The best economic recovery is a resilient one

Imagine. Government funding continues to stimulate private sector activity in the already fastest growing sector of the national economy: renewable energy. Your neighbor, who had been out of work for months due to the COVID-induced recession, was hired to install solar panels in the neighborhood. Between that job and all the savings from energy efficiency improvements at his own home, his family has more money to spend locally, including at your café. You’re able to hire back staff you laid off in the recession, and even to hire new employees. You take your kids down to the nearby stream to play after school, which you haven’t done in years, since before all the signs went up saying the stream wasn’t safe to swim or fish in. Even the option to walk feels new since the power plant isn’t burning coal across town anymore, so the air quality warnings have stopped.  

 

The United States, as with governments around the world, will spend vast amounts of money to recover from COVID-induced economic recessions. Choosing to invest in a green recovery, including financing renewable energy, clean physical infrastructure, and reforestation, would be most advantageous not only for the planet and human health, but also for employment and the economy. Every 1 million dollars invested in renewable energy generates 7.49 full-time jobs compared to only 2.65 jobs when put into fossil fuels. It’s no wonder that more than 80 percent of Americans want government investment in clean energy. The United States will not realize these employment, health, and environmental benefits, though, unless the government directs stimulus to meet the clean energy needs of the 21st century. The investment required is estimated to be less than 20 percent of the United States’ military spending. While substantial, this amount is affordable and well-worth spending to stave off the high costs of inaction.  

 

Researchers from Texas A&M and the University of California at San Diego argue that political leaders (and climate activists) must prioritize politically feasible “sweet spots” that quickly deliver jobs and revenue as well as climate benefits. In their recent article published in Nature, Dr. Ryan Hanna and his colleagues recognize that the global economic shut down will result in a temporary 6 percent drop in emissions. However, these emissions will return to pre-pandemic levels or higher as economies continue phased reopenings unless government investment can alter that trajectory with incentives for low-carbon investment.  

 

After surveying recovery pathways from past recessions, Hanna and colleagues conclude that economies rarely return to their pre-shock state. Instead, they usually follow either “greener” or more carbon-intensive, “dirtier,” paths. For instance, following the 1998 financial crisis in Asia, emissions doubled as rapid industrial expansion was fueled by coal. On the other hand, emissions fell by 15 percent in Germany following the collapse of the Soviet Union as East Germany was exposed to technology, investment, and incentives for efficiency.  

 

In the forthcoming article in the Oxford Review of Economic Policy, Cameron Hepburn and his team of researchers interviewed 243 economic experts about a range of recovery options to identify those “sweet spots” of job creation and climate benefits. The authors consider speed of implementation, long-run economic effect, and climate impact potential for each option. They find five categories of policies that would both stimulate economic activity and make progress toward net-zero emissions. These categories include clean physical infrastructure, building efficiency retrofits, education and training, natural capital investment, and research and development (R&D).   

 

The researchers found that those green investments outperform carbon-intensive ones in terms of job creation and “economic multipliers.” Every $1 spent on green investment ripples further through the economy since it generates more jobs immediately, which boosts spending. Green investments also drive down the long-term costs of the clean energy transition. Thus, the authors find that green investments outperform traditional government stimulus packages, even without considering numerous co-benefits, such as enhanced quality of health from reduced pollution and decreased risk of flooding with improved forest management. Implementing green recovery efforts now to mitigate climate change will also help ensure that future financial markets remain stable, since climate change is expected to increase the frequency of banking crises by as much as 248 percent.   

 

Despite clear economic, social, and environmental benefits, Dieter Helm, professor of Economic Policy at Oxford, argues in a recent article in Environmental Resource Economics that a green recovery from COVID-19 is not guaranteed. Helm recognizes the superior economic returns of green investment, but notes that governments are weighing a number of pressing claims on limited budgets including immediate healthcare and housing needs. Indeed, understanding that green investment must synergize with, not displace, other critical investment, is at the very heart of frameworks such as the Green New Deal.  

 

Helm argues that the pandemic hasn’t changed the underlying economic calculus in favor of addressing climate change. Nonetheless, it is not a given that countries will choose green investment over traditional, carbon-intensive stimulus packages. Helm notes that central banks are likely to keep interest rates low to encourage investment. While these low rates will reduce the cost of renewable technologies, they will also apply to fossil fuels. Thus, climate outcomes in the United States will depend on whether federal, state, and local governments use the lower cost of borrowing to invest in renewable energy generation, transmission, and storage. While many policymakers worry about increased debt from continued government borrowing, Helm does not share this concern because increased debt has not led to a reluctance to lend in the past. Yet, he highlights that more government borrowing and spending will lead to increased consumption and demand for resources. He argues, once again, that long-term environmental impact depends on how the money is spent.  

 

 

Decreased carbon emissions due to COVID-19 are temporary. Emissions are already rebounding as economic activity picks up. Whether “we will leap from the COVID frying pan into the climate fire,”  as Hepburn and colleagues said, will depend on the investment choices we make in the next few months. The potential of COVID-19 to mark a turning point on climate progress is immense. It’s possible to bring forward a future with millions of additional renewable energy jobs and clean streams to fish and play in. But that future is not a given. Government stimulus must begin to channel economic recovery resources toward investments that reduce emissions and create jobs, including green infrastructure, energy efficiency, and reforestation. Let’s get to work.