Climate chaos is affecting people everywhere around the world, including in the United States, and it is far past time to do something about it. To avert the most catastrophic impacts of this global crisis, we must transition to net-zero emissions by 2050 by investing in clean energy, electrifying our transportation, improving the energy efficiency of buildings, and removing greenhouse gases from the atmosphere. 

The transition to net-zero emissions will require unprecedented changes in land use and encumber similarly unprecedented investments. For example, MIT estimates that it would take eight million acres of land to meet the 2050 electricity demands of the United States with photovoltaics—that’s only three times the land area of all golf courses in the country, 40 percent of the total area of rooftops, or 16 percent of land area covered by major roadways. While we do not anticipate meeting all electrical power needs this way, these comparisons give us a chance to calibrate the challenge and our expectations about whether we can meet it. We can. 

As to how we’ll pay for it, the global consulting firm McKinsey recently estimated that the transition to net-zero emissions would cost around $275 trillion (about three times the global GDP) in public and private investment in new energy and land use systems over the next three decades, an increase of $3.5 trillion annually from current spending. For comparison, in today’s dollars, we spent around $500 billion over six decades to build the U.S. Interstate Highway System, around $180 billion to rebuild OECD countries in the two decades after World War II, $675 billion to fund the New Deal in the 1930s, and $850 billion for the American Recovery Act in the decade after 2009. In other words, our additional annual investments will exceed the total of all these “once in a generation” undertakings, each of which took a decade or more to complete. But unlike those projects, this effort calls for significant private contributions to supplement unparalleled public investment. 

Whenever we’ve encountered intractable financial challenges—like the infrastructure investment needed to serve two billion new urban dwellers in the next three decades—I’ve always responded with the same four words: the answer is land. Since our inception more than 75 years ago, the Lincoln Institute has obsessed over how land gets its value. In the last few years, we’ve tracked an exponential increase in interest in the potential of land value capture—the public recovery of the share of land value attributable to public actions. Places as diverse as Seoul, Korea, and São Paulo, Brazil, have shown how land value capture can pay for essential but seemingly insurmountable infrastructure needs. We know that investing in decarbonization can increase the value of land, and that the public can then recover a share of this value to pay for the investment itself. 

But while the public sector strives to capture its rightful share of publicly generated land value, private landowners are walking away with even bigger spoils by arbitraging information, something that arguably exerts greater power in determining the value of land. Whether and how policy makers respond to the connection between information and land values will have a huge bearing on how much it will cost to reach net-zero carbon emissions by 2050, and how we pay for it. Which brings us to a slightly different land-based financing tool that is proving effective in countering land speculation and could yield even more revenue than capturing publicly generated values: the land value increment tax (LVIT). Before we delve into that tool, let’s explore the issue it’s meant to address.  

Information lies at the root of private land value capture, often called naked speculation, which has financed land development for centuries. Everyone knows the three biggest determinants of land value: location, location, location. The salient information for land speculation is advance knowledge of what will happen in specific locations. In the 1960s, the Walt Disney Company used shell companies to secretly purchase 27,000 acres of Central Florida swampland at an average cost of $200 per acre to build its Walt Disney World resort. Disney needed only 10,000 acres for the development, but it knew that news of its investment would drive up land prices for the whole region. The company kept its intentions under wraps to capture the land value increment for itself, while it also negotiated with the State of Florida for unprecedented private control of development on its lands. (That agreement is now in peril due to political conflicts with the state.) Once the future development was announced, the same land was valued at $80,000 per acre, a tidy windfall of more than $2 billion on an investment of just over $5 million. Disney leased the extra land to cover the costs of expanding its attractions to include the EPCOT center, among other things. 

The climate crisis and the prospect of mass extinctions have opened a whole new area of land speculation. Reports like the Intergovernmental Panel on Climate Change’s Climate Change and Land, which painstakingly documents both positive and negative climate impacts on land around the globe, are like catnip to investors looking to acquire land that will benefit from climate change. Land with privileged access to scarce resources like water, higher ground for those retreating from rising seas, or critical habitats targeted for conservation are prime targets for speculators. Ironically, environmental advocates unintentionally fuel speculation by producing detailed analytics to guide conservation efforts or to build the political will to promote climate resilience, only to see private investors use the data for profit.  

Leaving ethical considerations aside for a moment, the practical implications of land speculation are devastating. Conserving land to address the climate crisis or mass extinctions is already an expensive proposition. As Christoph Nolte, a social-environmental data scientist at Boston University, notes, the $4.5 billion Great American Outdoors Act of 2020 was designed to provide sufficient funding to protect the habitat for all endangered species in the United States. By his estimates, the funding will protect only 5 percent of the needed land, because land values are already much higher than estimated. 

