Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 19 February 2019

How to pay for the Green New Deal

The Green New Deal has recently been promoted by a group of Democrats including the inspirational Alexandria Ocasio-Cortez. I first came across it in a report in 2008 by the Green New Deal group, most of whom are pictured above a decade later (HT Andrew Simms). The view that we face a potentially existential climate change crisis, which politicians seem currently reluctant to sufficiently tackle, and which therefore requires a government led programme on the scale in each country of Roosevelt’s New Deal, is something I share.

Why a New Deal? What is wrong with treating climate change as we would any other kind of pollution, with a mixture of regulations, taxes and subsidies? I think the answer is put rather well at the end of an article in the Economist (HT Laurie Macfarlane) which seemingly complains about the Green New Deal’s departure from what it calls ‘economic orthodoxy’. They write

“In fact, the criticism of the economic approach to climate change implicit in the Green New Deal is not that it is flawed or politically unrealistic, but that it is a category error, like trying to defeat Hitler with a fascism tax.”

I would put it in the following way. Tackling climate change is resisted by powerful political forces that have in the past prevented the appropriate taxes, subsidies and regulations being applied. Which is a major reason why the world has failed to do enough to mitigate climate change despite decades of warnings from scientists. You need something like a Green New Deal to push aside those vested interests, and get the right taxes, subsidies and regulations into place. Just as proponents of a Green New Deal are savvy about the need to overcome the resistance of, for example, the oil and gas industry, they also realise that the Green New Deal needs to be politically popular. So the New Deal package has to include current benefits for the many, perhaps at the expense of the few.

What the most effective measures are to mitigate climate change, and perhaps other global environmental disasters, is a fascinating topic. We can learn a lot from the successes so far. Solar energy is now at least as cheap as coal, oil and gas, but this was not always so. It required substantial subsidies or state help for initial development, despite protests that solar energy would always be too expensive. Once a technology is widely used it tends to get cheaper to produce because innovations continue when a mass market emerges, and that is what happened with solar energy. It is impossible to pick winners in advance, so we need to try a number of things some of which will fail. Partly because of those failures a great deal of the required research and development must come from the public sector. No stone must be left unturned when the future of humanity is at stake.

Which all sounds rather expensive, and in particular will require large amounts of public money. An interesting and important issue is how this should be paid for. In the scheme proposed by among others Thomas Piketty, higher taxes on multinationals, millionaires and carbon emissions generate funds to tackle poverty, migration, and climate change. Others have suggested that this spending is better funded by borrowing or creating money. To examine who is right, I want to talk about some of the work of John Broome, an Oxford philosopher and economist.

John Broome was a key advisor to the Stern review on climate change. He argued, and Stern agreed, that we should not discount the welfare of future generations as much as market interest rates appear to do. The reason is ethical: the current generation had no justification for valuing the welfare of the unborn less than their own welfare. This helped Stern to recommend much more current action on climate change than other US based analysis. As Broome emphasised, the key argument here was ethical not economic.

In terms of the funding debate, ethical arguments are also critical. The polluter pays principle suggests that the current generation should pay to mitigate the impact of the pollution they cause. So we should all be paying more for energy, for example, so that the carbon used to produce that energy is priced to reflect its impact on climate change. The idea that the polluter should pay makes economic and ethical sense. It embodies an idea of fairness that most people would accept.

Unfortunately this does not work well enough in practice because those with an interest in selling more carbon and their political allies make people doubt that climate change is real. In addition the connections between the prices people pay and the emissions that cause climate change are often not transparent. So how do you deal with societies that for these reasons fail to pay enough to mitigate climate change?

The argument that Broome put forward (following work by Duncan Foley) is that measures to tackle climate change can be funded by issuing debt. This breaks the polluter pays principle, but it can still lead everyone to be better off (what economists call a Pareto improvement). If government debt rather than taxes are increased to pay for, for example, investment in greener infrastructure the current generation gets away with not having to pay. If future generations have to pay back the debt used to pay for these measures, that cost falls on them, but it is more than matched by the benefits to them because of the climate change avoided as a result. In other words if you cannot make the polluter pay, it is still better to take action to stop climate change even if future generations have to pay the cost of that action.

