Will 2020 mark the dawn of a green infrastructure decade?
Infrastructure is getting walked all over – not just physically, but fiscally, as well. According to the Global Infrastructure Outlook, an initiative of the G20, the global infrastructure investment gap – representing the delta between needed and planned investment – is estimated at $15 trillion between now and 2040. To additionally achieve the UN Sustainable Development Goals (SDGs), including the universal provision of electricity, water and sanitation, an extra $3 trillion will be needed over the next 20 years, bringing the investment gap to $18 trillion in total. The same initiative pins the US infrastructure investment gap at $3.8 trillion.
At the same time, the emergence of a new climate and environmental politics, from the halls of Congress in Washington to the desks of mandarins in Brussels, is creating new energy to spend sums rarely before considered, taking what was once boring and grey and re-vitalizing it as something green and appealing. The United States would seem an unlikely geography for this to play out, given recent difficulties in keeping up with its existing crumbling roads and bridges. But Washington’s politics, notoriously dynamic and unpredictable, may yet deliver a new wave of infrastructure spending, much of it green, in the years to come.
“Infrastructure week” has become something of a joke in Washington, DC – a punch line to condemn worthwhile ideas perennially promised, yet never realized. There was always the seed of something different and unique for infrastructure spending in the Trump administration, particularly as the President represents a new model of Republican uninhibited by the fiscal hawkishness of the party that closely scrutinized – and often criticized – President Obama’s stimulus strategy in the aftermath of the 2008/9 financial crisis. Trump as a candidate proposed a $1 trillion infrastructure spending plan, at that point unprecedented from a major Republican candidate. Although it failed to achieve traction even after its promotion during “infrastructure weeks” in 2017 and 2018, the plan nonetheless grew even bolder in ambition and scope, by 2019 ballooning to a $2 trillion package with tacit bipartisan support, but few firm details. That plan quickly succumbed to political partisanship and sticker shock on the part of many Congressional Republicans, and the third infrastructure week, in May of last year, ended no closer to a bill being put forward than any of the infrastructure weeks before it.
It would be understandable, then, to view with skepticism the prospect for any movement on large-scale infrastructure spending in the years to come. However, not only does an election with the potential to reconfigure the political balance in Washington await at the end of this year, but already the resurgent dynamism of green politics is re-shaping the way that infrastructure is likely to be addressed – and eventually, potentially, funded – in the decade ahead.
Congressional Democrats, no longer waiting on the first move from the White House, have begun sketching out the contours of their own infrastructure plan. The package, at five years and $760 billion, puts a heavy climate slant on what is otherwise a transportation and water infrastructure package periodically renewed by Congress. In addition to re-authorizing funding for highways and other longstanding infrastructure, it would dramatically increase funding for transit, cross-country rail, and for electric vehicle charging infrastructure.
Many of the Democratic presidential candidates have unveiled major infrastructure plans, as well, with most at least $1 trillion in scale. For many of the candidates, their infrastructure plans are woven into the fabric of a broader “Green New Deal” framing, a trend that shows little sign of abating given the favorable numbers that the Green New Deal concept attracts when pitched as a job-creating infrastructure spending program. The Green New Deal proposal from Bernie Sanders currently dwarfs all others, calling for $16.3 trillion in federal investment aimed at addressing climate change, much of it earmarked for infrastructure.
Regardless of if and when a compromise proposal is able to achieve bipartisan votes in the House and Senate, one trend bodes promising for the eventual passage of an infrastructure package: the slow erosion of opposition to raising the federal gas tax in order to pay for an infrastructure bill. The federal gas tax has remained frozen for more than a quarter of a century, and has not even been indexed to inflation, leading to the “purchasing power” of the gas tax declining by more than 40% since its last increase. The US Chamber of Commerce, key labor unions, and the American Trucking Associations now all support paying for infrastructure through an increase in federal fuel taxes, and the Trump White House has given it serious consideration in the past. Increasingly, the attitude in Washington is a matter of when, not if, this long-neglected revenue mechanism will be tapped. And this funding mechanism itself would add extra momentum to any climate-oriented infrastructure bill, as any increase in fuel prices should, all things being equal, lead to a decrease in fuel consumption in accordance with the price elasticity of demand that one assumes.
Zooming out from domestic affairs, the US is still an important player in international infrastructure investment, as well, albeit one increasingly wary of the vast sums of capital being deployed or promised by China through the Belt and Road Initiative (BRI) and similar endeavors. In response, the US government first tried to stretch limited funds as far as possible, including an “Indo-Pacific Economic Vision” announced by Secretary of State Mike Pompeo in mid-2018 that included a $113 in new US government funding for infrastructure in Asia, and an expansion of the spending cap of the new US International Development Finance Corporation (“USDIFC”, an evolution of the Overseas Private Investment Corporation) to $60 billion.
It has since supplemented this with the “Blue Dot Network,” a certification project by Australia, Japan, and the United States intended as “a globally recognized seal of approval for major infrastructure projects, letting people know the projects are sustainable and not exploitative.” The idea is that such projects will attract additional private sector capital, with the potential for some US government financing entities, including the USIDFC, playing a role. While the Blue Dot Network asserts that it will abide by the G20’s Principles for Quality Infrastructure Investment, it remains to be seen whether it, in practice, will end up demonstrably more aligned with low-carbon or green infrastructure than other initiatives.
What else could drive demand for green infrastructure in the US and beyond over the coming decade? Certainly the fast-evolving posture of the private sector will play a role. Goldman Sachs recently announced a 10 year, $750 billion initiative across nine different sustainability domains, many including green infrastructure. Blackrock, the world’s largest asset manager, made waves with a new commitment to put sustainability at the center of its portfolio construction and risk management activities, and to join Climate Action 100+, a coalition of investors representing more than $40 trillion in assets under management that have committed to more aggressive climate action from the financial sector.
Turning to asset owners, institutional investors, such as insurance companies and pension funds, can and should play a larger role in addressing the infrastructure investment gap, and will be particularly critical for sustainable infrastructure. Many institutional investors are increasingly seeking low-carbon or sustainable assets, have longer investment time horizons than many other investors, and are to-date underexposed to these opportunities. World Bank research shows that all institutional investors account for only 0.67% of all global private participation in infrastructure financing. There is significant room for this number to grow over coming years.
Many stars are aligning that point to sustainable infrastructure becoming a key point of debate and discussion over 2020, in Washington and in other capitals as well. But what remains to be seen is whether the right constellation of political will and clarity of purpose will materialize to transform alluring paradigms into enduring investments over the decade to come.