To preface this post, I am a big advocate for green policy. I have a strong belief in the importance of renewable energy sources, and I love seeing climate change policy on the top of many politicians’ agendas.
With that being said, I believe that the Green New Deal, which is currently being touted by progressives in congress, is an inefficient direction for climate change policy.
What the Green New Deal Is
For a little bit of background, the Green New Deal is a policy initiative aimed at solving a multitude of problems, with a central goal of moving to 100% carbon-free energy in the U.S. by 2030. The initiative has been gaining attention so far this year due to a number of progressive politicians embracing it, including veteran Sen. Ed Markey of MA and newcomer Rep. Alexandria Ocasio-Cortez of NY.
The initiative aims at combating climate change through massive government involvement. It points to the expansion of government loans and subsidies as a means of investing in renewables, and promotes the creation of a Renewable Energy Administration (based off of FDR’s New Deal Rural Electrification Administration) to head the initiative at the federal level.
At face value, these initiatives sound very beneficial. Subsidies and government regulations have been the driver of current renewable energy and electric vehicle growth, so with more government money and support, we should be able to expand growth even further, right?
The reality is, however, that even with all of the current subsidies and government legislation, oil and gas are still in demand. In fact, demand is increasing for the major carbon emitting sources.
Th Economist elaborates on this wonderfully in their cover story from the February 9th, 2019 issue. The authors note how ExxonMobil plans to, “pump 25% more oil and gas by 2025, and how they also forecast that, “oil and gas demand will increase by 13% by 2030.”
This is not to say that renewables are not becoming more financially feasible, and that their use will not continue to grow over time. Increased subsidies, loans, and regulations from a Green New Deal would also certainly help make them even more financially worthwhile than they are now. However, the proposals within the Green New Deal are an inefficient way of curbing the fossil fuel market, and other policy directions would help curb fossil fuel demand faster and with less government involvement.
To see why, let’s look at some economic principles.
Climate Change: An Example of Market Failure
It may sound strange that even with current subsidies and regulations, fossil fuel demand is still projected to grow, and could even continue to grow under a Green New Deal. But from a conventional economic standpoint, this is a logical claim.
People around the world use fossil fuels to a high degree because there is a massive market failure surrounding fossil fuel use. By this, I mean that the private benefits of using fossil fuels far outweigh the private costs. Take your car, for example. Paying $2.50 per gallon at the pump is a burdensome cost for most, but the convenience of being able to drive your own car to work far out weighs the price you pay.
Yet at the same time, society as a whole incurs a cost from this fossil fuel use that is not priced into what individuals pay. While you have the freedom to drive your car to work, the people around you incur the burden of having more pollution due to your driving. As a result, the price individuals pay for gas and oil is far lower than the total cost burden on society. Therefore, since the original price of gas does not reflect this overall societal cost, there is a greater incentive to drive your car.
Truck drivers serve as a prime example for this logic. Semi-trucks are not cheap, usually costing the owner over $100,000 to purchase. As a result, truck drivers look for the most cost effective options to buy. Research into zero-emission semi-trucks has so far produced products like the Tesla Semi, a viable alternative that on average would cost about $30,000 more than a diesel truck to purchase, but would be cheaper to operate. Yet, even though this overall cost is not astronomically more, the nature of the trucking industry would still push drivers to purchase the lower initial-cost alternatives.
Since truck drivers, as businessmen, will always value the cost-efficiency in their trucks over the environmental impact they have, the higher price of zero-emission semis makes curbing the demand for the CO2 spewing diesel trucks that much harder. And with the demand for diesel remaining high, there is less of an incentive for developers to create other greener truck models. Therefore, diesel trucks remain more affordable since the cost to buy and operate them does not account for the immense contribution they have on pollution. Their cost would be quite a bit larger if it accounted for the social impact of pollution, but with the presence of the current market failure, diesel semi truck demand will be hard to curb.
