With the COVID-19 pandemic having triggered a deep global recession, talk of a “green recovery” is in danger of remaining just talk. Right now, policymakers are focused on saving lives and preventing a full-fledged depression. And yet, climate change ultimately poses a much greater challenge than COVID-19. At least with the virus, there’s hope for a vaccine, perhaps within a year or two. Tackling the existential threat of climate change is a more complex, longer-term challenge.
Unless climate action is closely tied to the immediate task of protecting jobs and livelihoods, it will become yet another casualty of COVID-19. Already, green policies have been sidelined in the United States and China. With lower-income constituencies under considerable pressure from the pandemic-induced recession, there will be intense political resistance to new carbon taxes or increased spending on climate action. Better “brown” jobs than no jobs, goes the thinking.
Making matters worse, the collapse in oil prices and corporate profits has weakened the incentive to invest in renewable energies. And increased hostilities between the US and China have dimmed the prospects for new global climate agreements.
ALL IS NOT LOST FOR CLIMATE ACTION
Despite these formidable headwinds, all is not lost for climate advocates. Before the pandemic, climate change was at the very top of the global policy agenda. And because the crisis demands unprecedented levels of stimulus, there is a big opportunity to start implementing green investment plans that have long been in the making. The key will be to shape programs like the Green Deal so that they become synonymous with the recovery effort. Here, the United Nations has already pointed the way with its disaster-relief slogan, “Build Back Better,” which is duly being repurposed for the current crisis.
Moreover, climate action could benefit from the growing skepticism toward populist regimes. The same governments that have actively supported fossil-fuel industries (the US) and deforestation (Brazil) have proven to be slower and more disorganized than other governments in responding to the pandemic.
The US will be a crucial battleground in the global climate debate. The big question is whether President Donald Trump will be able to hold on to the White House in November’s election. Polls consistently show him trailing his Democratic challenger, Joe Biden, and he has invited even more public anger over his divisive response to widespread protests over racism and police violence. If Biden wins, the US will, at a minimum, rejoin the Paris climate agreement; and if the Democrats regain control of the Senate, too, some features of the Green New Deal could even be on the table.
At the global level, the end of the pandemic will represent an opportunity for mobilizing popular support. Governments will have already demonstrated that they are capable of taking radical action and enforcing drastic behavioral and social changes. Many will emerge from the crisis with more credibility as agents of change. And if the international community does manage to develop and administer a universal COVID-19 vaccine, that success will lend momentum to other cross-border cooperative efforts.
Moreover, the longer the pandemic persists, the more likely it is that new climate-friendly behaviors will become long-lasting habits. The broad shift toward digital interactions, telecommuting, and e-commerce may prove permanent. Though many people crave a return to physical engagement, the new preference may be for fewer but higher-quality interactions.
Another, if unwelcome, possibility that could fill climate advocates’ sails is that the pandemic is accompanied or quickly followed by exceptional weather events. Hurricanes, wildfires, floods, and other natural disasters have been growing more severe and frequent in recent years. It might take only one of these to shine a spotlight back on the climate problem.
Beyond these contingencies, it is already clear that the appetite for climate action will be dictated largely by the economic hangover from the pandemic. Here, the fact that our more digitalized lifestyles are cheaper is encouraging. Less commuting, travel, and dining out will bring welcome relief to household budgets. Likewise, many hard-pressed, debt-burdened businesses will gratefully embrace the savings associated with remote working and other digitally enabled operational changes; and some of these cost reductions may be passed on to consumers.
However, digitalization and corporate cost-cutting also could translate into further job losses, making it even more difficult to reduce the current spike in unemployment. Given the sheer scale of the job crisis, the narrative will need to shift from “green recovery” to “sustainable recovery,” a broader concept that puts people’s welfare front and center. After all, climate action comprises just one of the UN’s 17 Sustainable Development Goals (SDGs), and it is not for nothing that people come first in the “triple bottom line” accounting framework of people, planet, and profits.
Amid the economic hardship that will follow from the pandemic, income and jobs will clearly be the top priority. And because the crisis is hitting lower-income groups the hardest, a labor-market recovery will also help to reduce inequality. But to be sustainable – both politically and economically – recovery policies will need the support of business and society alike.
Achieving such broad buy-in will not be easy in societies that are already highly polarized politically (between left and right) and culturally (between “open” and “closed”). Here, the US will again be the critical battleground. If the Democrats take power and pursue highly progressive policies, they might jeopardize the growing support for climate action among moderate Republicans. If they fail to design policies with true sustainability in mind, they could set the stage for another backlash from the populist right.
