situation in which we make really significant, genuine progress on changing what I see as the failing macro approach to the energy transition, then it doesn’t constitute success.