The case for using government debt to fund the Green New Deal has been strengthened by recent observations by Olivier Blanchard. He noted that interest rates on government debt have over the last half century been below the growth rate of GDP. What this means is that a one-off increase in debt may not require higher tax rates in the future, because that debt as a share of GDP will gradually shrink.

If both these reasons for using debt finance to partially pay for the Green New Deal fail to convince, just think of it this way. No one in a 100 years time who suffers the catastrophic and (for them) irreversible impact of climate change is going to console themselves that at least they did not increase the national debt. Humanity will not come to an end if we double debt to GDP ratios, but it could come to an end if we fail to combat climate change.

All this means that the question of how a measure is financed should never prevent that measure being implemented if it has a reasonable chance of reducing climate change. The whole point of the Green New Deal is that measures should be judged on how effective they will be at achieving their goal, and not on whether they can be afforded. Funding through taxes should be the first option because the polluter should pay, but if this is not politically possible then government debt should increase.

What are the chances of either of the two main political parties implementing a Green New Deal in the UK? It is hard to see a Tory government doing so because of its aversion to debt finance, its neoliberal reluctance to have government lead the way, and because the party contains many climate change deniers. The Labour party is much better placed, and has already set out plans to create its own Green New Deal. Crucially their fiscal credibility rule makes the distinction between current spending that does need to be covered by taxes in the medium term and investment spending that does not, because future generations benefit from that investment. The Green New Deal is all about investing now to improve the welfare of future generations.


  1. One way to combat climate change would be to slow down or better reverse economic growth in the developed world, for instance by making apparently nonsensical macroeconomic decisions. The Great Recession definitely caused a slow-down in CO2 production. Perhaps you could explain why someone who regards climate change as an existential threat shouldn't welcome Brexit and the consequent disruption to long-distance supply chains? (Serious question).

    1. Either you are a troll or too stupid to interact with.

  2. When you say that with debt it would be a future generation who paid, don't you really mean to say that the future generation would pay (and receive) interest payments, and it's the paying of interest on government debt that would create the deadweight loss borne by future generations? Wouldn't the current generation still be paying what we might consider the principal in the form of less current period consumption and more current period investment (a.k.a., deferred consumption)? Of course, that doesn't mean less GDP, it simply means that there would be less current period consumption. And that could be a problem because people probably care more about current period consumption than they do current period income...especially if you have an aging population with a very high personal discount rate.

    A second concern is that increasing current period investment towards greener future capital investment might very well in itself increase the amount of carbon we dump into the atmosphere. For example, if we use carbon intensive capital to create less carbon intensive products in the future, there's not guarantee that the net result would be less carbon 100 years from now. The point is that you have to account for the temporary increase in carbon inputs needed to make greener future products.

    Finally, while it's true that predicting winners is always tough, we might not be able to let a thousand flowers bloom because each one of those dying and failed blooms adds carbon to the atmosphere. So government will have to do a lot of pruning in that garden.

  3. Economically it’s about socializing negative externality. This is a sensually rent extraction. But imposing true price is insufficient. Substitution is required.

  4. Carbon offsets don't work. They don't reduce global emission while making those paying carbon taxes feel better. See "The inconvenient truth of carbon offsets", by Kevin Anderson. Putting a real dent in carbon emissions needs alternative sources of energy cheaper than burning coal. It's unfortunate that the west isn't so interested in nuclear power now as a few decades ago. Technology has gotten a lot better and there are now much better ways for bury the radioactive waste (holes drilled using fracking tech seem to be a good option that didn't exist before). Solar power is brought up often but with little discussion of how much pollution batteries may cause if we fully shut down coal plants.

    1. No. Anyone who suggests putting nuclear waste in holes drilled by fracking technology isn't living in the real world.

  5. The way to attack climate change in the US is to include a highh revenue-neutral carbon tax in an omnibus budget deal and have a Democratic President refuse to sign a budget that doesn't include it. The tax should be offset with income tax deductions.

