How to rethink environmental policies from “no” to “go”

Public policy can steer incentives for a more effective response to climate change, says Daniel Esty of Yale University

ENVIRONMENTAL POLICIES are often based on thou-shalt-not rules. They signal to the market what is not desired. Though incentives to spur industry to action also exist, they are overshadowed by these “red lights”. Daniel Esty, an environmental lawyer at Yale University, wants to change this.

For example, he initiated the idea of a “green bank” to co-ordinate public- and private-sector investment in renewable-energy projects, which has been adopted internationally. The state can also set out specific targets for green energy, which power companies can compete with each other to meet. The ideas come from a chapter by Mr Esty, published in a new book he edited, “A Better Planet: Forty Big Ideas for a Sustainable Future” (Yale, 2019).

Environmental law and policy as framed in the 1970s and 1980s focused on “command and control” regulatory strategies under which the government told businesses (and to some extent individuals) what they should not do. It was a world of stop signs and red lights for polluters. But this framework has proven to be incomplete. It has failed to offer signals as to what society needs businesses to do, including what problems to solve, what research and development to undertake, and what investments to make.

So years have gone by and many environmental problems persist, including our dependence on polluting fossil fuels and reliance on the same costly and inefficient electrical system that was put in place more than 100 years ago, with electricity flowing across wires on poles. To address these enduring problems, we need to reframe our approach to environmental protection—offering a systematically designed structure of incentives to encourage innovation and problem solving. In short, we need to complement our system of red lights with an expanded set of green lights.

The red lights approach made sense five decades ago as the need to stop harm-­causing behavior seemed obvious. From Cleveland’s Cuyahoga River catching fire to the thick smog that often hung over Los Angeles to the toxic waste and human health crisis of Love Canal, the problems seemed obvious. The public demanded action. With a primitive base of environmental knowledge and limited theory about how to respond to pollution threats, government ­defined regulatory mandates offered a path forward. And they worked—to some extent. Our air and water are much cleaner today. Chemicals are regulated, and waste disposal occurs under a regime of careful controls.

But this progress has come at a price. The command-and-control framework is now widely recognized as slow and inefficient insofar as the government does almost all of the environmental work—spotting problems, analysing the causes of various harms, identifying safe pollution thresholds, spelling out standards, and sometimes even requiring specific “best available technologies” to be adopted by particular industries. This over­-reliance on government as the central (and often sole) actor also leads to high costs, avoidable inefficiencies, constant litigation over standards, and disincentives for innovation.

Today, we know that red lights are not enough. Limiting or even forbidding pollution is not the same as solving environmental problems. Just as a traffic intersection needs green lights as well as red ones to optimise the flow of vehicles, we need a policy framework that highlights for businesses and individuals across the nation and around the world where problems exist that require solutions—and thus where their innovative thinking would be particularly welcome. […]

One of the biggest mistakes in our current environmental protection regime has been the assumption that once pollution control requirements were in place, the money to implement them would follow. And while big industries have spent millions of dollars on smokestack scrubbers and effluent controls, much less investment in pollution control technologies has been made by small businesses, households, and other entities with limited access to capital. But in recent years, innovative financing tools, such as Green Banks and Green Bonds, have created new incentives that encourage investment in environmental infrastructure. These “sustainable finance” green lights make capital available at attractive rates for borrowers—a model that could easily be expanded.

Many states have adopted Renewable Portfolio Standards (RPSs) setting out targets and timetables for expanded wind and solar power. For example, when I became commissioner of Connecticut’s Department of Energy and Environmental Protection in 2011, the state had a goal of 20 percent renewable power by 2020. But little progress had been made toward this goal. And when I pressed as to the reasons for the ineffectiveness of the millions of ratepayer dollars being devoted to driving clean energy innovation, I learned not only that Connecticut was falling way short of its RPS targets but also that the bulk of the money was funding biomass projects. Thus, the precious rate­payer innovation-­inducing dollars were being spent on burning wood—an energy source that has been around for 20,000 years.

It became clear that Connecticut needed more carefully crafted incentives (green lights) to drive funding into truly innovative projects. This gap led us to launch the first­-in-­the-­nation Green Bank, with a commitment to use limited public money to leverage private capital and scale up clean energy innovation and project deployment. Connecticut thus moved to the use of “reverse auctions” (in which the project developer that promises the lowest electricity prices wins) to select renewable energy projects with the promise of a Power Purchase Agreement (a commitment to buy the electricity generated for 15 years) for winning bidders.

