The Case for Corporate Climate Ratings: Nudging Financial Markets

Capital markets are cast as both villain and hero in the climate playbill. The trillions of dollars required to combat climate change leave ample room for heroics from the financial sector. For the time being, however, capital continues to flow readily toward fossil fuels and other carbon-intensive industries. Drawing on the results of an empirical study, this Article posits that ratings of corporate climate risk and governance can help overcome pervasive information asymmetries and nudge investors toward more climate-conscious investment choices with welfare-enhancing effects.In the absence of a meaningful price on carbon, three private ordering initiatives are trying to mobilize capital markets as a force for good in the war on carbon. But shareholder climate activism, calls for better climate-related financial disclosures, and the divestment movement have yet to usher in the paradigm shift toward low-carbon capitalism.Corporate climate ratings overcome existing information asymmetries to nudge investors toward more carbon-conscious allocation of their assets. Every year, rating agencies like Standard & Poor’s, Moody’s, and Fitch pass judgment on over one hundred trillion dollars’ worth of securities. Modeled after these well-established ratings of creditworthiness, independent ratings of companies’ climate risk and governance can redirect the flow of capital away from high-carbon assets toward more climate-friendly options—without the need for government authorization or other market-distorting interventions.A series of survey experiments with over fifteen hundred participants test, and demonstrate, the capacity of corporate climate ratings to promote low-carbon investment. Inclusion of climate ratings among the performance metrics commonly considered by investors significantly increases investment in the stock of companies with favorable climate ratings, even when other stocks boast a stronger return profile. Variations in the ratings’ framing and format, informed by insights from behavioral economics and finance, facilitate recommendations for best practices

Requirements for a Renewables Revolution

This Article identifies and analyzes the obstacles presently barring the rise of renewables, evaluates the role of the current policy favorite emission pricing, and offers design recommendations for a comprehensive U.S. renewables policy. Successful climate change mitigation requires a timely shift to renewable sources of energy, such as sunlight, wind or tides, to decarbonize today’s high-carbon electricity sector. But market pull alone is not strong enough. This Article discusses the most widely cited economic barriers and identifies and evaluates additional obstacles related to the electricity sector’s regulatory framework. Emission pricing is largely considered the most efficient policy to drive the timely transition to a renewables-based electricity sector. This Article argues that, for political, conceptual, and, most of all, regulatory reasons, emission pricing will not fuel the rise of renewables at the speed necessary for successful climate change mitigation. Rather, a comprehensive renewables policy is required to address each and every one of the existing barriers. Drawing on the policy experience of other sectors and nations, I offer recommendations for the design of a comprehensive U.S. renewables policy. Many of the proposed policy recommendations aim at non-economic barriers, which can be overcome through regulatory intervention. Once these barriers have been removed, policy support for renewables can focus on the remaining economic barriers and, hence, becomes far less costly. In light of the plethora of obstacles to a timely transition to renewables, this Article calls for concerted policy action by scientists, engineers, economists, lawyers, marketers, and educators to fuel the renewables revolution

Clean Energy Equity

Solar, wind, and other clean, renewable sources of energy promise to mitigate climate change, enhance energy security, and foster economic growth. But many of the policies in place to promote clean energy today are marred by an uneven distribution of economic opportunities and associated financial burdens. Tax incentives for renewables cost American taxpayers billions of dollars every year, yet the tax code effectively precludes all but the largest banks and most profitable corporations from reaping the benefits of these tax breaks. Other policies, such as renewable portfolio standards that set minimum quota to create demand for renewable electricity require such high levels of market expertise and financial acumen that they engender similarly disparate social impacts—all in the name of an environmentally sustainable energy future.To date, policymakers and scholars have focused primarily on the efficacy and, more recently, the efficiency of clean energy policy. This Article makes the case that the next generation of policies should incorporate equity as another first-order consideration in policy design and implementation. Properly defined as the commensurate matching of costs and benefits, equity offers a more reliable metric for distributional impacts than the multitude of competing, normatively charged notions of fairness that currently dominate the public discourse.Empirical assessment and qualitative analysis of today’s leading clean energy policies reveal widespread issues related to equity. Insights gleaned from a representative sampling of the global policy potpourri yield valuable design recommendations for the next generation of clean energy policies—a generation that, ideally, will be at once effective, efficient, and more equitable.As the greening grid becomes ever more interactive, so, too, should the process that produces the policy landscape driving the clean energy transition become more participatory. This Article suggests Elinor Ostrom’s polycentricity model as a powerful governance tool to help produce more equitable clean energy policies

