A high-level overview of green stimulus: what it is, what it isn’t and some lessons learned from previous efforts Canada should keep in mind.
This week’s post is sort of cheating because I didn’t have to think of a new blog topic – I stole one from work. In my day job, I lead the Smart Stimulus initiative with Canada’s top clean economy think-tank. I’ve spent the last month advising government officials, writing articles, and conducting research all on one topic: Green stimulus. It’s an area that is heavily misunderstood, fairly nuanced and not as magical as it seems. That said, it can make a substantive positive impact – if done properly. So this week is a 101 post: what is green stimulus (and stimulus more generally), what is the point of green stimulus and what have “many people” been saying that we should be doing?
First off, the basics: Stimulus is any action the government takes to resurrect overall demand within the economy. The current health crisis means we are still staying inside. Once we all leave our houses, we will need to do things (please god, let there be things to do) to make money and occupy ourselves. Right now, we are actually actively trying not to resurrect demand – we are suppressing it by staying inside. This means that the funding issued up to this point is not stimulus; it’s disaster relief. That’s an important distinction, because disaster relief is all about bridging cash flow gaps, not resurrecting aggregate demand. In most countries, including Canada, stimulus hasn’t actually started yet.
Now, when it does start, there can be quite a few different types. Stimulus can be automatic or discretionary, meaning it can be issued through automatic dispersals once a certain threshold (like GDP falling by a certain amount) is hit, or passed via legislation. It can be fiscal or monetary, meaning it can increase government spending/purchasing/transfers, or increase the amount of credit available to consumers and businesses. Fiscal spending can be direct, or use the tax system: using the tax system is faster and takes less administrative oversight, but direct spending can be more project-specific. And finally, stimulus broadly can be a single initiative or a package of approaches (pro tip: it is always a package of approaches. No country builds one bridge and goes “Economy fixed, job well done boys” like the government equivalent of the Penguins from the movie Madagascar).
Green stimulus is any of those approaches outlined above, and is simply used to fund “green projects”. Lowering the corporate tax rate for clean technology companies? Green stimulus. Financing electric public transit? Green stimulus. Lowering interest rates for borrowing for loans for energy efficiency retrofits? Green stimulus. You get it.
Importantly, there are some things that green stimulus is not. Green stimulus is not the same as general green or climate change policy. That’s because green policy (labour market policy, climate policy, etc.) is all about reducing emissions across the economy. Stimulus as a concept is 100% about short-term job creation to resurrect demand in the economy. Green stimulus is 100% about short-term job creation to resurrect demand in the economy, with the side aim that those jobs be created doing green “stuff” broadly. It is still job creation and investment policy – green stimulus just tries to make sure those jobs and investments are green.
Wh would we want green stimulus if it isn’t the same as climate policy? Because it can still help fight climate change across the overall economy. If the choice is between making investments in green projects or fossil fuel projects, one is likely to have a far greater impact on future carbon emissions trajectories. That’s a problem. Policymakers have been made dramatically aware in recent year that climate change is bad and the impacts are only going to get worse. No one thinks we can pretend that suddenly it isn’t happening just because a recession hit. If we blow past our climate targets, the extended disruptions we will endure will make the recession following this pandemic look like an episode of Phineas and Ferb (the full impacts of climate change may even come with anthropomorphic crime-fighting platypuses, we simply don’t know the long-run implications).
So they face a conundrum: how can they create jobs in areas hit hard by recession, if a majority of the available jobs today are in fossil fuel or carbon-intensive sectors? Getting people back to work is great, but doing so at the expense of our climate targets is likely to cause more problems than it solves. Green Stimulus seemingly offers some answers – but there are three important points worth noting about exactly what green stimulus can do that should be remembered.
- Green stimulus is not enough to support a transition. No amount of public spending is sufficient to transition an entire economy to zero carbon. A low-carbon transition means transitioning businesses, households, workers and communities (i.e. the whole economy) away from carbon-intensive energy use and consumption patterns. In order to do that, you need market signals that drive investment over the course of decades: carbon prices that steadily increase and regulations that grow in stringency over time. Without market signals, the market will not know what the minimum threshold of performance should be for future investments. Public spending on green projects without incentives – or worse, paired with spending on fossil fuel infrastructure or rollbacks on environmental regulations – won’t meet these minimum standards or support the market moving forward in a transition. This is because the market won’t move forward if there isn’t a signal about where it should go – it will simply stay as it is. You can’t just have carrots – you also need sticks. If you don’t have them, companies can’t plan investments or hiring into the future in a way that is compatible with climate goals.