Increased government subsidies and regulations from a Green New Deal would not account for this market failure, and that is exactly why it is not the best policy to move forward with. These initiatives may make renewable energy sources more appealing and increase the demand for them, but without accounting for the market failure surrounding fossil fuels, demand for oil and gas will remain high. This demand will make the long term emission cuts that are needed to avoid irreversible climate change very difficult to achieve.
A More Efficient Way Forward
To better combat the use of fossil fuels, policies should be geared towards increasing the price of them to account for this market failure. If the price were to rise and better reflect the societal impact of fossil fuel use, market forces would naturally push people away from fossil fuels, and towards sources of energy that do not incur as high of a social burden (i.e. renewables).
The way to do this effectively is through a nationwide carbon tax, which would be offset by employing tax-cuts elsewhere. This concept is in line with major economic publications, and the consensus of a bipartisan group of prominent economists that came to fruition in mid-January. This group included ex-Fed chairs, Nobel prize winners, and former members of the president’s council of economic advisers.
Their consensus had a few majors points. First, a tax should be levied on carbon emitting products (oil, gas, coal) to account for the market failure mentioned above. The tax should steadily increase each year until fossil fuel demand is sufficiently curbed.
These economists point out how this system would not only curb fossil fuel demand, but also create an incentive to innovate and develop better carbon-neutral technologies to avoid the higher costs of this tax. These market incentives to innovate would drive renewable adoption faster and more effectively than simply subsidizing them and regulating the industry.
Let’s go back to the semi truck example real quick. If the price of owning and operating a diesel truck would increase from a carbon tax, the gap between the cost of a diesel truck and a greener truck like the Tesla Semi would shrink. With this market shift, developing a zero-emission truck would be a more profitable project, since drivers would see them as a more cost effective option. More green trucks would then be developed as the market for them expanded, leading to even more green options for truck drivers, cheaper green trucks through competition, and waning demand for traditional diesel semis.
Following these two initial points, the consensus outlines the need to create a border carbon adjustment system, which would create an added penalty for pollution being leaked outside of our country. This essentially would give a more competitive edge to greener companies.
Lastly, and most importantly, the economists point out the need to return all government revenues from the carbon tax to the public. This may be accomplished in the form of a tax credit distributed yearly and equally to every citizen, or maybe an across the board income tax cut. This would ensure that the public is not burdened by the cost increase of fuel incurred by the carbon tax.
In other countries, where some form of carbon tax has been tested, the lack of a system to return carbon tax revenues to the public has become the initiative’s downfall. France serves as a prime example. President Macron led the charge to implement a fuel tax that added 30 cents to the cost of each gallon of gas, which the government would have used to help fund climate change directives. This tax was added with no tax relief elsewhere, and put a significant burden on the French people. The result has been the violet “Yellow Vest” riots and the subsequent repeal of the tax.
The French already faced the largest tax burden in the developed world prior to the fuel tax, which is part of the reason why the riots have been so bad. Had Macron offered cuts elsewhere, though, and made the tax revenue net-zero, the policy may have been more successful.
The Green New Deal: Great for Awareness, but an Inefficient Initiative
The Green New Deal succeeds in spreading awareness of the urgent need of climate change policy. Yet, it’s methods of moving forward are inefficient and would come at extreme fiscal costs. Furthermore, a political struggle would surely arise by trying to push these big government policies through a likely divided congress.
By eliminating a large market failure and using market forces to drive innovation, a nationwide carbon tax, that returns the revenues to the public, would be a far more efficient way forward.
However, I must point out that there would still be major political difficulties with imposing such a tax. How large should it initially be? How is the benefit given back to the public? These are questions that would likely see a partisan split.
Yet, seeing how there is already a bipartisan consensus among economists, there is definitely room for agreement among politicians. After all, if enacted properly, a carbon tax that returns revenues to the public would effectively fight climate change (appeases the left) without increasing spending or the tax burden (appeases the right).
Hopefully, progressives will see the shortcomings in their initiative moving forward. A better way to fuel the policy debate would be for a bipartisan group of moderates to come forward with a carbon tax plan. Until then, the policy spotlight will remain on an initiative that falls short on long term climate change goals.