Climate change policy strategies, economic growth and financial equity considerations for federal and municipal governments.
Stateside, governmental action and large-scale public policy efforts to address climate change have been stalled for decades by the central contention as to whether efforts to limit greenhouse gas emissions will cause greater economic suffering than the potential benefits of economy-wide mitigation efforts. American conservative political factions and the Republican Party have long held that climate change policy proposals such as the Green New Deal, “[will] kill millions of jobs, it will crush the dreams of the poorest Americans and disproportionately harm minority communities” [1]. At a more fundamental level, among conservative parties in western-orientated advanced countries the “U.S. Republican Party stands alone in its rejection of the need to tackle climate change” [2].
Those supportive of climate mitigation efforts counter these objections by in turn arguing that the framework of fighting climate change at the expense of workers and economic growth is a false choice [3].
As early as 1974, Economist William Nordhaus explained the need to transition from a “cowboy economy” to a “spaceship economy.” In a cowboy economy, “we could afford to use our resources profligately,” and “the environment could be used as a sink without becoming fouled.” Whereas, in a spaceship economy, “great attention must be paid to the sources of life and to the dumpers where our refuse is piled.” Further, Nordhaus explained, “things which have traditionally been treated as free goods – air, water, quiet, natural beauty – must now be treated with the same care as other scarce goods.”
The concept of the free market failing to account for environmental externalities has a long tradition within economics. Even Friedrich Hayek, the prominent neoliberal economist to whom many of the same conservatives embrace for his views against the regulatory state, wrote in his seminal work The Road to Serfdom,
“The price system becomes similarly ineffective when the damage caused to others by certain uses of property cannot be effectively charged to the owner of that property. In all these instances there is a divergence between the items which enter into private calculation and those which affect social welfare…. Nor can certain harmful effects of deforestation, or of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question or to those who are willing to submit to the damage for an agreed compensation. In such instances, we must find some substitute for the regulation of the price mechanism.”
The International Monetary Fund, in its 2020 World Economic Outlook report entitled A Long and Difficult Ascent, attempts to address both the mix of policy mechanisms required to address catastrophic climate change, the greatest environmental externality yet identified, in addition to estimating whether these mitigation policies will indeed greatly damage the economy and harm workers. The IMF also examines corollary policies to provide economic support for those must vulnerable in the transition to a low carbon global economy.
Chapter 3 of the Economic Outlook report – “Mitigating Climate Change – Growth and Distribution-Friendly Strategies” outlines different mixtures of policy programs to reduce global carbon emissions to net zero by 2050 with a focus on the political feasibility and likely constraints on policymakers to enact the recommended mitigation policies. Specifically, the chapter asks two questions and sets about to answer those questions:
“Which combination of policy tools – carbon pricing, a public and private investment push, research and development subsidies would allow the world to reach net zero carbon emissions by 2050 in a growth, employment, and distribution friendly way?” and, “Can well-designed and sequenced mitigation policies help with the economic repair from the COVID-19 crisis?”
Since the onset of the industrial revolution, global temperatures have increase 1° Celsius above the pre-industrial era as a result of heat-trapping greenhouse gasses collecting in the atmosphere. Under current emissions trendlines, global temperatures are estimated to increase at an average annual rate of 1.7 percent, resulting in an additional 2-5°Celsius by the end of the 21st century. Each decade since 1980 has increased in average temperatures compared to the previous decade and the past five years (2015 – 2019) were the hottest on record with 2019 estimated to be the second hottest year recorded.
Without global intervention and coordination to reduce emissions and improve these trendlines, the planet will experience carbon dioxide levels and reach temperatures not seen in millions of years. As greenhouse gas emissions continue to accumulate and temperatures rise, increased damage is caused to the earth’s systems. Such damage is evident in more frequent and more powerful weather-related natural disasters. Further, evidence is mounting that the world is edging closer to irreversible changes, such as melting ice caps and rising sealing levels. These “tipping points” are closer at hand than original estimates predicted.
