Thursday, November 27, 2008

Will This Recession Crowd Out the "Green Big Push"?

Do recessions have a "chilling" effect on reallocating resources towards more productive sectors of the economy? Or because the opportunity cost is low, recessions are the exact right time for key reallocations? This has been a topic of esoteric macro (see but now this issues has arisen in environmental policy. In a nutshell, will the world give up on trying to mitigate carbon emissions as they focus on the recession? Or, is there a triple win for the Obama Dream Team of simultaneously bundling; a Green New Deal that gets us out of the recession, helps to decarbonize the economy and reduces our imports of foreign oil?

As I said on my NPR appearance on tuesday, I have a few concerns with the sketch I have seen of the Obama Green Plan.

1. We need the Obama team to get a Carbon Price enacted by the Congress. Cap & Trade at around $25 per ton of CO2, this would be a credible incentive to get the ball rolling. Will the Obama team use its political capital to fight for this, or are they worried that this will be their "gays in the military back to 1993 with the first Clinton"?

2. The Boston Big Dig was a financial mess. The project's final cost ($17 billion was over 4 times what was ex-ante expected). How will the Smart Obama team guarantee that there will be accountability such that their Green Public Works project do not end up leading to millions of new Green Newmans from the television show Seinfeld? Newman wasn't working hard and the taxpayers were helping him to have a pretty good life. Was he an outlier or a glimpse of the future?

A good contract theorist would say that he can write down an optimal pay for performance contract such that the government will get good roads and green infrastructure per dollar we pay in the green big push. I hope this is true.

3. An alternative vision for the Green Big Push is more government investment at the NSF and the national labs in basic research. This will take years for the nerds to create a new "google" that trickles down but i know that this would be money well spent.

4. An alternative vision would be to sponsor innovation tournaments

5. We need some signal from the Republicans that they care about mitigating carbon. Is carbon mitigation a bipartisan issue or a Democratic issue? To send credible signals to the private investment sector we need them to believe that regardless of who controls the White House and Congress that carbon regulation is here to stay. That would be credible! If future Republican Presidents may renege on carbon pledges, then this creates time consistency issues and political business cycle issues and we will see very different green investment profiles relative to what we would have observed had there been bipartisanship on this issue.

November 27, 2008
New York Times Editorial

Save the Economy, and the Planet

Environment ministers preparing for next week’s talks on global warming in Poznan, Poland, have been sounding decidedly downbeat. From Paris to Beijing, the refrain is the same: This is no time to pursue ambitious plans to stop global warming. We can’t deal with a financial crisis and reduce emissions at the same time.

There is a very different message coming from this country. President-elect Barack Obama is arguing that there is no better time than the present to invest heavily in clean energy technologies. Such investment, he says, would confront the threat of unchecked warming, reduce the country’s dependence on foreign oil and help revive the American economy.

Call it what you will: a climate policy wrapped inside an energy policy wrapped inside an economic policy. By any name, it is a radical shift from the defeatism and denial that marked President Bush’s eight years in office. If Mr. Obama follows through on his commitments, this country will at last provide the global leadership that is essential for addressing the dangers of climate change.

In his first six months in office, Mr. Bush reneged on a campaign promise to regulate carbon dioxide and walked away from the Kyoto Protocol, a modest first effort to control global greenhouse gas emissions.

Still two months from the White House, Mr. Obama has convincingly reaffirmed his main climate related promises.

One is to impose (Congress willing) a mandatory cap on emissions aimed at reducing America’s output of greenhouses gas by 80 percent by midcentury. According to mainstream scientists, that is the minimum necessary to stabilize atmospheric concentrations of carbon dioxide and avoid the worst consequences of global warming. Mr. Obama’s second pledge is to invest $15 billion a year to build a clean economy that cuts fuel costs and creates thousands of green jobs. That includes investments in solar power, wind power, clean coal (plants capable of capturing and storing carbon emissions) and, as part of any bailout, helping Detroit retool assembly lines to build a new generation of more fuel-efficient vehicles.

Mr. Obama has surrounded himself with like-minded people who have spent years immersed in the complexities of energy policy.

His transition chief, John Podesta, was an early advocate of assisting the automakers and of finding low-carbon alternatives to gasoline. Peter Orszag, his choice to run the Office of Management and Budget (where environmental initiatives went to die during the Bush years) is an expert on cap-and-trade programs to limit industrial emissions of greenhouse gases.

Success is not guaranteed. Last year, a far more modest climate-change bill fell well short of a simple majority in the Senate. At least on the surface, it seems counterintuitive to impose new regulations (and, in the short term anyway, higher energy costs) on a struggling economy. Mr. Obama will need all his oratorical power to make the opposite case.

The historical landscape from Richard Nixon onward is littered with bold and unfulfilled promises to wean the nation from fossil fuels, especially imported oil. What is different now is the need to deal with the clear and present threat of global warming. What is also different is that the country has elected a president who believes that meeting the challenge of climate change is essential to the health of the planet and to America’s economic future.