The truly sustainable approach requires a suite of policies balancing the green gains from investment and subsidies against the political pains from taxes and regulation. Those pains will need to be distributed wisely. As France’s experience has shown, a regressive tax that hits rural commuters or other politically influential constituencies will face strong resistance.
True, central banks could mitigate the recovery pains by monetizing the pandemic-induced spike in public and private borrowing. But this would still leave a long shadow of debt, which would have to be worked off in some socially tolerable manner. In any case, policymakers may decide that a debt build-up is worth it. With interest rates likely to remain low for some time to come, there will be no rush to pay down the debt incurred during the pandemic.
ALL TOGETHER NOW
More broadly, any country pursuing a truly sustainable recovery will have to forge a balanced partnership between government and business. A strategy that leans too heavily on “big government” solutions – public investment, progressive taxation, and sweeping regulation – would undermine the valuable contribution that could come from private investment, innovation, and market mechanisms. Likewise, demonizing carbon-heavy “brown business” overlooks the residual need for investment in fossil-fuel production during the multi-decade transition to a net-zero-emissions world.
Fortunately, before the pandemic, businesses themselves were making new commitments to sustainability and inclusive growth. Major companies and investors have increasingly lined up behind a shift from shareholder to stakeholder capitalism, which has come to be seen as a better model not just for people and the planet, but for business, too. Investors doubtless will have noticed that many of the companies leading the push toward stakeholder capitalism have outperformed during the pandemic.
But these first movers still face a collective action problem. While investor attitudes are changing, most shareholders remain focused on short-term returns – a problem that will not have been helped by large pandemic-induced losses. The businesses stressing long-term sustainability thus risk punishment in the financial markets. To circumvent this problem, governments and regulators will need to revise the rules of the game.
In the rush to keep businesses afloat, many governments have understandably been reluctant to attach “green strings” to their emergency funding and loans. But there will likely be more opportunities to do so. The pandemic has triggered a collapse in emissions-heavy travel and transportation, which means that entire industries such as airlines are facing an existential threat. As such, governments will have enormous leverage to attach conditions to their support in the months ahead.
Moreover, at a time when the previously unthinkable has suddenly become reality, there is ample scope for implementing radical legal and institutional changes in support of stakeholder capitalism. This could mean broadening corporate board representation to include workers, community leaders, and other stakeholders, extending more active support to small businesses and start-ups, or cultivating more social business models such as local cooperatives.
Having protected business during the crisis, governments are also in a strong position to claim equity stakes in the potential profits that will flow from the recovery. Doing so would not only avoid overburdening businesses with debt, but would also enable governments to ensure that taxpayers and workers benefit from the returns on capital. And, in other cases, governments may be forced to nationalize failing companies, or to restructure entire sectors.
Finally, governments can help steer investment toward sustainability goals. For example, by establishing long-term but concrete deadlines for phasing out various carbon-intensive activities, the state can encourage private investment in renewables and other low-carbon sectors. Public investment and targeted subsidies or grants can also have a catalytic effect. A recent survey of 231 policymakers and economists from 53 countries identifies a range of attractive job-creating green investments, from clean physical infrastructure to retrofitting existing buildings for energy efficiency. And, again, sustained low interest rates will make financing such programs eminently affordable.
A NEW SOCIAL SETTLEMENT
The accelerated digitalization spurred by the pandemic lockdowns and travel restrictions will most likely be sustained. Like renewable energy, the marginal costs of digital technology are low and falling rapidly, which means that the largest constraint on their adoption is the need for upfront investment in infrastructure and capacity. Government incentives to foster such investment therefore will have multiple benefits, not only creating jobs but also accelerating technical progress and the climate-friendly shift from physical to digital activity.
That said, while these technologies create new jobs, they will also destroy old jobs, and supporting these displaced workers will add to the strain on public finances. A sustainable recovery therefore will require forging a new social consensus on tax burdens. As this process unfolds, there will likely be irresistible pressure to increase taxes on the winners of the digital economy, as they are the ones best positioned to scoop up a disproportionate share of the gains from accelerating digitalization. And, because the marginal costs of new digital products and services are falling, there will be scope for raising taxes without putting upward pressure on consumer prices.
For their part, tech companies recognize that the public is losing tolerance for the “winner takes all” effects that have allowed them to grow exponentially in recent years. Some tech leaders have even joined the growing chorus advocating radical measures to support displaced workers, such as a universal basic income (UBI), universal basic dividend (UBD), or state-subsidized job guarantee.
Similarly, while the recent collapse in energy prices undercuts the incentive for adopting renewables, it also represents a golden opportunity to increase carbon prices by phasing out fossil-fuel subsidies, raising taxes, or relying on emission permit trading. As it happens, this policy shift enjoys near-universal support among economists, growing support from across the political spectrum, and even some support from fossil-fuel producers. Even in the US, where climate-change skepticism and outright denialism have long stood in the way of progress, a growing number of Republicans are at least endorsing the use of the price mechanism to rein in emissions.