    The Green New Deal idea is perhaps the worst idea, politically, I've seen in a long time. It feeds the fear-mongering right-wing narrative about climate change legislation being an interventionist Trojan horse, representing vast overreach, which is exactly what it would represent. This idea is dead on arrival with all, but the more progressive liberals.

    Worse, it's bad economics.

    Worse still, the US needs a much more comprehensive program of new entitlements that should be part of a general new New Deal. It should include a shorter work week, a $10k/year UBI, and minimum hourly compensation at $12/hour via wage subsidy. Eliminate all existing social welfare programs that would now be obsolete. Then, either institute some kind of single payer healthcare plan, or completely deregulate the healthcare market and end all direct subsidies. Allow people to draw on future UBI benefits up to the present value of all future payments to the average life expectancy to pay for healthcare expenses and allow people to share withdrawals for such expenses. Or, go with a Singapore-type system.

    Also, make up for lost time in enforcing anti-trust laws and increase competition among web search, social networking, internet service, cable TV, financial service, and medical product and service providers.

    Don't ruin the New Deal rhetoric with a green New Deal plan that will scare off independent voters. This is a terrible idea polopolitic and substantively.

    1. I see you drank the UBI cool-aid hard. This post is a mash up of your own personal pet (bad)ideas - few of which have anything to do with climate change. I agree about single payer, but your alternative is nonsense. You live in a fantasy world in your head.

  6. There is a widespread assumption, made by SWR here, that a full energy transition will be very costly and require large and politically difficult sacrifices. The assumption is wrong.

    The 5th IPCC report concluded that the overall GDP opportunity cost would be insignificant. This finding has been repeatedly confirmed. There are now three independent modelling exercises for a 100% renewables energy scenario (Jacobson/Solutions Project, Energy Watch's German/Finnish team, and the German-Australian One Earth Climate Model). They all say the same thing. There are more studies for single countries: one of the Fraunhofer institutes for Germany, and Andrew Blakers for Australian electricity. The Blakers model is striking, as he took an extremely conservative technological baseline - just wind, PV solar, HVDC transmission,and pumped storage, all fully mature technologies with known costs. Even so, the transition is feasible and the resulting electricity price lower than the current coal-heavy one. If any of a raft of new technologies pans out (CSP, EGS, V2G, P2X, grid batteries, demand management ...), they can be added if they lower system costs. None is indispensable.

    Add in the huge avoided health costs from air pollution (over $4 trn per year, from an incomplete and now outdated study by the OECD), and the transition is a massive free lunch.

    What is required is not so much a huge WWII increase in spending on clean energies, but a reallocation of the trillions currently gong into maintaining the unsustainable fossil fuel system. Its economic power translates into political and cultural influence. The facts I have cited (a pity I could not give the links here) will come as a surprise to many of the highly educated readers of this blog. Ask yourselves: where exactly did you get the idea that renewable energy is still expensive, or faces a difficult and unsolved problem of storage to firm the variable output? Who funded your sources of misinformation?

    The rhetoric and policy energy of the GND may be needed not to generate new resources but to impose the death penalty on fossil fuel interests. Perhaps the oil, gas and coal industries should be nationalised everywhere, with a mandate to go slowly out of business. At least it would get them to shut up.

    I readily concede that that there are a limited number of areas where the technology is not yet shovel-ready, and a much greater public R&D effort is needed. They include conservation agriculture, direct iron reduction with hydrogen, low-carbon cement, high-density batteries for aircraft, ammonia or fuel cell propulsion for ships, and large-scale carbon sequestration using mineral carbonation or ocean dumping of biomass. But don't tell me we can't already go to 90% renewable electricity, electric cars, vans and trucks, and heat pumps for buildings, using stuff that's already on the market.

  7. " ... If future generations have to pay back the debt used to pay for these measures, that cost falls on them ..."

