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Energy Economics Weekly Briefings

Are There Any Economics In the Green New Deal?

Written by: Ellen Hughes-Cromwick

On February 7, 2019, Representative Alexandria Ocasio-Cortez and Senator Ed Markey issued a resolution “Recognizing the duty of the Federal government to create a Green New Deal.”  This document provides a series of goals and outcomes that are intended to achieve a reduction in greenhouse gas (GHG) emissions to near zero with a 10-year “national mobilization.” There is no economic or financial assessment — a game plan if you will — to achieve these desired goals and outcomes.  While broad-based policy measures could be implied by some of the text in the resolution, there are no specific details on such policies.  Without casting judgement on the likely economic, financial, and policy inputs which could produce the outcomes contained in the resolution, let’s look at the details.

There are five broad outcomes in the resolution:

  1. Achieve net zero GHG emissions
  2. Create millions of good, high wage jobs
  3. Invest in infrastructure and industry
  4. Secure clean air and water, climate and community resiliency, healthy food, access to nature, and a sustainable environment
  5. End injustices against, among others, minorities and low income people

In order to achieve these outcomes, the resolution calls for a 10-year mobilization plan to:

  • Become resilient against climate change and natural disasters
  • Repair and upgrade infrastructure
  • Eliminate pollution and GHG emissions “as much as technologically feasible”
  • Guarantee universal access to clean water
  • Reduce risks posed by flooding
  • 100% clean power grid
  • Overhaul the transportation sector with zero emissions vehicles, clean public transit, and high speed rail
  • Mitigate long-term adverse impacts on public health, the economy from climate change and pollution
  • Decarbonize the environment
  • Clean up hazardous waste
  • Promote international exchanges of sustainable technologies and to become a leader on climate action

There are no specific policy details in the resolution, nor are there any provisions for whether any of the outcomes are likely to be achieved by market forces or through policy interventions.  Simply put, the economics are not included in this resolution.

Currently, market behavior and policy stimulus in other countries do provide some insights about the costs and benefits of the outcomes laid out in this resolution.  The lack of any data or evidence to support the GND outcomes or initiatives presents a challenge for anyone reading this document.  For example, market forces produced a significant shift in the energy mix since the financial crisis of 2008-2009.  The chart below shows the share of electricity produced with the use of renewables since 2007.  This share has more than doubled in the last 11 years.

Moreover, the major driver for this shift has been the unit costs of renewables during this period.  The U.S. Department of Energy’s estimates of onshore wind and solar costs (capacity weighted) indicates that these sources for power production are competitive with several fossil fuel sources (see table below).  This March 2018 report indicates that even before tax credits are applied the total system costs for a 2022 service data are lower for onshore wind than for natural gas feedstocks.

Significant policy stimulus is being implemented in China and Norway, for example, in order to achieve CO2 emissions reductions in the transportation sector.  China has implemented purchase incentives and production targets for electrified vehicles.  Norway has done the same, resulting in an after-tax price of EVs which is competitive with a conventional internal combustion engine vehicle.

But there is no question that a suite of public policies are implied by the Green New Deal.  For example, the levelized costs for solar in the table above are competitive with natural gas after the tax credits are applied to yield a tax-adjusted levelized cost of $46.5 per mWh, less than the $48.3 per mWh for natural gas feedstock (again for service entry date of 2022).

Conventional public finance theory posits that there is a role for government policy intervention when a market produces what economists call an “externality.”  We “use” the environment as a “free” public good, and in the process, put harmful CO2 emissions in the air we breathe.  We don’t really pay for it.  Richard Musgrave, who was an economics faculty member at the University of Michigan from 1948-1958, provided both theoretical and empirical foundations for the role of public policy interventions when such externalities exist.  What we have missed in the U.S. is a way to influence our consumption and production decisions by properly pricing the externalities produced by our adverse climate outcomes.  And, in turn, the costs are mounting.

Does the GND have an economics backbone?  In some sense, legislation could be drafted from many elements of the GND that would be consistent with the basic tenets of public finance.  Scientific evidence and expert analysis of economic damages associated with climate change are documented.  We know that our nation’s infrastructure is not suitable for the changing climate.  We know that reducing CO2 emissions from our transportation sector will be increasingly feasible in the next 10 years given the cost reductions in battery technology.  These are two areas where important progress could be made in the next 5-10 years.