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What’s the Deal with the Green New Deal?

The economics of the emerging platform

I’ve heard a lot about the Green New Deal since the midterm elections. And, it’s not just me – Alexandria Ocasio-Cortez, the freshwoman Representative from the Bronx, posted this graph of the number of tweets on the phrase through mid-December. In honor of the 4-day-old, Democratic-controlled House, I figured I would try to dig into it.

 

Maybe you’ve seen some of the headlines, e.g. about Ocasio-Cortez’s decision to join a sit-in at Chairwoman Pelosi’s office to promote the Green New Deal or how 40 members of Congress, including 3 Senators whom some believe will run for President, have endorsed Ocasio-Cortez’s proposal. The proposal is posted as a Google Doc.

There’s not yet a ton of meat, but enough to understand some broad parameters.

(Source: The Intercept)

 

What Is It?

Several journalists have written detailed pieces about the Green New Deal – GND for short – including Vox, The Atlantic and The Intercept. A lot of the coverage focuses on the political machinations, such as the proposal to form a new House select committee – ultimately nixed by the Democratic leadership.

Here’s what I’ve been able to understand about the economics. With the requisite analogies to the original New Deal, the space race and World War II, the GND calls for a massive mobilization of government (US Federal, given the provenance) spending and policies to, “significantly draw down greenhouse gases from the atmosphere and oceans and to promote economic and environmental justice and equality.” Ocasio-Cortez’s Google Doc lays out some specific goals, including 100% renewable electricity, a national “smart” grid, energy efficiency investments, eliminating GHGs from transportations and other sectors, and a lot of investment in infrastructure.

It’s also pretty clear what the Green New Deal is not. The Google Doc explicitly states that simply relying on something like a carbon tax won’t do the job: “Given the magnitude of the current challenge, the tools of regulation and taxation, used in isolation, will not be enough to quickly and smoothly accomplish the transformation that we need to see.” While it certainly does not rule out carbon pricing, it also calls for more direct government interventions, such as mandates and spending.

Is the Green New Deal About Green Jobs?

The Green New Deal plan is also heavy on creating economic opportunities, “to make prosperity, wealth and economic security available to everyone participating in the transformation.” To my read, this is a lot more expansive, and thus plausibly more economically defensible, than green jobs.

Severin has critiqued the notion of green jobs in a previous blog post. In a nutshell, his point is that counting jobs in one sector misses the overall impact of a policy. For example, if promoting renewables makes electricity more expensive, that can lead to lost jobs in electricity-dependent industries. He also reiterates the point that we should be tackling climate change due to its costs, not as a way to create jobs.

I think the GND plan is about more than green jobs. At best, it’s recognizing that tackling climate change is going to be disruptive and paying attention to people who might be hurt by it. It calls for things like training, education and improved workplace safety, and singles out areas with fossil-fuel dependent economies. Yes, it also calls for a job guarantee program that ensures a living wage. This is certainly radical and may lead to its own set of economic distortions, but it’s not claiming that every coal miner can reinvent himself as a solar panel installer. (See Andy’s related post on green jobs.)

There are certainly versions of a Green New Deal that sound like a rehashing of the green jobs ground. For example, the Sierra Club GND write-up is all about weatherization—a highly dubious strategy as my co-authors and I have shown in previous research (here and here). Instead, I see the Google Doc as pairing two distinct goals – (A) address climate change and (B) support workers, but not necessarily claiming that (A) is going to do (B). I’m not an expert, but this strikes me as a savvy move politically.

Bold Government Action vs. Mobilizing the Masses

Fundamentally, how you feel about the economics of the GND hinges on what you think the government’s role should be in mobilizing activity to address climate change. You have to work hard to get a mainstream economist to agree that anything bests a global carbon tax. With a carbon tax, the government, informed by calculations of the benefits of avoiding climate change (the social cost of carbon that Meredith has blogged about), sets the level of the tax and then steps back and lets a thousand flowers bloom.

And, the beauty of a carbon tax is that it mobilizes everyone. The government doesn’t need to decide how to decarbonize the economy – private companies responding to the tax will figure out the best way.

But, is there anything to the claim that a carbon tax won’t work quickly enough? This has made me think that basic economic models don’t say much about the timing of activities. And, I can concoct reasons that the impacts of a carbon tax would be slower than those from direct government spending.

