January 18, 2021

Guest post by Edward B. Barbier

President-elect Joe Biden has made global action on climate change a top priority of his incoming Administration.  Delivering on this agenda rests on two key policies.

First, Biden has promised that the US will re-enter the Paris Climate Agreement on his first day in office and has appointed John Kerry as the newly-created Special Presidential Envoy for Climate to lead US global climate policy.

Biden has also pledged carbon neutrality for the US by 2050. To achieve this goal, Biden has put forward an ambitious climate plan that promises $2 trillion of investment in green infrastructure, innovation and other spending over the next four years.  Around $400 billion of that will go to clean energy research and development, especially battery development. The plan also proposes new fuel economy standards for vehicles, additional energy efficiency and insurance rules, and more sustainable agriculture and transportation, among other commitments to improve environmental and climate regulations.

An analysis for The Guardian suggests that the Biden plan could significantly impact a post-COVID global green recovery.  Of the current stimulus spending enacted by 18 major economies, only France, Spain, the UK, Germany and the European Union have packages that will produce a net environmental benefit. Canada’s spending on clean energy and efficiency is offset by more environmentally harmful measures such as massive road expansion and tax relief for fossil fuel companies. So far, the United States is one of the worst performers.  Before the November election, only about $26 billion - just over 1% - of US stimulus spending, was green.  However, Biden’s $2 trillion climate plan would be a dramatic reversal.  If fully implemented, the United States would overtake the European Union as the biggest investor in a global low-carbon recovery.

But is Biden’s climate policy agenda feasible, and will it be effective in achieving its objectives?

Rejoining the Paris climate accord is essential, but it is not sufficient. The US, along with China and many other major economies, has fallen woefully behind on its commitments under the agreement. The US must work with other countries to go beyond existing pledges and set new emission reduction targets for 2030 that are compatible with its commitments to carbon neutrality by 2050.  New pledges and spending plans are important, but they must also be backed by sound and effective policy.

As I have argued in a recent report for the UN Environment Programme, the US and other countries cannot rely on stimulus spending alone to foster a green recovery. Public investments can only place the world economy on a trajectory towards carbon neutrality if they are accompanied by other policy reforms, such as phasing out fossil fuel subsidies, introducing carbon pricing, and setting emission targets and standards. Pricing reforms are especially essential, for several reasons.

First, removing fossil fuel subsidies is vital to a green transition, not only in terms of providing a more level playing field for investments in clean energy but also as a signal to global markets and investors that the era of policies favoring fossil fuels is truly over. Consequently, it is critical that Biden’s newly appointed Special Envoy John Kerry pursue a US-led initiative demanding a world-wide ban on fossil fuel subsidies.

Second, the World Bank estimates that major economies will need to adopt a carbon price of US$40 to US$80 per tonne of carbon dioxide-equivalent (tCO₂e) if the world is to achieve the Paris Agreement temperature target. Currently, only five countries price carbon within that range - Sweden, Switzerland, Finland, Norway and France. If the US is serious about achieving carbon neutrality by 2050 and providing global leadership on climate action, then it must follow the lead of these countries and its northern neighbor and start pricing carbon. Canada has announced that it will be progressively increasing its carbon tax to C$170 per tonne (US$135/t) by 2030.

Third, funding the full $2 trillion climate plan is no longer the first priority of the Biden Administration.  The President-Elect has just proposed  a $1.9 trillion COVID relief plan that provides stimulus checks, unemployment and business relief, and a national vaccine distribution plan.  Biden suggests paying for these priorities through substantially more deficit-spending during the first 100 days of his Administration.

But this means that, when the Biden Administration and other governments are ready to implement their green spending plans, they will face much more limited fiscal space and debt constraints.  By 2023, governments worldwide are likely to face a cumulative shortfall of $30 trillion, and possibly more as the pandemic rages on. Any package of green and inclusive reforms must therefore be fiscally sustainable. As I have argued in a previous post, with the examples of the United States and Canada, pricing and market-based incentives will become essential to this aim.  They are needed both to foster green investments and innovations and to provide revenues from which to fund long-term public spending on green innovation and key infrastructure, reduce burdens on low-income households and displaced workers, and promote environmental justice.

Finally, carbon pricing might be more politically acceptable than previously thought, even in the United States. It is not just Democrats in Congress but increasingly Republicans, backed by industry and investors, that have expressed support for carbon pricing. Just before the US election, J.P. Morgan Chase, Morgan Stanley, BP and other major corporations endorsed a report by the US Commodities Futures Trading Commission that the US should price greenhouse gas emissions to ensure that financial markets reduce risks “consistent with the Paris Agreement.”

Spending alone will not de-carbonize the US and global economies.  There is a need for complementary pricing reforms to transition to clean energy, such as phasing out fossil fuel subsidies and taxing carbon.  Implementing these reforms will provide the incentives for the long-term investments and reduced financial risks necessary to achieve carbon neutrality by 2050. Pricing reforms will also help to pay the costs of any long-term green policy and spending strategy in the US and other economies.  If the Biden Administration truly wants to provide global leadership on climate action, adopting such policies should be a priority for its green agenda.

For more from Ed Barbier, check out his previous blog post here and a recent interview on "Smart Prosperity: The Podcast" here.