Beyond Algorithms: Toward a Normative Theory of Automated Regulation

The proliferation of artificial intelligence in our daily lives has spawned a burgeoning literature on the dawn of dehumanized, algorithmic governance. Remarkably, the scholarly discourse overwhelmingly fails to acknowledge that automated, non-human governance has long been a reality. For more than a century, policy-makers have relied on regulations that automatically adjust to changing circumstances, without the need for human intervention. This Article surveys the track record of self-adjusting governance mechanisms to propose a normative theory of automated regulation. Effective policy-making frequently requires anticipation of future developments, from technology innovation to geopolitical change. Self-adjusting regulation offers an insurance policy against the well-documented inaccuracies of even the most expert forecasts, reducing the need for costly and time-consuming administrative proceedings. Careful analysis of empirical evidence, existing literature, and precedent reveals that the benefits of regulatory automation extend well beyond mitigating regulatory inertia. From a political economy perspective, automated regulation can accommodate a wide range of competing beliefs and assumptions about the future to serve as a catalyst for more consensual policy-making. Public choice theory suggests that the same innate diversity of potential outcomes makes regulatory automation a natural antidote to the domination of special interests in the policy-making process. Today’s automated regulations rely on relatively simplistic algebra, a far cry from the multivariate calculus behind smart algorithms. Harnessing the advanced mathematics and greater predictive powers of artificial intelligence could provide a significant upgrade for the next generation of automated regulation. Any gains in mathematical sophistication, however, will likely come at a cost if the widespread scholarly skepticism toward algorithmic governance is any indication of future backlash and litigation. Policy-makers should consider carefully whether their objectives may be served as well, if not better, through more simplistic, but well-established methods of regulatory automation

Climate Choice Architecture

Personal choices drive global warming nearly as much as institutional decisions. Yet, policymakers overwhelmingly target large-scale industrial facilities for reductions in carbon emissions, with individual and household emissions a mere afterthought. Recent advances in behavioral economics, cognitive psychology, and related fields have produced a veritable behavior change revolution. Subtle changes to the choice environment, or nudges, have improved stake-holder decision-making in a wide range of contexts, from healthier food choices to better retirement planning. But the vast potential of choice architecture remains largely untapped for purposes of climate policy and action. This Article explores that untapped potential and makes the case for nudges to become a cornerstone of public and private climate governance, targeting both institutional and individual decision-making. Nudges are nimbler than most conventional regulations and adapt more readily to changing climate circumstances. Climate choice architects can build on a proven track record of successful behavioral interventions in water conservation, waste management, and other domains of environmental law and policy. Bipartisan approval of other prominent nudge campaigns demonstrates the potential of choice architecture to help defuse the increasingly polarized politics of climate change. Moreover, nudges not only improve the efficacy, efficiency, and equity of public policy but also amplify the impact of private governance action on climate change. As catalysts for more informed choices, climate nudges can further alleviate concerns over climate justice by transforming previously passive stakeholders into active decision-makers in the transition to a low-carbon economy. Despite their well-documented success, nudges have produced their share of discontents. But even the most outspoken critics support nudges that mitigate information asymmetries and remedy market failures, like the disastrous externalities imposed by greenhouse gas emissions

Beyond Tax Credits: Smarter Tax Policy for a Cleaner, More Democratic Energy Future

Solar, wind, and other renewable energy technologies have the potential to mitigate climate change, secure America’s energy independence, and create millions of green jobs. In the absence of a price on carbon emissions, however, these long-term benefits will not be realized without near-term policy support for renewables. This Article assesses the efficiency of federal tax incentives for renewables and proposes policy reform to more cost-effectively promote renewable energy through capital markets and crowdfunding.Federal support for renewable energy projects today comes primarily in the form of tax incentives such as accelerated depreciation and, critically, tax credits. Empirical evidence reveals that only a fraction of the subsidy value of tax credits may actually go to fund new renewable power projects. Why are tax credits for renewables so inefficient? And where do the remaining tax dollars go?Qualitative analysis suggests that the answer to both questions hinges on the mismatch between the profitability requirements of tax credits and the revenue profile of renewable energy projects. The value of tax credits lies in their capacity to reduce tax liability and lower tax bills. Most renewable power projects, however, require ten years or more to recover their up-front capital expenditures before they begin to generate taxable profits and, hence, tax liability to reduce. Bringing in investors with tax liability from other sources to monetize a project’s tax credits provides only partial relief. Such tax equity investment drives up a project’s financing charges and transaction costs, limits investment liquidity, and restricts growth in the renewable energy marketplace.Federal policymakers should give renewable energy access to master limited partnerships (MLPs) and real estate investment trusts (REITs) – two tax-privileged investment structures with a proven track record of promoting oil, gas, and other conventional energy. Merging the tax benefits of a partnership with the fundraising advantages of a corporation, MLPs and REITs could significantly reduce the cost of capital for renewable energy projects, broaden their investor appeal, and move renewables closer to subsidy independence. Most importantly, MLPs and REITs have the potential to deliver these and more benefits to renewable energy at considerably lower cost to taxpayers than the current regime of tax credits

Market Segmentation vs. Subsidization: Clean Energy Credits and the Commerce Clause\u27s Economic Wisdom

