Infrastructure has long been held up as the “Holy Grail” of stimulus. It is, the thinking goes, the investment that taxpayer funds can be channeled toward to miraculously generate jobs and get the economy humming. Despite the “leaky bucket” involved in moving dollars through the government bureaucracy and the likely influence of Washington’s lobbying industry, it is assumed that every taxpayer dollar spent on infrastructure will generate more than a dollar in stimulus.

This is a long bet, but one that’s made easier if you are spending “other people’s money.” Even if the multiplier is not big, or even positive, supporters say there is a benefit to repairing our crumbling roads, bridges, and waterworks. According to the American Society of Civil Engineers, the United States should sink $3.6 trillion into this undertaking. To be against stimulus in the form of publicly financed infrastructure investment is to be an austerity Scrooge and to miss the reality that these investments are prudent—adjusted for risks, their returns are positive. Yet this story fails to consider a few important real‐​world facts.

What if there already exists a significant pool of capital that is looking to invest in infrastructure voluntarily? Where, indeed, the capital providers not only recognize the net upside of these investments, but their very survival depends on the ability of the infrastructure service to deliver positive returns over the long run. And finally, what if this capital is long‐​term capital that matches the long‐​term lives of infrastructure assets? That is, what if the asset‐​liability match is perfectly aligned?

Sophisticated, long‐​term institutional investors such as pension funds, endowments/​foundations, and insurance companies are increasingly looking beyond stocks and bonds to alternative investments to achieve higher returns, diversification, and inflation protection. Globally, these long‐​term investors manage more than $60 trillion in assets.

The appetite for alternative investments (e.g., private equity, hedge funds, commodities, infrastructure, and real estate) is growing rapidly. In 1995, pension funds allocated on average 5 percent of their capital to alternatives; today that share is close to 20 percent, according to Towers Watson.

Following private equity and real estate, infrastructure is increasingly seen by investors as a separate asset class, one that garners a dedicated allocation of capital. Investors can gain access either through unlisted infrastructure funds that pool capital to purchase a portfolio of assets or by investing directly if they have sufficient resources.

What is the attraction of infrastructure? The services it provides are often essential and there are few (if any) alternative providers, which creates a steady demand and thus a stable revenue stream. This essential service nature means the projects are also less affected by the ups and downs of the economy and stock market.

For institutional investors these attributes translate into stable, income‐​oriented returns, often inflation‐​linked, with low correlation with other asset classes. Because they have long economic lives and stable cash flows, infrastructure assets such as roads, bridges, and water supply facilities are well‐​suited to investors looking to match their long‐​term liabilities.

What is transformative about these investors is that they bring with them something that is absent in the present publicly financed model: clear ownership that assigns responsibility, provides an economic interest, and encourages good stewardship. Capital that has a fiduciary responsibility to its underlying fund contributors (e.g., pensioners, payers of insurance premiums) is productive capital—it has an incentive to address poor maintenance and user fees that don’t cover costs, and thus it provides more sustainable investment and job creation than one‐​off, public debt, or tax‐​increasing schemes.

Some of the most active institutional infrastructure investors are based in Canada, Australia, and Europe, but not in the United States. These investors, such as Ontario Municipal Employees Retirement System, which invests over 15 percent of its $58 billion in assets under management in infrastructure, began first in their own backyards, but today are global.

Leo de Bever, one of the pioneers of institutional infrastructure investment and CEO of Alberta Investment Management (which manages $70 billion on behalf of pension, endowment, and government funds), noted recently that the “natural owner of an infrastructure asset is a pension or endowment fund that intends to hold the asset indefinitely.” The long‐​term liabilities, low risk appetite, and tremendous pools of capital make these investors a perfect fit.

Thus, the upsides to relying on long‐​term investor capital for infrastructure are many and significant: productive infrastructure; real, long‐​lasting stimulus and jobs; savings for taxpayers; and stable returns for retirees and other institutional capital providers.

Making the Social Cost of Carbon More Social

BY SUSAN E. DUDLEY, BRIAN F. MANNIX, AND SOFIE E. MILLER

SUSAN E. DUDLEY is director of the George Washington University Regulatory Studies Center, where BRIAN F. MANNIX is a visiting scholar and SOFIE E. MILLER is a policy analyst and editor of Regulation Digest.

