The Fall and Rise of the Green New Deal

Edward B. Barbier

In February 2019, Representative Alexandria Ocasio-Cortez and Senator Ed Markey introduced a joint resolution to Congress calling for a “Green New Deal” for the United States.  It calls for massive government spending over the next 10 years to shift the U.S. economy away from polluting industries, embrace green infrastructure and produce 100% of energy from renewables. In the process, the Green New Deal aims to create jobs and boost the economy.

The world has heard all of this before, most recently in response to the 2008-2010 Great Recession. During that Recession, I was asked by the UN Environment Programme to construct a Global Green New Deal, a plan to rethink the world economic recovery. The strategy was based on a comprehensive review of national-level green stimulus plans, examining what investments were most effective in terms of lasting efforts to make environmental improvements in major economies. 

Initially, there were high hopes for a Global Green New Deal.  Between 2008 to 2010, the major global economies spent more than $520 billion, or nearly 16% of their total fiscal stimulus, to “green investments”, such as low-carbon energy, energy efficiency, pollution abatement and materials recycling (see Table 1).  More than 60% of the stimulus ($335 billion) went to improving energy efficiency, with an aim to create much needed jobs in hard-hit sectors such as construction.  But since the global economic recovery began in 2010, little additional support for the green transition has materialized in any country.

Thus, the revival of the Green New Deal by Ocasio-Cortez and Markey is a welcome reversal of this green policy void.

Lessons from the Global Green New Deal

It is important to be realistic. Some commentators have been calling a Green New Deal unaffordable for US taxpayers, with some estimates putting the bill for complete decarbonization at as high as US$12.3 trillion. 

Such an ambitious target is both expensive, overly ambitious and unhelpful. Rather than putting a price tag on going 100 percent renewable – which would take decades – I believe we should figure out how much public spending should take over the next five years to transition to an economy less reliant on carbon, what these public investments should entail, how much it might cost for such an initial five-year plan, and finally how to pay for it.

A good place to start is to understand the lessons learned from the last time the world saw ambitious plans for stimulating green growth, which was during the Great Recession. For example, compare the experiences of the United States with South Korea, which did attempt to launch its own national Green New Deal in 2008-9.

Over 2008-9, the United States spent nearly $120 billion on green stimulus, about 1% of its GDP (see Table 1).  Around half of this expenditure went into energy conservation and other short-term energy efficiency investments to quickly boost the economic recovery and generate employment. The stimulus did help growth of renewable energy. And while this growth reduced CO₂ emissions, the more significant impact came from the slow-down in the economy and switching from coal to natural gas.

However, since 2016,  US CO₂ emissions have not fallen much, and may have increased by 3.4% in 2018. The 2008-9 green stimulus is no longer helping to de-carbonize the US economy, because of the failure to implement additional incentives, such as pricing carbon.  The green stimulus was originally intended to be combined with a carbon cap-and-trade program, which would have increased substantially renewable energy investment even after the short-term stimulus had expired.

In comparison, South Korea responded to the Great Recession by promoting “low carbon, green growth” as the new long-term development vision of the country. It allocated $60 billion, or 5% of Korea’s GDP, for its Green New Deal (see Table 1). In the end, South Korea may have spent only $26 billion on low-carbon energy. It also failed to adopt pricing reforms and other incentives to foster renewables, such as phasing out fossil fuel subsidies, carbon targets and stringent regulatory frameworks. This has slowed the pace of reducing energy intensity and de-carbonization.  Although the goal was to lower energy intensity by 2.5% per year up to 2030, it declined by less than 1% annually from 2006 to 2016. The result is that South Korea’s CO₂ emissions continue to increase.

There are two important lessons to be learned for the US from the Korean experience in launching a Green New Deal.

First, if the US is serious about committing to a Green New Deal, then it must commit to substantial public investments over at least five years.  Thus, the price tag for a five-year Green New Deal to begin de-carbonizing the U.S. economy should be closer to the 5% of GDP proposed for the original South Korean five-year plan, rather than 1% of GDP that the US spent on green stimulus during the Great Recession.  Based on 2017 US GDP (purchasing power parity) of $19.4 trillion, this amounts to a down payment of $970 billion to $1.94 trillion to launch the Green New Deal in its initial years.

