“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

                    – F.A. Hayek

Financing that improves the value of commercial property and helps pay for itself with no upfront costs sounds like a late-night infomercial gimmick. However, this is precisely what Commercial Property Assessed Clean Energy (CPACE) loans claim to do.

CPACE financing is used for improvements that could help lower upfront costs for energy efficiency, use less water, or make buildings more resilient to extreme weather conditions and natural disasters. It does so by funding projects such as heating ventilation air conditioning (HVAC) upgrades, installation of solar thermal capture systems, and irrigation-free landscaping upgrades. The first of these loans in Oklahoma was made in southeast Tulsa for a new hospital. The loan funded many improvements including LED lighting and energy-efficient windows.

CPACE loans use private funding to pay for these improvements. The private loans (CPACE) payments are made as an addition to county property taxes and are paid annually. Combining the payments with taxes grants these loans a unique quality so they seem more secure and allows for longer terms. The loans can be up to 30 years or the average useful life of the improvements. The loan also attaches to the building rather than the borrower. Therefore, if the building is sold, the improvement loan transfers to the new owner of the building.

The unique privileges provided through CPACE funding do not achieve its set objectives and actively reduce the free-market’s capacity to realize more sound solutions. While some of the improvements could reduce the amount of energy used or make the building more efficient, it also removes money from research that could result in more innovative technology. Because these loans are funding the less effective innovations, there is less incentive for the market to find better solutions. Eliminating CPACE funding would allow the market to function properly, addressing these needs without a dedicated loan to incentivize solutions artificially.

For example, if the government had decided to grant loans to fund improvements to phone lines, the result would be improved landline phones, while simultaneously diverting resources away from developing more innovative communication technology. Disruptive technology such as cell phones would have probably been invented, but likely would have taken longer. The incentive to research a new technology would have been reduced.

The unique terms of CPACE financing, particularly the length of the loans, make them seem more affordable but they can negatively impact additional improvements. The longer term is used so that the improvements can help payback for some of their cost. While the improvements could reduce some utility bills, it’s impossible to forecast for the life of the loan. If someone purchased a car thirty years ago and was still paying for it today, that person would be paying for a worn, drastically outdated technology. It’s likely that a thirty-year-old car would need to be replaced, but borrowers would still be stuck paying for it. The lifespan of a car or the relevance of technology is dependent upon current innovations. Unlike buildings or land, which do not drastically change from year to year, the rate of current innovation makes long-term loans for current technology disadvantageous.

So far, CPACE loans are only being used in Canadian, Cleveland, and Tulsa Counties in Oklahoma. The program is available for other counties to join. It currently has the opportunity to restrict economic progress in a small part of Oklahoma, but if adopted in other counties the impact could increase dramatically.

The effect of a policy should be evaluated not only by what is happening today, but also by what is not happening today. While the current economic effect includes facilitating the implementation of today’s technology and temporary employment through improvements, the policy also results in a lack of economic progress through innovation and technological advances. If the financed improvements were needed and cost effective, there would be no need for the CPACE loan program.

Jason Lawter is Fiscal Policy Fellow at 1889 Institute. He can be reached at [email protected].

The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.