The Financial Secret Behind Germanys Green Energy Revolution
Wind farmer Jan Marrink poses by his wind turbines in Nordhorn, Germany.
(Martin Meissner / AP)
The Green New Deal endorsed by Rep. Alexandria Ocasio-Cortez, D.-N.Y., and
more than 40 other House members has been criticized as imposing a too-heavy
burden on the rich and upper-middle-class taxpayers who will have to pay for
it. However, taxing the rich is not what the Green New Deal resolution
proposes. It says funding would come primarily from certain public agencies,
including the U.S. Federal Reserve and a new public bank or system of
regional and specialized public banks.
Funding through the Federal Reserve may be controversial, but establishing a
national public infrastructure and development bank should be a no-brainer.
The real question is why we dont already have one, as do China, Germany and
other countries that are running circles around us in infrastructure
development. Many European, Asian and Latin American countries have their
own national development banks, as well as belong to bilateral or
multinational development institutions that are jointly owned by multiple
governments. Unlike the U.S. Federal Reserve, which considers itself
independent of government, national development banks are wholly owned by
their governments and carry out public development policies.
China not only has its own China Infrastructure Bank but has established the
Asian Infrastructure Investment Bank, which counts many Asian and Middle
Eastern countries in its membership, including Australia, New Zealand and
Saudi Arabia. Both banks are helping to fund Chinas trillion-dollar One
Belt One Road infrastructure initiative. China is so far ahead of the
United States in building infrastructure that Dan Slane, a former adviser on
President Donald Trumps transition team, has warned, If we dont get our
act together very soon, we should all be brushing up on our Mandarin.
The leader in renewable energy, however, is Germany, called the worlds
first major renewable energy economy. Germany has a public sector
development bank called KfW (Kreditanstalt für Wiederaufbau or
Reconstruction Credit Institute), which is even larger than the World
Bank. Along with Germanys nonprofit Sparkassen banks, KfW has largely
funded the countrys green energy revolution.
Unlike private commercial banks, KfW does not have to focus on maximizing
short-term profits for its shareholders while turning a blind eye to
external costs, including those imposed on the environment. The bank has
been free to support the energy revolution by funding major investments in
renewable energy and energy efficiency. Its fossil fuel investments are
close to zero. One of the key features of KfW, as with other development
banks, is that much of its lending is driven in a strategic direction
determined by the national government. Its key role in the green energy
revolution has been played within a public policy framework under Germanys
renewable energy legislation, including policy measures that have made
investment in renewables commercially attractive.
KfW is one of the worlds largest development banks, with assets totaling
$566.5 billion as of December 2017. Ironically, the initial funding for its
capitalization came from the United States, through the Marshall Plan in
1948. Why didnt we fund a similar bank for ourselves? Simply because
powerful Wall Street interests did not want the competition from a
government-owned bank that could make below-market loans for infrastructure
and development. Major U.S. investors today prefer funding infrastructure
through public-private partnerships, in which private partners can reap the
profits while losses are imposed on local governments.
KfW and Germanys Energy Revolution
Renewable energy in Germany is mainly based on wind, solar and biomass.
Renewables generated 41 percent of the countrys electricity in 2017, up
from just 6 percent in 2000; and public banks provided over 72 percent of
the financing for this transition. In 2007-09, KfW funded all of Germanys
investment in Solar Photovoltaic. After that, Solar PV was introduced
nationwide on a major scale. This is the sort of catalytic role that
development banks can playkickstarting a major structural transformation by
funding and showcasing new technologies and sectors.
KfW is not only one of the biggest financial institutions but has been
ranked one of the two safest banks in the world. (The other, Switzerlands
Zurich Cantonal Bank, is also publicly owned.) KfW sports triple-A ratings
from all three major rating agenciesFitch, Standard and Poors, and
Moodys. The bank benefits from these top ratings and the statutory
guarantee of the German government, which allow it to issue bonds on very
favorable terms and therefore to lend on favorable terms, backing its loans
with the bonds.