    If the government issuing the debt securities is a monetary sovereign, then it's not really debt at all, and therefore nobody has to pay it back at any stage. The reason being that the government never has any difficulty servicing the interest payments .. never! And the "debt" may be effectively rolled over, in perpetuity. Whenever a security reaches its term the investor may roll it over, or alternatively if it is cashed in then the government can (and usually does) issue replacement securities - at a price too good to refuse.

    Better to think of these financial entities as a form of broad state fiat money, interchangeable with banking reserves. Moreover the public deficit is a private sector surplus, which facilitates private saving, investment and spending. And the net financial assets created for accommodating government deficit spending are absolutely required for the healthy operation of the economy.

  8. Interesting.

    To reduce global greenhouse gas emissions (GGE), we need more people to have greater access to natural gas and oil.

    For readers in Canada (especially Western Canada), this article is likely not to break new ground, but for my UK contacts, this may be both new and seem counter-intuitive. Bear with me, there is good logic and data to support the argument.

    First off, this is not a polemic against renewable energy. Far from it, increasing the production of energy and distribution of energy from these sources is a sin qua non of reducing GGE. However, both the production and distribution of this energy requires very sophisticated technology, with attendant requirements for maintenance by trained people and capital outlay.

    To get the same amount of energy you would need 144 metric tons of wood versus 30,000 cubic metres of natural gas. If you compare the values of suspended particulates, hydrocarbons, and carbon monoxide of biomass or wood to natural gas or distillate oil. Wood is pretty nasty stuff.

    In September 2010 the International Energy Agency, the UN Development Programme, and the UN Industrial Development Organization released the "Energy Poverty: How to make modern access universal?" report. In that report they stated that there were 1.4 billion people around the world that lack access to electricity, while 2.7 billion relied upon biomass for energy. It's worth noting what biomass means in this context; wood, agricultural crops and waste products after harvesting, animal manure, and human sewage.

    Yep. You read that right. People are using manure and sewage as their primary household energy source.

    To give you some idea of global energy poverty, the Energy Poverty report produced a chart that the distribution across Latin America, Sub-Saharan Africa, and the Far East. The numbers are staggering.

    In Africa it's estimated ( that between 6 to 9 million tonnes of biomass are burned each day. Significantly higher amounts of carbon monoxide and nitrogen oxide are produced burning biomass than natural gas or distillate oil. Moving from wood or coal to distillate oil or natural gas would be a vast improvement on GGE, would be far easier rather trying to move sub-saharan Africa to more technologically dependent alternative resources, meet the Paris Climate Accord targets, and reducing anthropomorphic climate change. Then there's the other positives on health, education, and the wider economy.

    In Africa the majority of biomass is collected by women; who spend many hours foraging, carrying, and tending fires. So they are more exposed to the harmful effects of burning biomass, spend their days in drudgery and do so from a young age. Their health suffers massively from the effects of gathering and using biomass. The UN report above showed a clear link causal link between sub-Saharan woman, biomass, poor health, and shortened life expectancy. The report also showed a casual link between children's education and energy poverty; where outcomes are far lower as children also send significant amount of their time collected, as they cannot have proper lighting, nor use computers. You can extend this to healthcare, where adequate electricity is absolutely needed to build, maintain, and operate hospitals and clinics.

    While many conservationists would argue the world needs to be weaned off its dependency on oil and gas, this would condemn billions to lives that are nasty, brutish, and short. Too often this perspective seems to be formed by those in the most developed nations, who have access to alternative renewable energy sources, and ignores the plight of those for whom no oil and gas would be to condemn them to poverty.

    Getting distilled oil and natural gas to these markets, constructing facilities to produce power and a network to distribute the power, would dramatically reduce GGE globally, help raise poverty levels, and provide for better healthcare.