Every dollar gained by land speculators represents an additional dollar of public, private, or philanthropic investment that will be needed to protect critical habitat or mitigate the climate crisis. If policy makers are serious about mitigating climate change or conserving land and water resources, they cannot allow private investors to stay 10 steps ahead of the public. 

There is one easy way to prevent the astronomical windfalls of land speculation. Among the many effective land policy instruments we’ve studied, the land value increment tax (LVIT)—a well-known and well-tested tool—is best for minimizing land speculation. A tax on realized unearned gains in land values, the LVIT has been applied at rates as high as 90 percent in places like Taiwan, where the tax now ranges from 40 to 60 percent. The revenues generated by the LVIT can be invested in climate resilience or habitat protection, ensuring that increases in land value are used for public benefit. Other land policies, like limitations on foreign ownership of land that minimize international speculation, are good supplements to the LVIT. 

Mitigation of the climate crisis and the prevention of mass extinction will require unprecedented changes in land use across the globe. In past issues I’ve discussed ambitious efforts to protect 30 percent of Earth’s land and water resources by 2030 and half of the planet by 2050. We’ll also need to transform the landscape to accommodate climate migrants and renewable energy production. Without proactive measures to minimize the impact of private land speculation, we will bankrupt the public weal and drain philanthropic coffers before we can make a dent in reducing global warming or protecting any species—including homo sapiens. It is hard enough to build the political will to tackle existential threats. Why would we unwittingly allow others to inflate the cost of our efforts for their own private windfalls? We already know the remedy we need to chill land speculation—an aggressive LVIT. Can we summon the courage to use it? 

A version of this article first appeared in Public Finance magazine, the journal of the London-based CIPFA (Chartered Institute of Public Finance and Accountancy). 

Image: Hsinchu and other cities in Taiwan have used a land value increment tax (LVIT) to counter land speculation. Credit: Sean Pavone via iStock/Getty Images Plus.

Writing during the last Gilded Age, Henry George warned of the social and economic perils of giving away land value increases to landowners who had done nothing to earn them. In this new Gilded Age, wealth inequality coupled with persistently low interest rates is leading to a worsening redistribution of wealth, with a growing share flowing to the asset-rich while a growing share of families is priced out of decent housing. One positive outgrowth of the pandemic is the political will we’ve summoned to deal with two related challenges that have their roots in land policy: the housing affordability crisis and the wealth gaps created by structural racism. 

A consensus is emerging among policy analysts and policy makers that both challenges are the result of exclusionary land policies. While exclusion is the principal driver, it is not the only one. More important, no single remedy will magically call forth more affordable housing and simultaneously close wealth gaps. Dozens of local, state, and national governments—including that of Pasco, Washington, which we recently profiled—are reforming residential zoning that previously permitted only detached single-family dwellings. The logic of this intervention is sound. Single-family zoning constrains development with restrictions like minimum lot sizes. This drives up housing costs and excludes lower-income families from buying or renting in desirable neighborhoods. By relaxing these policies, it will be possible to produce more housing at lower prices. At least in theory. 

Market fundamentalists argue that the financial incentives are so powerful that if we make it possible to build two, four, or even twelve units on a parcel that formerly permitted one, we cannot help but solve the housing affordability crisis through increased production. But there is a big difference between permitting the development of multiple units and multiple units being developed. And there is no guarantee that these units will be affordable. Many unaffordable condos and apartments have been built in high-density locales like New York City, where affordable housing is in critically short supply. A lot of them are vacant. How can places like Pasco keep the same thing from happening? 

Part of the answer has to do with the housing market. As I’ve noted before, housing represents two very different commodities traded in the same market. Each unit can satisfy the demand for shelter for a family or the demand for yield from hungry investors. Often, but not always, a housing unit can satisfy both—when the owner occupies the unit. But more and more frequently, households find themselves competing for available shelter against investors drowning in liquidity. With the exception of a pathbreaking intervention by the Port of Cincinnati that I will discuss another time, the investors usually win.  

As global wealth inequality worsens, the wedge between shelter provision and investment opportunity is precipitating unassailable affordable housing shortages. But not housing shortages. We have some 20 million more units of housing in the United States than we have households, and there are more houses than households in every housing market in the country. Even in a tight market like Pasco, the U.S. Census reports that there are 23,126 housing units but only 22,174 households. The metro market that includes Pasco contains 106,104 housing units and 100,336 households. This oversupply is not vast, but it offers a good illustration: our problem is not supply, but the kind of housing we supply (or allow to be supplied). 

