Should the Federal Government Subsidize Firm Investment in Climate Resilience?
Does PGE Have the Implicit Property Right to Contribute to Wildfire Risk?
The WSJ reports today that California electric utility PGE is seeking a government loan in order to accelerate its efforts to submerge its power lines to reduce fire risk. Does economic analysis offer any insights here?
As I understand the facts, if PGE receives this loan its cost of capital will decline from roughly 6% to 3%. Why? The U.S government can borrow at a lower interest rate than a private firm.
I have mixed feelings about this. On the one hand, we all now know that wildfires in the American West (and Canada!) contribute to creating Particulate Matter PM2.5 spikes. This air pollution drifts across boundaries causing literally headaches for millions of people downwind. This regional public bads case is a classic econ 101 example of a negative externality. A Coasian might go so far as to say; “the downwind victims should co-ordinate and collect $ and offer it to the polluters to stop their polluting activity.” Permit me to explain.
Suppose that California’s PGE is the only power company and it can pay $1 billion to submerge its power lines. If it does so then the probability of a wildfire declines by 10 percentage points.
Suppose that if a wildfire occurs that PM2.5 increases by 30 units for 5 days and 25 million people will be exposed to the pollution spike and each of them are willing to pay $75 per day to not be exposed to the smoke.
The total cost to society of the wildfire from the PM2.5 equals; 5*25 million*75 = 9.3 billion.
In this example, the benefits of stopping the wildfires by buying the $1 billion cost is worth it. A Coasian would ask why the victims didn’t raise the money to pay PGE to submerge the power lines.
The WSJ says that the Federal Government is paying the implicit interest rate subsidy. This means that the victims and the non-victims across the country are paying the bill. Why are people who do not gain from PGE wildfire risk reduction being asked to pay for a regional public good?
Why aren’t the PGE shareholders responsible for making this payment? Shareholders are supposed to bear the “new news”. They gain from good news and are supposed to lose from bad news.
I can imagine an economy where a for profit firm such as PGE invests in self-protection of submerging power lines if it fears a large court case liability ruling if it fails to take such proactive steps and a costly wildfire occurs that kills and injures people due to fire and smoke.
By subsidizing the PGE risk mitigation measures, the U.S government is implicitly stating that the polluter has the right to pollute! Does it? Why must we implicitly pay PGE not to injure those downwind? How did PGE acquire this implicit property right?
NOW, let me end with a counter-point for why this PGE request for this low interest rate loan may be “good news”.
A key reason for why I am optimist that we can adapt to many of the impacts of climate change is due to induced innovation. Innovators are more likely to make risky investments if they believe that they will get rich from creating climate adaptation products. If the Federal Government commits to subsidizing demand for such products then this reduces the risks for firms who enter this nascent market. This is slightly similar to the commitments to vaccine makers.