For example, companies may delay investment in GHG-reducing measures to make sure that the carbon tax will stick. And, empirically, there are plenty of examples of policy reversals. Australia enacted a carbon tax in 2012 and got rid of it 2 years later. And, US companies are likely counting their blessings that they didn’t make major investments on the assumption the Clean Power Plan would still be in force.

Protesting coal in Australia, 2016. (Source: The Herald)

For this reason, I can imagine that there can in fact be complementarities between government and private sector investments, so it could make sense to have both a carbon tax and some more direct government spending or other policies.

The disadvantage of having the government doing a lot is that they’re unlikely to minimize costs. For example, the Google Doc calls for both 100% renewable electricity and making “state-of-the-art” energy efficiency investments in every residential and commercial building. To an economist, this doesn’t make sense. If the electricity is already 100% decarbonized, why spend a lot of money making sure that we’re using as few of those squeaky-clean electrons as possible? This will just raise costs unnecessarily. The cost-minimizing approach is likely to be some combination of almost clean electricity and some additional energy efficiency investments.

I am also disappointed that the existing GND discussions pay very little attention to the role of the government in supporting research and development of new technologies. It would be much easier to encourage emerging economies to, for instance, run their electricity sectors on 100% renewables if we could get some dramatic breakthroughs in storage or renewable generation technologies. (As an aside, I have seen no mention of nuclear power in any of the GND discussions.)

In general, though, I’m very sympathetic to the idea that the US government needs to do a lot more to address climate change, and the GND’s first steps aren’t totally whacky from an economics perspective. I hope Ocasio-Cortez and others succeed in mobilizing interest and putting climate change back in the political spotlight. And, I hope this is the first of many posts we’ll do on the GND.

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Catherine Wolfram View All

Catherine Wolfram is the Cora Jane Flood Professor of Business Administration at the Haas School of Business, University of California, Berkeley. ​During Academic year 2018-19, she will serve as the Acting Associate Dean for Academic Affairs at Berkeley Haas. She is the Program Director of the National Bureau of Economic Research's Environment and Energy Economics Program, Faculty Director of The E2e Project, a research organization focused on energy efficiency and a research affiliate at the Energy Institute at Haas. She is also an affiliated faculty member of in the Agriculture and Resource Economics department and the Energy and Resources Group at Berkeley.

Wolfram has published extensively on the economics of energy markets. Her work has analyzed rural electrification programs in the developing world, energy efficiency programs in the US, the effects of environmental regulation on energy markets and the impact of privatization and restructuring in the US and UK. She is currently implementing several randomized controlled trials to evaluate energy programs in the U.S., Ghana, and Kenya.

She received a PhD in Economics from MIT in 1996 and an AB from Harvard in 1989. Before joining the faculty at UC Berkeley, she was an Assistant Professor of Economics at Harvard.

21 thoughts on “What’s the Deal with the Green New Deal? Leave a comment

  1. As hinted in my earlier comment, there are ways to derive a faster transition to clean energy than what we proposed in 1997. One of these is to solve for the optimal transition to the Green Golden Rule (e.g. Heal’s 2000 little green book, Valuing the Future) with a renewable backstop resource and zero depreciation of GHGs (Endress et al. JEBO 2005). (From there, you could simulate the optimal transition for very slow depreciation.)

  2. There is also the very serious issue of mass extinctions occurring in our Oceans. If we fail to transition rapidly and halt CO2 uptake and acidification of the oceans, the “business case” will likely seem very pale by comparison.

  3. The reason to implement high efficiency mandates is to LOWER the cost and increase the time frame of getting to 100% renewable Power for not only buildings but transportation and all infrastructure. This is a critical part of the quickest and least expensive path… it is the “low hanging fruit” of getting to a decarbonized future and any chance of reversing or halting global warming. Another observation, the “disruption” of failing to achieve this, (thereby halting sea level rise), will be MANY times greater than making the transition as rapidly as possible. A sustainable future literally depends on a successful and rapid transition.