By harnessing the power of competition— including a requirement that wind, solar, fuel cells, and other clean energy options compete against each other—renewable energy prices were driven down. Moreover, while the promise that Connecticut would someday receive 20 percent of its electricity from renewable sources had provided insufficient certainty to past projects to enable them to get bank financing, the presence of a 15-­year electricity-supply contract made the projects “bankable.”

To be fair, some states have backed their RPS goals with a structure of “feed-­in tariffs” or Renewable Energy Credits that has induced a ramp­-up in solar and wind power, but often at very high costs. So once again, the lesson is that the presence of incentives is not enough. The green-lights framework must be carefully considered and sharply focused on driving innovation and scaling up the engagement of private capital to deliver on public policy goals. Simply put, the goal cannot be “clean power.” It needs to be cheaper, cleaner and more reliable energy supplies. […]

Some might ask why certain activities—such as clean energy development—deserve government attention and green lights prioritsation while others do not. The answer is straightforward: these projects offer public benefits alongside the private gains of the project developers. Indeed, insofar as a commitment to the “end of externalities” and the polluter pays principle means that those causing harms to society should pay for their negative externalities, it also implies that those delivering positive externalities—benefits to society—should be compensated.

An interview with Daniel Esty

The Economist: Why aren't “red lights” enough to tackle climate change?

Daniel Esty: To decarbonise our economy, we need to drive innovation with incentives that engage the world’s entrepreneurs, financial markets and creative spirits in the pursuit of clean energy generation, supporting technologies (including improved batteries and other means of electricity storage, as well as smart grids, smart appliances and smart homes), and the spectrum of investments required for a sustainable future.

The Economist: Why has society been slow to adopt “green lights”?

Mr Esty: Modern environmental law and policy is only 50 years old—and the first generation of pollution-control strategies that emerged in the 1970s and 1980s focused on stopping the big and obvious sources of emissions. Because the prevailing model of “command and control” regulation produced pretty good results, we stayed with it for a long time.

As we have moved on to more disaggregated harms and harder-to-see problems, such as greenhouse-gas emissions, the limits of the 20th-century strategies—high costs, inflexibility, over-reliance on the federal government as the key actor in pollution control and lack of incentives for innovation—have become more evident. But there is now a rising consensus that we need to focus much more on “green lights” to provide incentives for change and innovation.

The Economist: The idea of green lights seems costly—who should pay for the incentives?

Mr Esty: Incentives for technology developments and behavioral change in support of a more sustainable future can come in many forms, not all of which will be costly. Perhaps the most fundamental policy to incentivise innovation would be greater reliance on the “polluter pays” principle. Specifically, if we commit to an “end of externalities”—meaning that polluters must either stop their harmful emissions or pay for the damage they cause—we would see an enormous amount of corporate focus on reducing pollution and a major ramp-up in efforts to solve environmental problems.

With a structure of carbon pricing or broader “harm charges” in place, every company would have a financial interest not only in minimising its own pollution but also in helping its customers address their clean energy and environmental challenges.

The Economist: The “green bank” sounds promising. Why has this idea not caught on more broadly?

Mr Esty: Perhaps the greatest shortcoming of the 20th-century approach to environmental protection was the failure to ask where the money would come from for the required investments in clean technology development and deployment. Simply put, the lack of a broad-based signal that made clear that polluters would bear the cost of the harm they caused led to a major market failure.

But we now see Connecticut, New York and eight other states as well as a half-dozen countries creating green banks to help ensure the flow of capital to clean energy investments and other underpinnings of a sustainable future. Using limited public funds, these green banks leverage private capital in support of energy-efficiency retrofits, clean energy projects, and a range of other investments that are helping to address climate change and other environmental threats.

As the Connecticut model has helped to spur $1.6bn in new clean energy projects, with each government dollar leveraging almost seven dollars of private capital, and other jurisdictions are seeing similar results, the idea of green banks as a critical tool for financing decarbonisation is beginning to catch on. But change is often hard to deliver and so only recently has there been a real focus on this sustainability-finance model.

The Economist: Your book offers 40 ideas—what’s the most radical that’s put forward?

Mr Esty: One of the most radical is Gary Brudvig’s proposal to reverse engineer photosynthesis as a way to capture and store solar power. But one might also argue that Thomas Easley’s essay, “Hip Hop Sustainability”, also represents radical change in its call for bringing sustainability to communities that have been left out of environmental debates—in their own language. Broadening the conversation and ensuring that issues of equity are addressed in the transition to a decarbonised and sustainable future will be critical.