By Francesco Lamperti and Andrea Roventini (Sant’ Anna, Pisa)

While Trump keeps overlooking the problem of climate change, recent findings underline that tight climate policy would markedly strengthen the US economy rather than dampening it.

The global High-Level Commission on Carbon Prices, co-chaired by economists Joseph Stiglitz and Nicholas Stern, highlighted in its last report the potential benefits of a green transition, pointing to the need of sharply increasing the price of carbon.

As stressed by Stiglitz in a recent column:

<< Trump is looking toward the past – a past that, ironically, was not that great. His promise to restore coal-mining jobs (which now number 51,000, less than 0.04% of the country’s non-farm employment) overlooks the harsh conditions and health risks endemic in that industry, not to mention the technological advances that would continue to reduce employment in the industry even if coal production were revived.

In fact, far more jobs are being created in solar panel installation than are being lost in coal. More generally, moving to a green economy would increase US income today and economic growth in the future. In this, as in so many things, Trump is hopelessly mired in the past >>.

The recipe for the transition outlined by the Commission is a relative simple one: a more stringent regulatory system (e.g. one that restrains coal-fired power generation, for example) would reduce the market for high-emitting energy technology and a deeply higher-than-today carbon tax would help promote investments in renewable energies. Tax revenues would support a more equitable growth.

The price of carbon might vary across countries but needs to be high enough to deliver a signal. As reported in the Commission report:

“Efficient carbon-price trajectories [must] begin with a strong price signal in the present and a credible commitment to maintain prices high enough in the future to deliver the required changes.”

High carbon prices would automatically deliver revenues that could be used to support currently deficient aggregate demand or to enlarge transfers to lower income classes. However, opportunities from a tight climate policy do not run out here. The transition to a low-carbon economy could be a powerful growth story. In the medium term, it can be a strong driver of discovery, innovation, and investment (Stern 2015); in the shorter term, the necessary investments in sustainable infrastructure could be a key driver of growth (Abiad, Furceri, and Topalova 2014; IMF 2014). The role of the financial system will also be fundamental in shaping the speed and smoothness of such a growing transition.

Within the DOLFINS project, researchers from Scuola Superiore Sant’Anna and OFCE are developing new agent-based integrated assessment models which are exploring the role of policy intervention for triggering the green transition and make it compatible with given climate targets. Preliminary analysis delivers policy prescriptions in tune with the report, but highlight the need for strong command and control interventions together with even more aggressive carbon pricing than suggested in the report itself.

 

References:

Abiad, A., D. Furceri, and P. Topalova. 2014. “The Time Is Right for an Infrastructure Push.” World Economic Outlook 2014. Washington DC: International Monetary Fund.

IMF. 2014. “IMF World Economic Outlook (WEO), October 2014: Legacies, Clouds, Uncertainties.” Washington DC, USA: International Monetary Fund.

Stern, N. 2015. “Economic Development, Climate and Values: Making Policy.” Proc. R. Soc. B 282 (1812): 20150820. doi:10.1098/ rspb.2015.0820.