CLIMATE
Climate Policy from a Keynesian Point of View
A new paper by J. W. Mason (City University of New York) emphasises the need for investment-centred instead of price-centred climate policy.
BY
DAVID KLÄFFLINGPUBLISHED
3. MAY 2022READING TIME
6 MINMany economists would argue that a carbon tax is the best way to tackle climate change. Because climate change is first and foremost understood as market externality, the cost of carbon emissions is not incorporated into prices, and hence too much is spent on carbon-intensive goods. In this light, the goal of regulation should be to correct this mis-pricing; once this is done, private businesses and consumers can find the lowest cost path to decarbonising the economy in a decentralised way.
However, developments like the Gilets Jaunes protests in France, and more recent responses to rising energy prices in the wake of the war in Ukraine, have raised doubts about the viability of aggressive carbon pricing, putting distributional deliberations at the centre of climate policy. In a new article, J. W. Mason emphasises an investment-centred approach with more direct measures to boost climate investment rather than taxes or other forms of carbon pricing. This vision of climate policy, sometimes referred to as the Green New Deal in the United States or the Green Deal in Europe, sees decarbonisation as a project of actively building up a low-carbon economy, with the state playing a leading role, both through public investment and measures to direct private spending.
The author sketches out how disagreements over climate policy arise, not just from different political judgements or preferences, but from alternative models of how the economy works. In the orthodox model, resources and technology are given, known, and fully utilised; the only question is what way of using them will deliver the most well-being or utility. The heart of the Keynesian vision is the idea that the central economic problem is not scarcity, but coordination. What does this difference mean for a Keynesian view of climate policy?
In the first place, it means that decarbonisation will be experienced as an economic boom. If we imagine the economy in terms of a fixed pot of resources to be allocated, then devoting more to climate goals must mean less for other purposes. If we think of the economy as an open-ended process of cooperation, then there is every reason to think that a big influx of new spending will mean more production of all kinds, especially if it is accompanied by new forms of coordination.
The second major implication of the Keynesian view of the economy is that there is no trade-off between decarbonisation and current living standards. The idea that there is a hard trade-off between current consumption and decarbonisation rests on the assumption that there is no meaningful slack in today’s economy, and that workers are already engaged in the highest level of productivity activity they are capable of.
A third major implication follows from the first two: There is no international coordination problem in climate policy, because the countries that move fastest on climate will reap direct benefits. In the first place, aggressive decarbonisation will boost domestic demand, leading to faster growth. Second, many decarbonisation policies are likely to have co-benefits (to public health, for example) that outweigh their costs and will be realised at a national level. In these cases, rather than facing an international coordination problem, action on climate change can be seen as helping overcome political obstacles to policies that are already in the nation’s self interest. Third, early investment in decarbonisation will generate a persistent advantage in strategic industries.
What the primacy of coordination over price signals means in practice, can be illustrated by the example of wind power. Not so many years ago, costs of wind power were much higher than the costs of new fossil fuel power capacity. Even a very high carbon tax might not have been enough to close this gap, while imposing unacceptable hardship on consumers. Targeted subsidies for wind generation, on the other hand, were able to raise the scale of wind investment until eventually its costs fell below those of fossil fuel generation.
The need for coordination becomes even clearer, when considering a familiar chicken-and-egg problem: one of the major obstacles to the widespread adoption of electric cars is the lack of charging stations. But it makes no sense for private businesses to invest in charging stations when the share of electric cars is still very low, so the state has to step in as credible coordinator for private actors.