As the IMF notes, “damages from climate change include (but are not limited to) lower productivity due to changes in the yield of agricultural crops and fish farming and hotter temperatures for people working outside; more frequent disruption of economic activity and greater physical destruction of productive capital, infrastructure, and buildings as a result of more frequent and severe natural disasters and (for coastal areas) the rise in sea levels; deterioration of health and possible loss of life due to natural disasters, and increased prevalence of infectious diseases and diversion of resources toward adaptation and reconstruction.”
To avoid the worst of the predicted impacts of global warming, scientists warn temperature increases need to level at no more than 1.5° to 2° Celsius above preindustrial temperatures. In a business as usual scenario without international mitigation efforts, one third of the planet’s population will experience average annual temperatures north of 29° Celsius (84.2° Fahrenheit) by 2070. Currently, average temperatures this high are experienced in only 0.8 percent of the planet’s land surface, primarily in Africa. These temperatures will spread to 19 percent of the earth’s landmass by 2070 without mitigation.
In order to achieve the 1.5° to 2° Celsius warming target, net carbon emissions must decline to zero by mid-century. Carbon emissions must be eliminated, or any remaining emissions must be removed from the atmosphere through either natural carbon sinks (forests, oceans) or technological innovations such as carbon capture and storage.
The 1.5 to 2° target has been endorsed by the participating nations in the 2015 Paris Agreement. However, for most of the participating countries, the “Nationally Determined Contributions” (NDCs) pledged under the Paris Agreement are regarded as inadequate to achieve the 1.5° to 2° Celsius warming target. Nearly all Paris signatories are revising their NDCs prior to the 2021 UN Climate Change Conference. Approximately 70 countries have thus far committed to net zero emissions by 2050.
A global decarbonization strategy requires both improvements in energy efficiency, as well as greater usage of low-carbon energy sources to displace fossil fuels. Direct incentives must be provided to encourage adoption of low-carbon energy and efficiency measures by making the research, development and overall cost of these technologies cheaper. Carbon-intensive energy must also rise in cost relative to low-carbon energy and on an absolute price basis.
As is, fossil fuels are hugely underpriced. Current price levels do not reflect the environmental costs (air and water pollution, global warming). If these externalities were reflected in fossil fuel prices, as Hayek, Nordhaus and other economists have long recommended, additional cost estimates range from $305 billion to $4.7 trillion (6.3 percent of global GDP) in 2015 dollars. These dollars amount to a global fossil fuel subsidy.
… revenues derived from carbon taxes are projected to produce enough revenue to finance both green infrastructure investments following the period of debt financing and the recommended cash transfers to low-income households around the world.
REACHING NET ZERO BY 2050
The IMF proposes a comprehensive package of policies to achieve net zero emissions by 2050, with a focus on growth in the short term and financial transfers to households to protect low-income workers and those working in carbon intensive industries.
The operational goal of these policies is a net 80 percent reduction in gross global emissions by 2050, with the remaining 20 percent emissions negated by natural carbon sinks (forests) and the deployment of “negative emission” technologies. Further, each country will need to achieve the 80 percent emission reduction target, will little variation between countries, regardless of development status or cumulative historical emissions.
The policy package has upfront macroeconomic targets to help the global economy recover from the COVID-19 epidemic and to garner broad popular support. Carbon price increases are gradually phased-in along with compensatory financial transfers to low-income and impacted households.
Specifically, the IMF calls for an 80 percent subsidy rate on renewable energy production and a 10 year “green public investment program” starting at one percent of national GDP and declining to zero after 10 years. These investments are focused in the energy, transportation, infrastructure and real estate sectors. Renewable and low-carbon economic sectors also have the benefit of being job-intensive industries, particularly compared to employment in coal and natural gas production.
The IMF calls for this global green investment program to be financed through debt for the first decade. Governments should take advantage of the low-interest, low-inflation economic environment. Supporting green investment through debt issuance is seen as broadly popular as opposed to financing the program via tax increases.
Carbon pricing is implemented and calibrated to achieve the 80 percent reduction in emissions by 2050 and accounts for projected emissions reductions from the green investment program. The IMF recommends a per ton CO2 price of between $6 to $20 per ton, depending on the country, with a seven percent annual growth rate. Carbon prices reach between $10 and $40 per ton of CO2 by 2030 and between $40 and $150 per ton of CO2 by 2050. Under the IMF plan, the price of carbon continues to grow until 2080.