  9. The obvious alternative is to simply issue the currency to fund the Green New Deal, Medicare for All (talking about the US), free college trade school for all), and a Job Guarantee. Inflation shouldn't be a problem as long as there are unutilized resources in the economy (unemployed folk) as business people go wakey wakey, hire them, and produce goods and services to offset the added money issued. If you blow past full employment then:

    the law has to include automatic, across-the-board, tax increases that kick in when certain monthly wage inflation target are hit. These can include:
    a) Income Taxes,
    b) Sales / VAT Taxes
    c) Asset Value Taxes (or Wealth Taxes)
    That'll cool things off pronto. The taxes can be inserted into the Job Guarantee law so they kick in automatically if monthly inflation exceeds a certain level for say 6 months in a row.

    Easy Peasy

  10. 1) The UK government is unlike a:
    a. state,
    b. municipality,
    c. business, or
    d. household,
    in that it can issue its own currency.

    2) A sovereign (Treasury combined with the Central Bank), like the UK, that:
    a. issues,
    b. borrows in, and
    c. floats
    its own currency, can NEVER run out of cash.

    3) The sovereign, like the UK, can:
    a. issue currency to spend and buy anything the economy produces,
    b. up to the productive capacity of the economy (adjusted for turnover/velocity),
    c. without creating inflation.

    In other words the UK government can issue currency and hire any and all unemployed and underemployed folk. The constraint is the productive capacity of the economy, as measured by wage inflation. If prices do rise above an acceptable level, they can be controlled by i) selling government securities, ii) raising interest paid on deposits at the fed, iii) raising taxes across the board (on income, sales/vat, and asset values), or iv) a cut in spending.

    4) The UK government debt is not a problem in any way shape or form. In fact, it can be repaid tomorrow without a negative repercussion. That would simply involve replacing government bonds with deposits at the Central Bank with similar interest and maturities. The similar or even better risk/reward terms assure no change in investor savings/spending preference or desire to hold dollars. Not recommending this course of action, just pointing out that it is possible.

    Private Debt, by the way, can be a problem and is largely responsible for many of our recessions.

    1. There is a second constraint which is the balance of payments.

      A developed country can produce most goods and services itself, but not all of them, and not always as cheaply as imports.

  11. 'Partly because of those failures a great deal of the required research and development must come from the public sector' - as an Economist, you seem to have a funny idea how life works. Look around you (outside the College walls) and you will see that private enterprise takes those risks every day. That is what has made the world around you, and why we can afford to have professors etc.
    Anyway, now that solar is at the same cost as coal power, why does this green deal need to be 'paid for'?

    1. To accelerate its adoption. we are running out of time.

    2. To accelerate its adoption. we are running out of time.

  12. I agree. But can I take issue with the statement that 'it is impossible to pick winners in advance'?

    Almost all economists have this view but one of the principles of any Green New Deal is that we can, in fact, already see the outlines of the energy system of 2050. (PV, wind, geothermal, some biogas, batteries, EVs, power-to-gas and power-to-liquids).

    The cost reductions in these technologies seem strikingly predictable and largely driven by accumulated manufacturing 'experience' or 'learning'. The role of the GND is to focus on these energy supply/energy transformation and use cash now to increase the rate of cost decline. At 'experience curve' declines of around 20% - certainly the case for solar, wind and batteries - there is probably no societal cost whatsoever to huge incremental investment. We are just using capital now to bring forward lower energy prices. Whenever I look at the rough numbers, my calculations show net cash benefits to society very quickly.

    Just to restate my point, if I may. Economists always advise 'don't try to pick winners'. Unfortunately this tagline is often used by existing lobbies to defend vested industries. Economists might instead think of saying 'use reasonably reliable forward extrapolation to pick winners' and then work out the optimal rate of capital investment to drive down costs at a rate consistent with any assumed social discount rate, whether it is Stern's or HM Treasury.

    Thank you for this very stimulating article.

  13. It's very unusual for Simon Wren-Lewis to make a mistake, which is why I have followed his blog for several years. Plus I am going to nominate him for a gong (whether he likes it or not).

