The New Deal was a bonds financing strategy of the United States of America between 1932 and 1939. In total, 15 to 35 billion was spent on a series of development programs that funded public work projects, financial reform, and economic development. Franklin D. Roosevelt’s overarching goal for the project was to relieve and reform the country so it could recover from the Great Depression.
The recently proposed Green New Deal (GND) advocates using both a carbon tax and green bonds in order to stimulate economic growth. Based on the foundations of Modern Monetary Theory, the GND aims to vitalize the economy through a transition to renewable energy and sustainable growth. The GND serves as a market solution to the provision of global environmental governance, defined as “the sum of the many ways individuals and institutions, public and private, manage their common affairs.” (Puaschunder 2020). The GND thereby combines Roosevelt’s economic approach with modern ideas such as renewable energy and resource efficiency.
The Green New Deal operates within the framework of the United Nations Environment Programme (UNEP) and Sustainable Development Goals, which since 2008, has encouraged countries to create jobs in green industries, thus boosting the world economy and curbing climate change at the same time. In 2019, over 600 institutions signed a letter to the United States Congress in support of reducing greenhouse gas emissions. The signing entities advocated for fossil fuel extraction and subsidies, transitioning to renewables, and expansion of public transport.
Since 2019, Senator Edward Markey and Representative Alexandria Ocasio-Cortez have advocated for the United States to transition to the exclusive use of renewable energy, as well as using that energy to power new transportation technologies, such electric cars and high-speed rail systems. The GND aims to improve vulnerable communities via state-sponsored employment, universal health care, increased minimum wages, and anti-monopoly enforcement. A ten-year national mobilization targets job security and working conditions by providing high-quality health care; affordable housing; economic security; access to clean water, air, healthy food and nature; education; clean, renewable, zero-emission energy; repaired infrastructure; energy efficient smart power grids; upgraded living conditions; pollution elimination; clean manufacturing; and positive work collaborations.
Economic theories that support the arguments advanced by GND advocates include John Maynard Keynes’ spending multiplier effect (1936), which captures the ratio of a change in national income to any autonomous change in spending – such as private investment spending, consumer spending, government spending, or spending by foreigners on the country’s exports.
Joseph Stiglitz famously advocated for the GND by declaring that “it is better to leave a legacy of financial debts than to hand down possibly unmanageable environmental disasters.” Similarly, Jeffrey Sachs supports financial overspending for the sake of avoiding irreversible tipping points and environmental lock-ins (Puaschunder 2019b, 2020). Money will always exist and is fungible, whereas environmental resources are depletable and irreplaceably destroyable.
Global Environmental Governance could provide different means for implementing the GND, ranging from formal institutions (major global conferences and treaties) and legal regimes, to informal arrangements, intergovernmental relationships, nongovernmental organizations, global capital markets, and multinational corporations (Puaschunder 2020).
The public sector and governing institutions play a central role in overcoming free-rider problems with externalities like climate change. Climate change mitigation and adaptation can be financed via tax revenues (Puaschunder 2019b). Other proposed financing tools include (long) maturity bonds – such as discussed in Sachs (2014), Orlov, Rovenskaya, Puaschunder and Semmler (2019) and Braga, Fischermann and Semmler (2020).
To peg emissions to tax payments appears simple and fair. Around the globe, most taxation efforts are only a few cents or dollars per CO2 ton of emissions. Yet the revenue potential is huge: a 43 USD per metric ton carbon tax that increases by inflation plus 5% annually would raise about USD 180 billion in new revenue in 2021 and nearly USD 300 billion in 2031. So far, Sweden has been quite successful with this: Since 1991, the CO2 tax has been raised to 130 USD and carbon emissions dropped by about 1/4th while the economy continued to grow.
Monetary and credit policies
Monetary and credit policies are dependent on inflation targeting. Climate change adaptation, climate disasters, and economic turmoil often produce financial instability that causes higher inflation rates. Therefore, a single-minded focus on lowering inflation does not seem to be the appropriate policy when one is facing these kinds of negative shocks on the supply side.
Departing from their central focus on monetary and economic stability (e.g., legal tender & setting the interest rate to achieve market stabilization), central banks have recently gained interest in supporting the financialization of climate change mitigation and adaptation (Camiglio, Dafermos, Monnin, Ryan-Collins, Schotten &Tanaka, 2018).
Some researchers stress the importance of preventive actions and of policy buffers, designed to enhance resilience to climate shocks (Nordhaus, 2018). Furthermore, easy credit, greater reserves, and reserve fund accumulation is suggested. Low-income countries and regions have limited access to climate bond markets and exercise little borrowing power. Besides tax increases, risk pooling through self-insurance or some collective insurance schemes, grants from donors, and buildup of financial buffers and disaster funds for contingencies are recommended.
Solar power and wind turbines, eco-friendly infrastructure, and more research and development in clean energy and green technology are all worthwhile investments that can also slow climate change. Addressing market changes and the financialization of climate justice are estimated to comprise 5-7% of the contemporary world GDP, accounting for 5-6 billion USD. Green bonds could fund all these endeavors.
