Killing two birds with one stone? Green dead ends and ways out of | Umweltbundesamt

Killing two birds with one stone? Green dead ends and ways out of the coronavirus crisis

Blogpost by Prof. Dr. Erik Gawel and Prof. Dr. Paul Lehmann 

Public measures to combat the coronavirus pandemic are leading to a severe economic crisis these days. In order to cope with this crisis, many expect the state to act strong. Therefore, governments across the world have pledged billions of Euros for extensive recovery programs. But how “green” should these recovery programs be?

The coronavirus crisis as a moment for interest groups

When the quick distribution of a big amount of public money is announced, huge desires arise. The opportunity to make use of these public funds in their own interest, brings lobbyists of every shade to the scene – preferably with old wish lists on hand. On the one hand, climate change mitigation is put under pressure as being an “extra burden” for industries. For example, European car manufacturers have called for postponing the upcoming tightening of EU emission standards for car fleets. Some EU Member States call for stalling EU Commission’s plan of a European green deal. On the other hand, many recommend spending the public money mainly on measures that also help mitigating climate change – among them Frans Timmermans, Executive Vice-President of the European Commission, or Fatih Birol, head of the International Energy Agency. Still others demand to exclude polluting companies completely from receiving bailout funds or economic aid.

There is one thing that must not be overlooked in this politico-economic competition: public funds are still short and must be used reasonably. Otherwise excessive green subsidies can quickly turn into a part of the problem instead of being the solution. At the beginning of every discussion about (green) recovery programs it is important to develop transparent and sensible criteria based on which public aid should be allocated. The “Abwrackprämie” (scrapping premium to replace old by new cars) Germany introduced after the 2009 financial crisis warns as an example of a misguided recovery measure: It turned out to be ineffective in helping national car manufacturers to recover, and it was counterproductive environmentally.

Recovery programs must be climate-proof

After the initial bail-out programs, public recovery programs to stabilize the economy are now debated politically. This is not only an unprecedented opportunity for structural transformation. The distribution of public aid also justifies committing beneficiaries to public interests to a certain extent. Consequently, the currently available political degrees of freedom should be used to promote the transition of society towards sustainability. Subsidies to branches like tourism, aviation and agriculture – which are particularly hit by the crisis and are lagging behind in terms of sustainability – should be paid conditional on meeting minimum environmental standards. A recovery program cannot only be about reestablishing the status quo ante by assigning large funds, possibly creating new barriers for sustainability transitions. In this respect, it makes sense to implement recovery programs that are in line with the objective to mitigate climate change – as called for by many at the moment. However, such green recovery programs must not be arbitrary.

No broadband green subsidy program, please

Green recovery programs must go beyond green subsidies. First of all, it is also important to reduce unnecessary barriers for green investments, for example by revising legal constraints to the expansion of renewable energies like solar photovoltaics of wind power. Moreover, any green recovery program can only effectively and efficiently spur decarbonization if it combines with a carbon price and the abolition of environmentally harmful subsidies. The direction of recovery must be crystal clear. Otherwise green subsidies risk being ineffective, while imposing additional burdens on public budgets and reducing political degrees of freedom in the future. For subsidies to be economically justified, they need to meet clear criteria.

Green stimuli must help stabilize the economy

For green recovery programs to succeed in the competition for public funds with other important policy fields (such as health or digitalization), they must help stabilize the economy. Moreover, policy-makers need to be aware that some of the currently observed economic problems might even resolve without any government aid. It can expected, for example, that global supply chains will resume and that people will catch up on purchasing durable goods like cars, at least partly. It is exactly (the maintenance of) environmental regulation that may help steer this consumption towards more sustainable modes and incentivize car manufacturer to revise models and prices.

Government interventions must take effect where permanent disruptions are looming. One example: If innovative green business models are at risk because banks limit loans in the presence of the current uncertainties, government loans may help. In contrast, attempts to lower prices for goods and services – e.g., for cars (VAT reduction, purchase premiums) or electricity (reduction of energy levies) – are rather inappropriate means to stabilize the economy. Such measures fail to address the actual sources of insufficient investments or reduced purchasing power and therefore inefficient ways of spending public budgets. Furthermore, it is unclear whether and to what extent such certain discounts will be passed through to final consumers by market prices.

Green stimuli must be checked for mitigation potential and maturity

Green recovery programs should focus on government interventions that would also have been economically reasonable without the coronavirus crisis, for example, to correct market failures, and also that have the highest priority for climate policy. Moreover, those measures should be implemented for which rational concepts have been drafted already and that can be realized promptly. Positive examples for such “no-regret measures” can be found in the transport sector. This sector is severely lagging behind in terms of climate change mitigation, and economic rationales for public expenditures exist at least partly. In addition to that, numerous actors have already developed elaborated programs of measures. Those measures that are the ones that can be implemented quickly, should now be launched – for instance to electrify the transport sector or to strengthen of public transport.

Polluters should contribute to funding green recovery programs

(Green) recovery programs must not only address the expenditure side. A totally disregarded issue is the question how the required billions of Euro could be raised. Public expenditures for a green recovery program should at least partly be funded by polluters by implementing a carbon tax and abandoning ecological harmful subsidies. Such policies internalizing environmental costs would not be an extra sacrifice – but rather part of the solution both for revenue problems and for the redirection towards sustainability.

Conclusion: Combine economic stabilization, mitigation of climate change and revenue raising

The coronavirus crisis has opened up a window of opportunity for transformation. This should be used without getting off the regulatory track. Green recovery programs must not be reduced to a mere competition for green subsidies. Abandoning barriers to green investments and imposing a carbon price are equally important. If economically sensible, green subsidies should contribute both the stabilizing the economy and mitigating climate change. Moreover, smart green recovery programs may contribute to raising revenues for the additionally necessary public expenditures.

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Authors:

• Prof. Dr. Erik Gawel is the Head of UFZ Department of Economics and Full Professor for Institutional Evironmental Economics at Leipzig University. Director of the Institute for Infrastructure and Resources Management at Leipzig University. Main research areas are environmental and energy economics, institutional economics and public finance. Member of the European Academy of Sciences and Arts. 
  
• Jun.-Prof. Dr. Paul Lehmann is Assistant Professor of Environmental and Energy Economics at the University of Leipzig in cooperation with the UFZ. He heads a junior research group on “Sustainable deployment of renewable energies with multiple environmental impacts – Policy strategies to address environmental trade-offs of the German energy transition (MultiplEE)”. His research interests include the economic analysis of policy instruments for climate, energy and water policy.