A TRULY SUSTAINABLE RECOVERY
If there was ever a time to shift away from subsidies and toward a carbon tax, it is now, when energy prices and the general level of inflation are low. To ensure that the new form of taxation is widely accepted, policymakers should consider giving the revenues back to people via general tax cuts or flat-rate payments – so-called “carbon dividends.” That way, it would operate as a progressive tax, because those higher up the income ladder, who tend to have a larger carbon footprint, will pay more than they get back, while those further down will get back more than they pay in.
One such proposal in the US is the Baker-Shultz Carbon Dividends Plan, which would initially tax carbon dioxide emissions at $43 per ton, returning $2,000 per year to the average family of four. According to an estimate from the US Department of the Treasury, the net income of earners in the lowest decile would rise by 8%, while those in the highest decile would face a net reduction of only 1%. And that is even before factoring in the benefits of reduced pollution, traffic, accidents, illness, extreme weather events, and dependence on energy imports.
Aside from domestic concerns, there is the issue of cross-border fairness – specifically, the risk that some countries will try to gain a competitive advantage by not taxing carbon, effectively free riding on others’ emissions reductions. One potential solution to this problem is to impose taxes or tariffs on imports from countries that do not tax carbon at the same level as the recipient country. This approach could actually encourage some countries to raise their own carbon taxes even more, to obtain higher tariff revenues. But it also might unfairly hit poorer exporting countries that already have relatively low emissions.
To get around that knock-on effect, Raghuram G. Rajan of the University of Chicago Booth School of Business advocates a global redistributive plan, whereby countries with per capita emissions above the world average would pay some proportionate amount into an incentive fund, to be distributed to below-average emitters. In the case of the US, Rajan suggests that it could fund its contribution to the shared pot by diverting carbon dividend payments from richer households (either under the Baker-Shultz plan or a similarly structured framework).
Beyond the issue of carbon pricing, financing economic recovery in a sustainable, socially inclusive fashion will require a much broader shift of the tax burden away from labor income, at least that of lower- and middle-income groups. Because higher taxes on digital activities and CO2 emissions will not be enough, other creative ideas will be needed. Additional longstanding targets for progressive taxation – profits, wealth, property, and land – will all enter into the debate.
Still, it’s worth noting that a green agenda would be served especially well by higher taxes on certain forms of consumption. It is past time that the developed world confronted its addiction to amassing ever more “stuff.” Framed in this context, proposals for new kinds of taxes almost write themselves. For example, policymakers could consider taxes to reverse the upward trend in the size of cars and sport utility vehicles, a trend that is strangely at odds with the fact that the average vehicle occupancy in the developed world is around 1.5.
A WINDOW OF OPPORTUNITY FOR RADICAL SHIFTS
Radical tax reform is a key part of the full-spectrum policy shift that a sustainable recovery will require. Clearly, such a shift would lead to a very different world from the one today. But it remains to be seen how far advanced economies will go in this direction. As we have seen, much will depend on how the pandemic plays out, and on political developments in the US and other countries.
Still, for many governments, a window of opportunity is opening. The task will be to embrace not “big government” but smart government. While regulation has an obvious strategic role to play, one of the lessons from the pandemic is that unnecessary bureaucracy can do more harm than good.
In crafting policies to advance a sustainable recovery, governments will also need to develop a new approach to business. Many businesses’ new dependence on the state can be leveraged to usher in a more sustainable model of corporate governance, and to wean firms from debt through broader equity participation. Businesses themselves have already shown their willingness to head in this direction.
The shift toward stakeholder capitalism would also complement the mobilization of civil society. In the wake of the pandemic, both governments and big businesses should now recognize the importance of the service sector, small businesses, and start-ups for generating jobs and serving local communities. Cooperatives and other forms of social organization could help to lead a grassroots push for more sustainable growth and climate activism.
But nor should we forget the power of market mechanisms to drive change. Radical shifts in taxation and subsidies, combined with new regulatory frameworks, could spur far-reaching changes in private consumption and investment behavior. Just as the rapid adoption of new technologies can sustain climate-friendly digitalization and the tax revenues generated by it, low energy prices offer a chance to kick-start the shift toward carbon pricing, and away from labor-income taxation. Eventually, these revenues could go toward further tax cuts or even more ambitious wish-list items like a UBI or UBD.1
Climate action does not have to fall victim to the colossal economic damage wrought by COVID-19. If anything, there is a unique opportunity for a green recovery that serves both people and the planet. True sustainability will ultimately depend on healing divisions in the economy, politics, society, and business.
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