Toronto, Ontario, Canada
Harvey believes that a middle-of-the-road, surprise-free scenario is reason enough to do something about global warming. There are significant opportunities to reduce CO2 at a net cost savings. Economists argue that if this potential really exists, why isn't it happening now? One key reason is transaction cost. Looking at technical potential and engineering analysis, the potential does exist, so we should look for ways to reduce transaction costs.
Harvey presented a proposal for saving electricity in Toronto with a goal of a 20% reduction in electricity use. Looking at a "frozen efficiency" projection and two other projections, he claims that in the study area, it is in society's interest to reduce electricity use by up to 50%. A program under consideration in Toronto will try to get as much of that identified efficiency potential as possible by overcoming the usual barriers: awareness and credibility problems; lack of coordination among key players, transaction costs, and up front financing.
If there is an economically desirable outcome, private sector money can be used; but financial institutions often lack awareness of energy efficiency potentials. Thus the financing scheme for this program includes a private sector pool and a government pool for loan securitization, up front payments to contractors, and the generating of positive cash flow for consumers by having the costs of financing the retrofits be lower than the savings in utility costs. In addition, by combining gas, water, electricity, and financing costs all into one bill, some administrative savings are realized. Loans are structured a with 20-30% margin of error so savings are generally greater than anticipated. The figure that follows illustrates a financial structure for funding a local plan to reduce greenhouse gas emissions (Figure 6.1).
The government's role in reducing overall risk is to cover defaults through property taxes; anything extra goes back into the pool. That is a significant difference between this program and conventional government subsidies. The system uses the leveraging of a larger pool of capital to reduce risk and obtain lower interest rates; this pooling of money reduces transaction costs to financial institutions The target is maximum energy and water savings. The methods are private sector financing, positive cash flow, and a decentralized structure.
In conclusion, the surprise may be that it is not so costly to reduce CO2 emissions.
