Felix Salmon

William Wild has an intriguing idea which could be applied not only to new stimulus funds but even to energy-infrastructure funds left over from the first stimulus which haven’t yet been spent. His premises are simple; here’s how I understand them.

• It’s a good idea for the government to subsidize renewable-energy projects, but we want those projects to be viable, post-subsidy.
• There’s lots of equity capital floating around the green-tech space, but precious little debt.
• Increasing the amount of debt in renewable-energy projects won’t meaningfully decrease the amount of equity capital available. If anything, the opposite is true.
• We need to get banks lending again, and it would be great if government subsidies could be leveraged with bank debt.

Wild’s proposal addresses all of these ideas, quite simply:

At least 70% of any project’s commercial capital (excluding the subsidy) should be in the form of non-recourse commercial bank debt.

It’s an intriguing idea. At some point, there’s enough government subsidy in the project that banks will be willing to lend into it. (The subsidy can be in any combination of debt, equity, or even outright grants: the only thing that matters from the banks’ point of view is that they’re senior to the government.) Since banks aren’t doing much lending into renewable-energy projects right now, this could help jumpstart a whole new set of renewable-energy groups within commercial banks, who would rapidly become expert on the economics of the sector, and help it to grow.

The big potential problem is that such a rule would delay green-tech projects unnecessarily, and even prevent certain interesting projects from happening at all. Banks are by their nature very conservative when it comes to things like this, and Wild’s rule would essentially give them veto power over any and all new projects seeking government subsidy. I’m not sure we want that. But I do like the idea of dragging them into the sector. It’s surely a much better use of their funds, from both a financial and a societal perspective, than subprime housing loans were.

In the wake of the publication of an extremely high-impact article in Science magazine which says that mountaintop removal mining has enormous environmental impacts which can’t possibly be mitigated, the campaign against JP Morgan Chase’s financing of such activity is heating up again:

JPMorgan Chase has been funding six of the top eight coal mining companies responsible for mountaintop removal coal mining in the United States. Recently, its investment bank underwrote more than $1 billion in new financing to Massey Energy, the largest mountaintop removal coal mining company.

JPMorgan Chase states that its “environmental goal is to make a positive contribution to sustainable business practices by integrating environmental practices into our business model.” Yet, Massey Energy has a deplorable environmental record, having violated the Clean Water Act no fewer than 4,500 times – resulting in a $30 million fine in 2008.

The practice of mountaintop removal mining is egregious in the extreme: the Economist, for instance, has said that “the underlying question is why America allows this practice at all”. And JP Morgan can’t fall back on the “everybody else is going it” argument: BofA pulled all its financing as long ago as 2008, and Wells Fargo has pulled out as well, leaving the field wide open for JP Morgan — which can either charge monopoly rents for such financing, or can do the right thing and withdraw from the field as well.

It makes financial sense for the likes of Massey Energy to destroy the environment in search of cheap coal. That’s what they do. But it’s not JP Morgan’s job to facilitate such activity, in the US or anywhere else. If they want to stop being perceived as evil banksters, they’d be well advised to get out of this business sharpish.