The dormant Commerce Clause has long been a thorn in the side of state policymakers. The latest battleground for the clash between federal courts and state legislatures is energy policy. In the absence of a decisive federal policy response to climate change, nearly thirty states have created a new type of securities—clean energy credits—to promote low-carbon renewable and nuclear power. As more and more of these programs come under attack for alleged violations of the dormant Commerce Clause, this Article explores the constitutional constraints on clean energy credit policies. Careful analysis of recent and ongoing litigation reveals the need for better differentiation between constitutionally questionable market segmentation and constitutionally sound subsidization policies—in clean energy policy and beyond. Many observers view the dormant Commerce Clause doctrine as a major threat to state-led efforts to combat climate change. Pushing back against widespread scholarly skepticism and recent precedent, this Article makes the case that state policymakers can use clean energy credits to simultaneously promote global environmental and local economic causes without running afoul of the dormant Commerce Clause. Critics and courts alike fail to recognize that not all energy credit programs are created equal. When states use energy credits as compliance instruments for their renewable portfolio standards—requirements that electric utilities source a percentage of their electricity sales from solar, wind, and other renewables—they partition power markets into renewable and nonrenewable segments. Such segmentation policies cannot follow state boundaries or other geographically defined lines without violating the dormant Commerce Clause. A few pioneering states have begun to use energy credits as a vehicle for subsidies that operate independently of sourcing requirements. Unlike their market segmentation counterparts, these subsidization policies raise no concerns under the dormant Commerce Clause even when subsidies are available only to in-state firms. The Commerce Clause’s “preference” for subsidization over segmentation policies may seem counterintuitive. Both have, after all, the potential to disrupt interstate commerce and competition. Yet, two centuries of dormant Commerce Clause jurisprudence reflect a simple economic truth: segmentation prevents competition altogether, while subsidization can have a pro-competitive effect, such as when used to correct for carbon externalities and other market failures

Market Segmentation vs. Subsidization: Clean Energy Credits and the Commerce Clause\u27s Economic Wisdom

The dormant Commerce Clause has long been a thorn in the side of state policymakers. The latest battleground for the clash between federal courts and state legislatures is energy policy. In the absence of a decisive federal policy response to climate change, nearly thirty states have created a new type of securities—clean energy credits—to promote lowcarbon renewable and nuclear power. As more and more of these programs come under attack for alleged violations of the dormant Commerce Clause, this Article explores the constitutional constraints on clean energy credit policies. Careful analysis of recent and ongoing litigation reveals the need for better differentiation between constitutionally questionable market segmentation and constitutionally sound subsidization policies—in clean energy policy and beyond. Many observers view the dormant Commerce Clause doctrine as a major threat to state-led efforts to combat climate change. Pushing back against widespread scholarly skepticism and recent precedent, this Article makes the case that state policymakers can use clean energy credits to simultaneously promote global environmental and local economic causes without running afoul of the dormant Commerce Clause. Critics and courts alike fail to recognize that not all energy credit programs are created equal. When states use energy credits as compliance instruments for their renewable portfolio standards—requirements that electric utilities source a percentage of their electricity sales from solar, wind, and other renewables—they partition power markets into renewable and nonrenewable segments. Such segmentation policies cannot follow state boundaries or other geographically defined lines without violating the dormant Commerce Clause. A few pioneering states have begun to use energy credits as a vehicle for subsidies that operate independently of sourcing requirements. Unlike their market segmentation counterparts, these subsidization policies raise no concerns under the dormant Commerce Clause even when subsidies are available only to in-state firms. The Commerce Clause’s “preference” for subsidization over segmentation policies may seem counterintuitive. Both have, after all, the potential to disrupt interstate commerce and competition. Yet, two centuries of dormant Commerce Clause jurisprudence reflect a simple economic truth: segmentation prevents competition altogether, while subsidization can have a pro-competitive effect, such as when used to correct for carbon externalities and other market failures

Clean Energy Federalism

Legal scholarship tends to approach the law and policy of clean energy from an environmental law perspective. As hydraulic fracturing, renewable energy integration, nuclear reactor (re)licensing, transport biofuel mandates, and other energy issues have pushed to the forefront of the environmental law debate, clean energy law has begun to emancipate itself. The emerging literature on clean energy federalism is a symptom of this emancipation. This Article adds to that literature by offering two case studies, a novel model for policy integration, and theoretical insights to elucidate the relationship between environmental federalism and clean energy federalism. Renewable portfolio standards and feed-in tariffs both seek to mitigate global climate change by promoting low-carbon, renewable energy. Despite their shared objective, subtle differences in the design characteristics and regulatory requirements of both policies point to different policy innovation pathways, recommending renewable portfolio standards for implementation at the federal level and feed-in tariffs for implementation at the state level. Contrary to the literature\u27s traditional view that renewable portfolio standards and feed-in tariffs are mutually exclusive policy alternatives, this Article proposes a model for closely integrating both policies toward a better, more efficient allocation of investor and regulatory risk. Properly integrated, such a joint policy regime could harness the competitive market forces inherent in portfolio standards and redirect them to optimize overall risk allocation. With aggregate risk mitigation greater than the sum of its parts, an integrated policy regime could leverage higher private-sector investment in renewables while requiring lower returns than necessary under less coordinated current policy approaches. From a theoretical perspective, this Article illustrates how clean energy federalism both draws on and advances the theories shaping today\u27s environmental federalism discourse. Specifically, this Article calls for a more nuanced, multidimensional application of environmental federalism\u27s matching principle, offers support for a more open-ended, institutionally agnostic public choice narrative, and operationalizes dynamic federalism theory in the clean energy arena