Second, spending alone will not de-carbonize the economy.  There is a need for complementary pricing reforms to transition to green energy, such as phasing out fossil fuel subsidies and taxing carbon. Implementing these reforms will provide the incentives for long-term investments in low-carbon energy and for reducing dependence on fossil fuels.

But there is good news, too, on the costs of promoting clean energy. 

Expenditures targeted at clean energy research and development will lead to lower costs and wider adoption, as the technology becomes more familiar, innovation spreads, and production scales up.  The rapid fall in solar panel costs as one example of this “spillover effect”. There is also a network, or “chicken and egg”, effect where increasing demand for a clean-energy technology or product fosters related innovations that lower cost.  For example, purchases of electric vehicles will stimulate demand for charging stations, which once installed will reduce the costs of running electric vehicles and further boost demand. This suggests that subsidies for purchasing electric vehicles can kick-start this network effect, but should be phased out once the effect takes hold.

Paying for the Green New Deal

However, there are good and bad ways to pay for the Green New Deal.

First, it should not be funded through deficit spending, especially as the price tag is likely to be high. Saddling future generations with unsustainable levels of national debt is just as dangerous as burdening them with an economy that is environmentally unsustainable. Deficit spending is warranted to boost overall demand for goods and services when unemployment rises, consumers do not spend and private investment is down. When that is not the case, efforts to boost green sectors should pay for themselves.

This is again where price incentives, such removal of fossil fuel subsidies and pricing carbon through a tax can help.  Consumer subsidies for fossil fuels and producer subsidies for coal cost US taxpayers nearly $9 billion a year. These subsidies could be shifted instead to cover some expenditures under a Green New Deal. A $20 tax per metric ton of carbon, rising at 1% per year above inflation, could reduce US emissions by 11.1 billion metric tons over 2018-2030, and raise nearly $970 billion in revenue from 2018 to 2027. 

These revenues alone would cover the five-year cost of a Green New Deal. They could also be used to raise the minimum wage, provide payments or retraining for displaced workers, and reduce burdens for vulnerable households affected by the green transition. The drop in emissions accompanying the tax – from 80% of 2005 levels when initially adopted to 45% of 2005 emission by 2030 – would also lower the overall price tag of the Green New Deal.

Any Green New Deal to initiate de-carbonization will be expensive. But what policies are adopted and how we choose to pay for it could ultimately determine the plan’s success and whether we can afford it.

Green stimulus during the 2008-9 Great Recession

	Green Stimulus (US$ bn)	Share (%) of Green Stimulus in:
Economies	Low carbon power a/	Energy efficiency b/	Waste water c/	Total	Global Total	Fiscal stimulus	GDP
China	1.6	182.4	34.0	218.0	41.8%	33.6%	3.1%
United States	39.3	58.3	20.0	117.7	22.5%	12.0%	0.9%
South Korea	30.9	15.2	13.8	59.9	11.5%	78.7%	5.0%
Japan	14.0	29.1	0.2	43.3	8.3%	6.1%	1.0%
European Union	13.1	9.6	0.0	22.8	4.4%	58.7%	0.2%
Total Five Economies	98.9	294.7	68.0	461.6	88.4%	18.8%	1.1%
Total G20	105.3	330.1	78.1	513.5	98.3%	17.1%	0.8%
Global Total	107.6	335.4	79.1	522.1	100.0%	15.7%	0.7%

a/ Support for renewable energy (geothermal, hydro, wind and solar, nuclear power, and carbon capture and sequestration.

b/ Support for energy conservation in buildings; fuel efficient vehicles; public transport and rail; and improving electrical grid transmission.

c/ Support for water, waste and pollution control, including water conservation, treatment and supply.

d/ Based on 2007 estimated Gross Domestic Product (GDP) in terms of purchasing power parity, from the US Central Intelligence Agency The World Factbook, available at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2001rank.html.

G20 is the Group of 20 countries. The members of the G20 include 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the US), plus the European Union. The G20 total excludes the European Union.

Source: Edward B. Barbier. 2016. “Building the Green Economy” Canadian Public Policy42 Supplement 1:S1-S9.

Edward B. Barbier is a University Distinguished Professor in the Department of Economics at Colorado State University