Shift the Subsidies

Natural gas fracking well in Louisiana

In a perfect world, publication of what is at its core a listing of financial commitments to energy activities by public banking institutions should not be an item of particular note.  For the most part, the shareholders of these banks are Western nations with a tradition of accountable public institutions and democratically-elected governments.  It would seem only natural that the credit supports (including direct loans, loan guarantees, and various export insurance products) extended by these banks would be easily accessible; and that such information would include which firms got on the taxpayer's credit line, how much they got at what terms, and how diligently they've been keeping up on payments.  Given the scale of commitments (the face value of credit supports provided to the energy sector alone by the nine institutions covered in Oil Change's Shift the Subsidies database were nearly $103 billion between 2008 and 2011), the expectation of full transparency does indeed seem a reasonable one.

Oil Change LogoAlas, the world is far from perfect.  And against the imperfect backdrop of highly fragmented and not very precise information on credit supports, the work done by Steve Kretzmann and his team is a big step forward.  It's not a new issue for Kretzmann.  He and I have had discussions on this topic going back a good six or eight years; and even back then he'd been pondering the issue for awhile. 

What is great about his current presentation of the topic is the ease with which detailed listings of commitments can be accessed, and the very creative ways in which important distinctions are graphically displayed.  It is always tough to distill core messages from a large set of data, and I think they've done a nice job.  They use color, of course -- "green" projects are, well, green.  Relative magnitudes are enhanced using symbol tags and larger circles to show who gets the biggest pot of credit.  The sorting capabilities (by fuel, geography, time) and drill-downs to information on the specific project are extremely good.  I also appreciate their decision to include resources like biomass, incineration, and large scale hydro into an "other" energy category rather than pretending that these resources are inherently clean power sources.

Overall, this is a solid platform that I hope they will be able to expand and extend in the following ways:

  • More lending institutions.  The multi-lateral banks are not the only big players in the world of subsidized credit.  In fact, export support agencies in major nations are often far less transparent, while also more likely to use sovereign credit to prop up their own national champions.  A combination of lower visibility and larger pressure from entrenched domestic interests also suggest that the national banks will do less to align lending with social or environmental goals.  For all of these reasons, it is extremely important to get the key export credit agencies added to the mix here -- with at least a core group of France, China, the US, Japan, and Russia to start.
  • Cleaner definition of "subsidy".  The current database measures subsidies as gross credit supports.  Gross patterns of support are important, as they indicate the most likely winners and losers from the banks' activities, and highlight what I refer to as selection bias in the lending institutions with respect to what forms of energy do and don't get funded.  Over time, this selection bias can greatly alter the energy path of particular countries (particularly those where nearly all of the energy infrastructure has relied to some degree on the international credit support), and even on the direction of research and innovation. 

    That said, the actual subsidy associated with any specific loan is not its face value, but the difference between the terms offered by the credit agency and what that borrower could get on the open market.  I call this intermediation value, because the lending institution is using its own borrowing capacity and risk profile to intermediate in capital markets on behalf of a weaker borrower (in the unlikely scenario that a borrower had stronger credit than these institutions, it would self-select out of the program).  The financial benefits of intermediation come through two main venues:  lower costs of debt because the bank becomes a guarantor of the loan; and the ability of the borrower to fund a project with much more debt than would be permitted in a market transaction.   Using more debt cuts borrowing costs because equity financing is generally more expensive (sometimes very much so) than debt financing.  You can read additional background here.

The newer and higher risk the technology being financed, the poorer or more politically unstable the country a project is going into, and the larger the capital going into a specific deal, the higher the intermediation value of these credit programs are likely to be.  While getting the value exactly right can be hard, we can clearly do better than just reporting the face value of the commitment.  Quite helpful in taking that step would be a much higher degree of transparency by the banks in terms of credit terms and loan-specific performance. 

  • More shades of green.  I'd like to see more precise judgments made on projects in the biomass or large scale hydro space, as some of them may deserve to be put in a "dirty" energy category if their environmental impacts are particularly large.  Unfortunately, this could also be the case for some of the centralized solar technologies (due to their use of water) if they are located in arid regions.  Particularly for projects that can results in large scale land conversion, the fuel source matters less than the ancillary impacts of the project on ecosystems.