  4. 1. You note AOC’s statement: “Given the magnitude of the current challenge, the tools of regulation and taxation, used in isolation, will not be enough to quickly and smoothly accomplish the transformation that we need to see.” This is what Dasgupta calls a category mistake. “The transformation we need to see” should be derived from welfare foundations, not assumed. Chakravorty et al. (JPE 1997) derive a very gradual transformation ending with 100% renewability in something over 300 years. This of course needs updating to determine the optimal length of a transition to renewable energy, but 26 to 27 years (to 100% renewability by 2045) seems a little quick. (The good news is that Hawaii’s alleged commitment to 100% renewability in electricity by 2045 is fake news based on a fake index. The index was adapted from California’s RPS. In particular you get to put rooftop solar in the numerator but only retail sales in the denominator. Since the index goes from zero to infinity, you can easily achieve an index of 100% with 50% of generation being non-renewable.)
    2. In benefit-cost analysis, jobs (regardless of their color) are a cost, not a benefit. If there is substantial unemployment such that job creation is a legitimate target of government policy, the shadow cost of jobs is set less than their market wage, but it’s still positive.

    • How do we determine “optimality” in a world full of second bests and worse which undermine the very definition of welfare efficiency? I suspect that this approach might have decided that it was optimal to fight Hitler over a 20 year period–sometimes the imperatives of the situation demand more than just adherence to myopic “optimality” that cannot accommodate the entire set of dimensions in the problem.

      Your note on BCA highlights the core problem with BCA–a singular dimensional measure of efficiency. A function society is about more than monetary transactions. Of course jobs creation is a benefit–economists just haven’t done an adequate job themselves of incorporating that into the BCA framework. All of those displaced workers in Middle America who are unhappy enough to say “f*** you” to the system represent the victims of that singular dimensionality.

      • Richard,
        Abstraction is the most valuable ladder in any science (Georgescu-Roegan). The master of the second-best, Peter Diamond, has pointed out its weakness: There are so many ways of doing it, that any one second-best solution is unlikely to be robust. Nordhaus has made substantial progress with a first-best, aggregate approach. Our first-best approach is disaggregated and hopefully more suitable for the details of an optimal energy transition.
        Jim

        • My point is that Nordhaus’ “first best” is a mirage–the world’s economy functions far from the first best conditions. The point is that finding a single partial equilibrium “efficient” outcome does not guarantee that it is truly optimal due to all of the other market failures occurring throughout the economy. Pretending that we can somehow specify all of these relationships in a model does not make the outcome “optimal.” Also the inability to specify a truly full societal utility function undermines this point. Optimality is a false god. Instead, these models should be used to estimate deviations in the economic pathway for each policy choice without attempting to judge “optimality.” Those analyses can be used to identify the significant undesirable consequences and what decisions open up those vulnerabilities.

  5. Question is, what Uncontrollable Damages will be mitigated by these investments? Sure, that’s a stochastic question, and it’s tough to know in part because world government, especially the richest and most responsible for cumulative greenhouse gas emissions, haven’t invested as much as they should in the science and engineering needed to answer it.

    Nevertheless, it should be expected that there is some.

    This is an unfair framing of the question and problem. On the one hand, there’s Business As Usual, projecting the present out, ad finitum, into the future. On the other hand, there are these immediate, big costs, for conversion to zero Carbon, for retraining for jobs, paying for it all with increased taxes, stranding fossil fuel assets, etc, etc.

    But the former case or arm of possibility is a complete phantasm. Look at the budget of just FEMA for the last 10 years and its flood insurance. Look at the U.S. insurance companies. Look at the dissonance between the implemented standards of inland stormwater management and the actual (not climate projected) expected risks of 24 hour rainfall based upon historical measures on the books: There’s a WORLD of hurt lurking there, and the possibility of economic collapse for towns and cities, not to mention loss of life, and of confidence in the ability of town administration to manage these things.

    Accordingly, a Green New Deal, if informed by fact, is a good idea. I agree the Carbon Tax, whatever you want to call it, is too slow. It’s also seldom comprehensive enough, failing to assess proper charges on cross-border products, and failing to address what happens when and if it succeeds. But the Green New Deal isn’t enough, at least as presently sketched.

    We are still directly on track for our world to hand us an ultimatum, and we’ll need to deal with it. I thought we were collectively smarter than that. I’m willing to admit I was completely wrong there.

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