On November 1, 2013, the White House released updated values for the “social cost of carbon” (SCC) to be used by various agencies when evaluating the benefits of emissions regulations, energy efficiency standards, renewable fuel mandates, technology subsidies, and other policies intended to mitigate global warming. Use of a uniform SCC reflects an effort to bring some consistency to a vast portfolio of different policies aimed at reducing carbon emissions from sources ranging from power plants, to cars, to household products.

Perhaps more significant than the updated SCC values themselves is the administration’s commitment to seeking public comment on them. Until now, despite President Obama’s commitment to “creating an unprecedented level of openness in Government,” the administration has rebuffed requests to subject the SCC and its underlying models and assumptions to public scrutiny.

Australia has a long tradition of institutional infrastructure investment, which took off in the 1990s with federal and state government privatizing of airports, toll roads, and gas and electricity assets. Importantly, the impetus wasn’t just budgetary; it was also driven by the desire to raise service levels. Today, Australian institutional investors allocate more than $30 billion to infrastructure, including airports, seaports, toll roads, energy, and social infrastructure, with the average allocation of the eight largest infrastructure investors at about 7.4 percent, according to Colonial First State Global Asset Management.

President Obama has publicly committed to addressing climate change through an ambitious regulatory agenda, to be undertaken by multiple federal agencies using a wide range of existing statutory authorities. While the merits of this climate agenda as a whole are debatable, the use of a unified SCC makes sense. The SCC summarizes into a single number (more properly, a range of numbers) a vast array of information derived from scientific and economic research and modeling. All of this information is subject to disagreement and the relationships embedded in the calculation of the SCC are extraordinarily complex, presenting a daunting challenge to anyone trying to arrive at a consensus figure. (See “Pricing Carbon When We Don’t Know the Right Price,” Summer 2013.) Nonetheless, it is worthwhile to try. To the climate, all carbon dioxide molecules look alike, so any cost‐​effective collection of carbon‐​reduction policies must have the same implicit marginal cost. The use of a consistent set of SCC values government‐​wide can discourage government agencies from trying to outbid each other in their efforts to save the planet, resulting in inefficient policy choices.

Need for comment / The influential nature of the SCC value for a variety of future policies, as well as the difficulties and uncertainties of calculating the SCC, demand conscientious attention—including public comment and peer review—to the task of getting it right. Should benefits to other nations be included in the value? What is the appropriate discount rate for considering effects that may occur far in the future? What effects do different economic models and assumptions have on SCC values?

Rather than encouraging a robust discussion of these many important questions, last May the Obama administration quietly released a revised SCC as a “technical support document” (SCC-TSD) produced by an interagency working group. The Department of Energy relied on this revised SCC a month later to support a final regulation setting standards for microwave ovens. The May 2013 SCC of $41.1 per metric ton of carbon dioxide, which is almost double the value of $22.3 per metric ton that the DOE had used in its proposed rule, caused the department’s estimate of the standard’s benefits to increase by $438 million. The Landmark Legal Foundation petitioned for reconsideration, objecting that by making this change without providing the public an opportunity for comment, the DOE violated the Administrative Procedure Act, which has governed regulatory practice for over 65 years. The DOE subsequently sought comment on how it should respond to the petition.

We filed a comment with the DOE encouraging the government to solicit public comment and peer review on the updated SCC before incorporating it into rulemaking. Both the SCC-TSD and the DOE’s decision to incorporate this highly influential scientific finding into its final microwave rule without the benefit of public comment lacked not only the transparency urged by the president, but procedures required by longstanding legislative and administrative directives.

President Obama has “committed to creating an unprecedented level of openness in Government” and identified three principles to achieve that commitment: transparency (which “promotes accountability by providing the public with information about what the Government is doing”), participation (which “allows members of the public to contribute ideas and expertise”), and collaboration. By releasing the SCC as a final decision in a “technical support document” and incorporating it in a final rulemaking without the opportunity for public comment, many objected that the administration not only disregarded those principles and undermined the president’s commitment to open government, but violated the Administrative Procedure Act and established administrative policies.

The May SCC revision raised the estimated social cost of U.S. carbon dioxide emissions by about $100 billion per year. If the United States were using a carbon tax to address climate change, this would amount to a trillion‐​dollar tax increase over the next decade. Instead, that trillion dollars will be placed on the scale of cost‐​benefit analysis, weighing in favor of expanded regulation by the DOE, the Department of Transportation, the Environmental Protection Agency, and all of the other federal agencies engaged directly or indirectly in climate policy. The implications for the economy are troubling, particularly since—assuming they are real—few, if any, of those climate benefits will accrue to the United States.