The IMF estimates that under their mitigation program, the transition costs to a low-carbon economy are “moderate” with both the green fiscal stimulus and carbon pricing integral to a successful transition. The policy package increases global GDP growth by 0.7 percent in the first 15 years of implementation and thus supports the economic recovery from COVID-19. Green fiscal investments directly increase GDP through higher investment spending and boosts economic activity by stimulating greater aggregate demand.
The stimulus also indirectly moderates the transition costs to a low-carbon economy by reducing the emissions baseline, improving productivity via green infrastructure, juicing research, development and the creation of low-carbon technologies, as well as stimulating private investment in low-carbon economic sectors. Once carbon pricing ramps up after year 15, the program reduces net output and GDP growth is lower by one percent relative to baseline in a business as usual scenario.
However, the projected losses in GDP are miniscule as the IMF estimates cumulative global economic growth of 120 percent for the next 30 years. From 2050 forward, having achieved net zero carbon emissions, the global economy benefits from avoiding lower productivity as a result of higher temperatures and more frequent and powerful natural disasters. Net output gains are estimated to escalate substantially after 2050 and reach a net 13 percent of global GDP by 2100 compared to the baseline no mitigation scenario.
The IMF states, “the benefits of climate change mitigation in the form of avoided damage grow larger, and the policy package boosts GDP and growth substantially above their baseline levels.”
Climate change mitigation policies impacts on global employment mirror those on economic output. Global employment is increased, at first, by 12 million each year on average between 2021 and 2027. After 2027, employment declines slightly compared to the business as usual baseline. Despite the comparative decline to the baseline, employment growth is strong through to midcentury. An estimated two percent of global jobs will reallocate from high-carbon to low-carbon job sectors, and these workers will require reskilling and government support.
A third pillar of the IMF mitigation program calls for redistributing carbon tax revenues in cash transfers to the bottom two quintiles of households in each country. These funds will compensate the most vulnerable for higher energy costs and negate much of the effects of carbon taxation, while allowing these households to raise their consumption. The IMF recommends each nation structure a cash-transfer program focused on the lowest income earners and households, as a matter of equity and inclusion and to ensure broadly popular global political support for the mitigation programs.
The IMF recommends redistributing one fourth and one six of carbon revenues, respectively, to the lowest quintile of earners in the United States and China. 55 percent and 40 percent of carbon tax revenues would need to be diverted to protect consumption of the lowest two quintiles in the U.S. and China.
Overall, revenues derived from carbon taxes are projected to produce enough revenue to finance both green infrastructure investments following the period of debt financing and the recommended cash transfers to low-income households around the world.
The fight against climate change is not zero sum. Governments can design effective programs to reach net zero carbon emissions and structure these programs to both enhance economic output and employment and expedite the recovery from the COVID-19 pandemic, while protecting those most vulnerable in the transition to a low-carbon future.
NICHOLAS EPSTEIN, BA, MPP is a U.S.-based public policy, government affairs, commercial real estate and economic development professional. Nick advises real estate development, investment and private equity firms on complex development and transaction assignments. He possesses significant expertise on zoning and entitlement issues. He also works extensively with state and local governments on public policy and economic development initiatives and structuring public/private partnerships. Nicholas c0-founded and serves as a Principal for his firm BrickWright, a real estate development and investment firm. Nicholas is passionate about good policy, economics and effective government and writes about the latest research on these subjects. Nick can be contacted via any of his linked socials: LinkedIn | Twitter | Facebook | Instagram.
[1] https://www.businessinsider.com/president-trump-declares-war-on-aoc-green-new-deal-2019-7
[2] https://www.theguardian.com/environment/climate-consensus-97-per-cent/2015/oct/05/the-republican-party-stands-alone-in-climate-denial#comment-60800586
[3] https://www.newyorker.com/news/news-desk/the-false-choice-between-economic-growth-and-combatting-climate-change
