Incentive Interventionism

Detroit goes to Kyoto

Naomi Klein chronicles a chilling new chapter of unfairness called “disaster capitalism” in her recent book Shock Doctrine. When crisis hits there are a team of people looking to take financial advantage from the chaos, often displacing original inhabitants or at least at their expensive. But there must be a way to reverse this effect - where crisis can turned to our collective advantage. This idea is called Incentive Interventionism.

Let’s first look at cars. Detroit needs money badly, Obama wants climate protection. Let’s sign the big three up with Kyoto, meaning that the fleets they produce need to meet the GHG reductions (compared to baseline 1990 emissions) on an annualized schedule. If they do meet the targets, then they pay the government the prime lending rate. If one of the car companies fails to meet the target, for every percentage off, the interest rate increases by a percentage point for the upcoming year. If any of the car makers can exceed the Kyoto reductions for their total fleet, then their interest rate is reduced. If you were only building plug in hybrids, you would pay zero interest.

The lesson from the past is that government intervention in business is worst when the government dictates what producers should make and as little as possible should be done to interfere with markets functioning. But climate change has created a new environment for production and the transport sector, we need to internalize pollution costs of we are going to trash the atmosphere and the biosphere right after it.

What Incentive Interventionism does is permit GM to continue to make Hummers, if that is where the big money market is. But they have to convert the rest of the line to compensate for the pollution – or they pay the fine. But by internalizing the cost of pollution, Detroit will adapt, retool and we will have cleaner cars. And there will be tremendous pressure on brands like Hummers, which their must be if we are to address the reduction of petroleum products.

The banks need money, the oversight is not working, Obama wants to sign Kyoto, how can all these end come together. For all the praise which was being heaped on Paulson, from where I sit it just appears to be another record Bush administration transfer of wealth from poor people to rich people. Bank executives and shareholders are benefiting from Paulsons lack of conditions, holding govt money, buying other banks with it – doing almost everything except what they agreed to do with it. The oversight is not working, because it is being designed after the loans are handed out.

We need to condition these loans and also link them to Kyoto. The condition is that some specified fraction (say 70%) of the government money given to banks must actually go into loans granted in the next 12 months. When those loans are for construction or energy facilities or other GHG emitting activities, the bank must estimate what these loans look like as a fraction of their overall portfolio. Again link loan repayment rates to performance against Kyoto goals.

Some rousing ending about new models for new times and new leadership – or something

PS Will points out that simply taking ownership stake in these companies (which apparently Paulson is starting to do) might be enuf and that the UK and other countries have used this as part of their bailout packages. Not surprisingly, i like my bld plan better, but Wills maybe more accessible

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