- The market barriers and problems that existed before this recession still exist today. Just because we entered a recession doesn’t mean that clean technology suddenly doesn’t face barriers to deployment, it doesn’t mean the provinces all suddenly get along with the federal government, and it doesn’t mean that every clean technology is suddenly ready for mass deployment. As much as I personally love the idea of investing in green or blue hydrogen manufacturing plants and a cross-Canada pipeline network with the aim of decarbonizing home heating, there are limitations to what public sector spending can achieve. For my example, hydrogen is too far up the cost curve (forecasts don’t put it at production cost parity until 2025) for the market to naturally step in once public sector funding exits, and its deployment will depend more on decreases in the costs of electricity (i.e. we need a lot more renewables before cost-competitiveness is realistic). That means governments need to focus on both pairing stimulus with policies that lower barriers to entry, and on targeting the technologies that are mature enough that the market can step in once public sector capital dries up.
- Green stimulus probably won’t not create jobs in every industry. It is important to keep in mind that most “green jobs” in a stimulus context are manual labour or technical jobs – not all, but most. Funding for energy efficiency retrofits, orphan well clean-ups and renewable energy construction, tends to benefits construction and manual labour jobs – which is great, but the hardest hit demographic in this particular recession in Canada has been women under 25, and women between 25 and 54 have been unemployed at almost twice the rate of their male counterparts. Given that, as of 2018, only 14% of apprenticeships were held by women, stimulus that pushes manual labour jobs is unlikely to help the most affected demographics. This isn’t some secondary argument – if we create jobs in sectors that haven’t been as adversely affected, we might end up displacing or shifting jobs (and losing them in aggregate) rather than creating new ones. And new research has shown inequality directly harms growth prospects over the short, medium and long-run. So if even for purely economic reasons (which is not even the main reason we should be thinking about this) – we need to think a lot more explicitly about women and vulnerable populations than we would if we just funded energy efficiency projects. But whether green stimulus is the best fit to help those demographics entirely depends on how creative policymakers are willing to get, or what types of supports get called “green”.
With all of that being said, there is a lot of good green stimulus can do. First, there are lots of projects whose primary issue really is not having enough money. Throwing money at the problem won’t fix everything – but it will fix a lot. Green and clean investments have been historically underfunded at ridiculously sub-optimal rates, and this is a great way to correct a market inefficiency. If market-ready technologies are selected and supporting infrastructure is built, stimulus can build momentum that results in important ideas or solutions taking flight.
Second, there are opportunities to overcome politcal inertia and develop support for certain technologies, approaches or industries that will boost support for future action in the sector. The energy efficiency sector in the United States is worth over $1 billion USD annually – that is a great deal of support lobbying for climate policies that spur demand in their sector, and a lot of money returned to households through jobs and cost-savings. Oil and gas companies do the majority of lobbying now because they have the majority of the money. If other sectors get money, they can lobby for things that benefit them. Stricter energy efficiency regulations and renewable energy mandates are two great examples of solutions that a strong solar industry would actively advocate for when speaking with government.
Finally, green stimulus can have major spillover benefits if it invests in infrastructure that enables future action. One example is electric vehicle charging. The more we invest in EV charging stations, the lower the perceived risk of being stranded without a charge becomes to consumers (currently the #1 barrier to purchasing an EV in Canada) and the more likely they are to buy an EV. Once more start buying EVs, it creates momentum as dealerships, manufacturers and neighbours all scramble to meet demand, the technology becomes normalized and we all make/save money doing the right thing. So there are major benefits to making smart investments if we want to spur future action and create climate wealth.
All in all, green stimulus is like any other kind of stimulus – the focus in on jobs right now. It will not independently drive a market transition, and we should be mindful of its distributional impacts and limitations. But it can also do a lot of good in supporting a transition and preventing backsliding on climate progress. We should remember all of that in discussions to come, and make a point to ensure we advocate for responsible policies in 2020 conversations. Canada has a real shot to do some good and make progress on fighting climate change – and if we get this right, we might even manage to score.