    However in his para starting "The argument that..." he falls for the popular myth that if something is funded via debt, the future generations have to pay, in that they have to repay the debt. That idea doesn't just break the laws of economics: it breaks the laws of physics. To illustrate, if a bridge is built in 2019, the blood sweat and tears needed to build the bridge and the steel and contrete used in its construction absolutely have to be sacrified in 2019 or earlier. That is, it is not physically possible to build a bridge in 2019 using steel produced in 2029.

    Put another way, future generations do not just inherit a debt: they also inherit relevant bonds. I.e. on balance they inherit nothing, apart from the brdige.

    And finally I'm well aware of the attempts by Nick Rowe to get round the above "physical impossibility" point. I'm not impressed by his arguments.

    1. Ralph Musgrave:
      1. Most economies, especially developing ones, are open enough that foreign-owned debt is significant. That's a real burden on the natives who have to service it. The symmetry of creditors and debtors you posit does not apply.

      2. Suppose your debt is owned by nationals, as in the UK in 1815 (+/- 290% debt-to-GDP ratio, though of course they didn't have the GDP number, just the debt one). The main problem of public finance, since the government didn't supply many services to its citizens, was levying the taxation needed to service the debt: a large coerced transfer between social groups. You don't have to be a libertarian to think that large-scale taxation for this purpose is a problem for the polity. The price of your large group of rentiers is social tension and conflict with those who pay them. It's not an accident that Lord Liverpool's government was the most reactionary and repressive of the parliamentary era.

      It seems reasonable to treat this situation as a burden, to be contained through moderation. Moderation in debt is even more important in the open economy with asymmetric debt and credit relationships.

      Mend you, the current economics of renewable energy and electric transport do not suggest that a Napoleonic debt mountain will be necessary to finance their rapid expansion. Just take the money from the oil and gas industry.


  14. It’s hard to believe there is a serious suggestion in the comments that slowing economic growth in the developed world is desirable. Doesn’t anyone remember that the North Atlantic Financial Crisis swept through East Asia in the form of a collapse in exports, thereby shaving large pieces off the standards of living of people who are NOT part of the developed world?

    Can we please not advocate taking away from the policy sets that gave us the largest increase in standards of living, for the largest number (or share) of the world’s population in all of human history?

  15. One major fear that the Nervous Nellies try to impose on us is the maternal/paternal instinct to not burden future generations with the debt of our profligacy. The truth is just the opposite. The best gift we can give our great grandsons and daughters is an economy with large base of wealth populated by highly skilled, working people adding to the goods and services produced and to the productive capacity of the economy.

  16. To defeat climate change we need a massive build-out of nuclear energy: this would be better done by the state than by the private sector, as was the case with nuclear power in France, Ontario and South Korea (or with hydroelectric power in Brazil).

    Unfortunately, I fear Alexandria Ocasio-Cortez has been misled by older Democrats who are hostile to nuclear energy: either because they they turned against nuclear power in frustration at their inability to rid the world of nuclear weapons (as is most likely the case with Bernie Sanders, who is old enough to be part of the "Duck and Cover" generation) or because they have been corrupted by fossil fuel money (as was the case with Ed Markey, who while serving in the House of Representatives represented a district which hosted a Liquified Natural Gas terminal).

    It breaks my heart that AOC (a politician I'd love to be able to root for) isn't more supportive of nuclear energy, given that she:

    * is a millennial and therefore mercifully untouched by Cold War fears of nuclear war,
    * is a Hispanic who ought to be aware of the former Malthusian and anti-immigration inclinations of the Sierra Club (one of the most influential US environmental groups), and
    * is a woman, who should be aware of how great a force abundant electrical power (and specifically electrically-powered washing machines) have been for female emancipation.

  17. As a layperson when it comes to economics I would be interested to know what Simon's opinion is on the argument that seems to be coming from many climate scientists at the moment (supported by at least some economists) that we need to urgently abandon growth. I believe their main argument is that improvements in technology mean we have to consume ever greater resources in order to produce the same amount of growth, and this damages ecosystems, removes trees, uses up fuel etc. Are they panicking too much or is it really that bad? Apologies for going off topic slightly

  18. We need a fascism tax too. Levied on Wall Street.


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