Land, too, is a commodity traded in multiple markets—as an investment good and a good with multiple uses: residential, industrial, commercial, and agricultural. The price of land derives from a complex mix of social, statutory, and economic factors that are almost completely outside the aegis of the landowner. If more people migrate to a city or neighborhood, the land value goes up. If infrastructure improvements are made, like wastewater treatment or accessible transportation, the value of the land goes up. If local policies allow for more intensive development on a parcel, its value will go up. 

Who wins when we allow multifamily construction on formerly single-family lots? Landowners who receive windfall increases in land values are among the big winners. This increase in property values puts nearby homeowners at risk, if it raises their tax bills. If zoning changes aren’t designed to be part of a broader strategy to tackle affordability, they could inadvertently usher in displacement. Planners in Pasco know this and are working on a suite of balanced and comprehensive tactics to keep their community affordable. 

This country’s legacy of racial exclusion further complicates land and housing markets, while eluding all efforts to address it. Historically, deed restrictions, legal covenants, and other overt, but now illegal, practices ensured that people were kept out of neighborhoods based on skin color, ethnicity, or religious affiliation. These were supplemented with blatantly racist finance practices established at the birth of the modern housing finance system. For six decades, we have attempted to confront these forms of structural racism using public policy, with very limited success. It is an important cautionary tale.  

Starting with the Civil Rights Act of 1964, the Fair Housing Act of 1968, and the Equal Credit Opportunity Act in 1974, the nation nominally prohibited discrimination in housing and lending. The Community Reinvestment Act of 1977 imposed further affirmative obligations on regulated lenders to meet the credit needs of their communities. And yet, in 2018 the Center for Investigative Reporting analyzed 31 million mortgages and found that people of color were denied conventional mortgages by regulated lenders at significantly higher rates than whites in 61 metropolitan areas, even after controlling for income and other socioeconomic factors. The national racial gap in homeownership rates is worse today than it was in 1960, when efforts to address housing discrimination began. 

Closing the racial wealth gap will require much more than leveling the financial playing field and producing more housing units. Stable, affordable housing in high-opportunity areas is foundational to the long-term economic success of families. But increasing the housing stock does not necessarily increase affordable housing for lower-income households, nor does it ensure that historically excluded populations will have access to wealth-building homeownership opportunities in thriving neighborhoods.  

In almost every housing market in the United States, we’re producing too much of the wrong kind of housing and letting the existing housing stock slip out of local control. Escalating rents are inspiring conversions of single-family homes to rental units at unprecedented rates. Single-family rental real estate investment trusts (SFR REITs) have become a hot investment. According to CoreLogic, investors acquired more than 25 percent of all the single-family homes purchased in the United States in the last two quarters of 2021.  

A single zoning reform will not change the way the market works, and nothing will stop global capital from bidding housing in desirable neighborhoods away from families that need shelter unless other actions are taken. We need aggressive inclusionary housing requirements that obligate landowners to build affordable housing when redeveloping former single-family sites. We also need to provide and protect opportunities for historically excluded families to purchase affordable homes and build wealth. Rather than giving away additional development rights to landowners, development rights should be sold. Development rights are traded actively in many private and some public markets in the United States. Municipalities could raise billions of dollars by selling development rights, and the proceeds could be used for affirmative efforts to address the racial wealth gap by, for example, providing generous down payment assistance or property tax relief. 

Once we have established a reasonable supply of affordable housing, we need to preserve it. This will require shielding affordable housing stocks from global capital markets. This can be done easily with steeper capital gains taxes imposed on speculative property transactions. In Taiwan, land value increment taxes had a chilling effect on property speculation. 

In addition, deed restrictions can limit future sales prices. Alternative ownership arrangements like limited equity cooperatives or community land trusts can ensure permanent affordability. If we don’t act now, we’ll face continual affordable housing crises in the coming decades. But there is an important caveat: preserving affordable housing by limiting the financial upside will impede our efforts to close racial wealth gaps through homeownership. This illustrates the challenges of intervening in complex systems. Once we recognize the complexity, we can consider tradeoffs to find a practical and acceptable compromise.  

At the Lincoln Institute, we applaud the recognition that land policy sits at the roots of major social and economic challenges. But simplistic interventions in complex land and housing systems will not address these staggeringly complex challenges. We cannot rely on increasing the supply of housing as a silver-bullet solution. We must layer zoning reform with other policies, trying different combinations in an iterative process. As we proceed, we should be mindful of the words of H.L. Mencken: “there is always a well-known solution to every human problem—neat, plausible, and wrong.” 

George W. McCarthy is president and CEO of the Lincoln Institute of Land Policy. 

Image: “Missing middle” housing such as this duplex in Portland, Oregon, can provide more affordable options in formerly single-family neighborhoods, but the zoning changes that allow such housing must also mandate affordability and must be part of a broader housing strategy. Credit: Sightline Institute Middle Homes Photo Library via flickr CC BY 2.0.