Saturday, May 2, 2009

Of Stern, the Green Bonds and the politics of climatic Change in Washington State.

I listen to the discussion of climate change by Nicholas Stern the other night, thought deeply about how disagreeable we economists are on issues of discounting future stream of benefits of a particular investment and came to the conclusion that, we can only work within our expectation of the future, no one can actually know how investment in curbing climatic change will precisely turn out.

Likewise, I read part of the transcripts of HB 2334 and the claim that a $3 billion investment in capital improvement projects would lead us to increased health, safety and energy efficiency in public facilities. As convincing as this argument seem, the reality of Nicholas Stern discounting of future returns to investment of this nature, makes the justification of substantial future returns of what I would now call Green Bonds, questionable. I love us to be able to correct climate change. I strongly support initiatives that help correct environmental pollution or climate change, but I shy away from any investment, where the calculation of the future streams of return, to say the least, is questionable. If the grounds of assessment of the potential returns provided for by HB 2334, is based on future discounted rate propounded by calculations of Nicholas Stern or similar ones, I would strongly argue that we refrain from going in that direction, because the jury is not out on the actual discounted returns on investments of this nature. Further, if the estimate of future returns on initial investments into projects that may save energy is propounded by the expectations from performance-based contracting, I would say, and what planet are those guys from? The reality is you cannot enforce completely performance-based contracting, when there could be extraneous factors as earthquakes, natural disasters and other associated factors that may lead to cost over-run on projects. We must not forget the Big Dig in Boston! Performance-based contracting are as good as the events and the occasion surrounding the project, and since none of us can completely predict nature or people, we must be cautious as we use this type of tool in predicting potential returns to investments in capital improvement projects.

Finally, while I am not an accountant, I do understand a thing or two about budgeting, and if I can hear the Democratic State Treasurer correctly, a bond package of the three billion dollars magnitude for the sake of HB 2334, is necessarily not a wise idea when we have a Nine Billion dollars hole already in our budget. A word is sufficient for the wise, even while we contemplate the problem of climate change.
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