Environmental pricing reform is the process of adjusting market prices to include environmental costs and benefits. A negative externality exists where a market price omits environmental costs. Until these externalities are internalized, rationally self-interested economic decisions can lead to environmental harm, as well as to economic distortions and inefficiencies that undervalue environmental issues. Example measures to improve these price signals include green tax-shifting (ecotaxation), tradeable pollution permits, or the creation of markets for ecological services. “Ecological fiscal reform” differs in more narrowly dealing with fiscal (i.e. tax) policies as opposed to using non-fiscal regulations to achieve the government’s environmental goals.
Absorbing CO2 and forestation
Another market-based solution could be to capture CO2 currently in the atmosphere. Examples of this are carbon-absorbing forests, green rooftops in cities, carbon-negative clothing such as fungus-based clothing, as well as industrial-scale carbon capture by machinery and windmills. Another ground-breaking innovation could be decentralized energy grids that are run on blockchain approaches. Thereby single households could generate energy, for instance via solar panels on the rooftop or isolated heating devices. As soon as the energy is generated, the individual household could either use the energy or distribute it to neighbors on the grid. This point-to-point solution between closer distributors and decentralized energy sharing could revolutionize the dependency on a few energy providers.
In most recent decades, affluent people in high-income countries have defined environmental conscientiousness as a luxury good. High-end consumers around the world have proven interest in goods that do not cause CO2 emissions. They travel and shop environmentally-conscientiously with respect for the wider community and are investing to fund social and environmental causes in their local communities. Behavioral economists have shown in many powerful laboratory and field experiments the power of behavioral “nudges” and “winks” on consumer choices without large financial incentives. Nudges, the behavioral means to change people’s choices based on their emotions, status, and other environmental and social conditions, have proven to be powerful and easily implementable sources to educate and change people’s behavior without direct enforcement (Puaschunder forthcoming a, b).
Sustainable tourism is the concept of visiting somewhere as a tourist and trying to mitigate negative impacts on the environment, society, and economy. Tourism can involve primary transportation to the general location, local transportation, accommodations, entertainment, recreation, nourishment, and shopping. It can be related to travel for leisure, business and visiting friends and relatives. There is now broad consensus that tourism development should be sustainable.
Innovation efforts financialization
Technological innovations are usually a result of a mix of private and public activities. The public sector can set frameworks and incentives to support inventions through R&D and de-risk innovation through public support (Mazzucato, 2015). Public intervention – such as taxes and subsidies – could enable the transition to a low-carbon economy.
In order to stabilize the climate, current generations face high taxes and expenses. Future generations benefit from these investments. With the right financialization strategy, these costs can be borne by future generations after the climate has been stabilized (Puaschunder 2018, 2019a, c). Green bonds would be able to enact this intergenerationally-harmonious solution. These financialization strategies are common in the public sector. For instance, New York City’s water distribution is built on this principle. With financial means that raised money via bonds, lakes could be built in mountains near New York. Now when water is consumed, the consumers pay off previous expenses.
Engaging portfolio managers
In an integrated economy, oil price fluctuations are causing disturbances in many industries. Portfolio and hedge fund managers strive to reduce risk in their overall portfolios, in both the short and the long run. Renewable energy appears to be a market option resilient to geopolitical risks and supply shocks. Investment options based on renewable energy can reduce the risks and political dependencies on commodities associated with fossil fuels.
With the novel Coronavirus (COVID-19) spreading around the world, calls are being made for the medicine of the future to prevent diseases instead of just treating their consequences. We are paying renewed attention to the preexisting conditions, such as obesity, that determine whether the Coronavirus becomes a life-threatening danger for the individual. Just as the COVID-19 crisis is an important accelerator for necessary, fundamental changes in the health system, it is a reminder that it is dangerous to wait for crises to spur change. Instead, advocates of the GND urge us to address our environmental risks and vulnerabilities today.
Julia M. Puaschunder a Post-doc and Prize Fellow in the Inter-University Doctoral Consortium of New York affiliated with Columbia University, The New School Department of Economics and The New School Environmental Studies Program as well as the Parsons School of Design in New York City.
This post is based on a working paper available on SSRN.
João Paulo Braga, Thomas Fischermann & Willi Semmler. Ökonomie und Klimapolitik: So könnte es gehen. Die Zeit, 11, 5, March 10, 2020.
Emanuele Camiglio, Yannis Dafermos, Pierre Monnin, Josh Ryan-Collins, Guido Schotten, Misa Tanaka. Climate change challenges for central banks and financial regulators, Nature Climate Change, 8, 6, pp. 462-468, 2018. DOI: 10.1038/s41558-018-0175-0, retrieved at https://www.ifc.org/wps/wcm/connect/043e7320-3984-4dc1-b57b-347efb27a830/Climate+change+challenges+for+central+banks+and+financial+regulators.pdf?MOD=AJPERES&CVID=mh2uvIt
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