KfW does not work through public-private partnerships, and it does not trade
in derivatives and other complex financial products. It relies on
traditional lending and grants. The borrower is responsible for loan
repayment. Private investors can participate, but not as shareholders or
public-private partners. Rather, they can invest in Green Bonds, which are
as safe and liquid as other government bonds and are prized for their green
earmarking. The first Green BondMade by KfW was issued in 2014 with a
volume of $1.7 billion and a maturity of five years. It was the largest
Green Bond ever at the time of issuance and generated so much interest that
the order book rapidly grew to $3.02 billion, although the bonds paid an
annual coupon of only 0.375 percent. By 2017, the issue volume of KfW Green
Bonds reached $4.21 billion.
Investors benefit from the high credit and sustainability ratings of KfW,
the liquidity of its bonds, and the opportunity to support climate and
environmental protection. For large institutional investors with funds that
exceed the government deposit insurance limit, Green Bonds are the
equivalent of savings accountsa safe place to park their money that
provides a modest interest. Green Bonds also appeal to socially
responsible investors, who have the assurance with these simple and
transparent bonds that their money is going where they want it to. The bonds
are financed by KfW from the proceeds of its loans, which are also in high
demand due to their low interest rates, which the bank can offer because its
high ratings allow it to cheaply mobilize funds from capital markets and its
public policy-oriented loans qualify it for targeted subsidies.
Roosevelts Development Bank: The Reconstruction Finance Corporation
KfWs role in implementing government policy parallels that of the
Reconstruction Finance Corporation (RFC) in funding the New Deal in the
1930s. At that time, U.S. banks were bankrupt and incapable of financing the
countrys recovery. President Franklin D. Roosevelt attempted to set up a
system of 12 public industrial banks through the Federal Reserve, but the
measure failed. Roosevelt then made an end run around his opponents by using
the RFC that had been set up earlier by President Herbert Hoover, expanding
it to address the nations financing needs.
The RFC Act of 1932 provided the RFC with capital stock of $500 million and
the authority to extend credit up to $1.5 billion (subsequently increased
several times). With those resources, from 1932 to 1957 the RFC loaned or
invested more than $40 billion. As with KfWs loans, its funding source was
the sale of bonds, mostly to the Treasury itself. Proceeds from the loans
repaid the bonds, leaving the RFC with a net profit. The RFC financed roads,
bridges, dams, post offices, universities, electrical power, mortgages,
farms and much more; it funded all of this while generating income for the
government.
The RFC was so successful that it became Americas largest corporation and
the worlds largest banking organization. Its success, however, may have
been its nemesis. Without the emergencies of depression and war, it was a
too-powerful competitor of the private banking establishment; and in 1957,
it was disbanded under President Dwight D. Eisenhower. Thats how the
United States was left without a development bank at the same time Germany
and other countries were hitting the ground running with theirs.
Today some U.S. states have infrastructure and development banks, including
California, but their reach is very small. One way they could be expanded to
meet state infrastructure needs would be to turn them into depositories for
state and municipal revenue. Rather than lending their capital directly in a
revolving fund, this would allow them to leverage their capital into 10
times that sum in loans, as all depository banks are able to do, as Ive
previously explained.
The most profitable and efficient way for national and local governments to
finance public infrastructure and development is with their own banks, as
the impressive track records of KfW and other national development banks
have shown. The RFC showed what could be done even by a country that was
technically bankrupt, simply by mobilizing its own resources through a
publicly owned financial institution. We need to resurrect that public
funding engine today, not only to address the national and global crises we
are facing now but for the ongoing development the country needs in order to
manifest its true potential.
Ellen Brown
Ellen Brown is an attorney, chairman of the Public Banking Institute, and
author of twelve books including "Web of Debt" and "The Public Bank
Solution."