Michael Liebreich
Senior Contributor
BloombergNEF
One of the most iconic images from the COP15 Climate Conference in Copenhagen in 2009 was the occupation of the conference center by protesters holding signs reading “We won’t leave until you reach a fair, ambitious and legally binding agreement.” Of course no such deal was reached, but the protesters meekly left anyway. Climate change has not been a winning political issue anywhere in the world since then. But that may be about to change.
In the decade since Copenhagen, there has been a broad political détente between major political parties around the world – an unwritten agreement that climate action is to be energetically pursued, but only to the extent that it doesn’t jeopardize the recovery from the great recession, upend the neoliberal economic model, or damage any powerful incumbent interests. Unless of course you are a U.S. Republican, Australian Liberal, Canadian Conservative or elderly U.K. Conservative, in which case the whole thing is, frankly, a huge joke and an electoral gift.
Despite its success, the Paris Agreement of 2015 did not fundamentally challenge this situation. Its elegance lay in being non-ambitious and non-binding enough to get signed, but still managing to achieve two important things (as described in my commentary at the time, entitled “We’ll Always Have Paris”). First, to include a ratchet mechanism, setting the scene for continued scientific research and the resulting escalation in demands for action; and second, to send a clear signal about the world’s inevitable trajectory toward a low-carbon economy.
President Donald Trump’s decision to pull out of the Paris Agreement and his boorish attempts to dismantle U.S. climate programs failed to disrupt the post-Copenhagen consensus. As demonstrated by the We’re Still In campaign, support remained unshaken at state, city and local level, as well as among businesses and other institutions.
The world of 2019 is not the world of 2009
As I wrote in my piece at the end of last year (Two Business Cycles to Prepare for A Low-Carbon World), it feels like the post-Copenhagen consensus which has reigned for the past decade may be about to break up.
First, we know far more about the hard science of climate change now than we did in 2009. The so-called hiatus in global average temperatures – so misused by opponents of climate action – was well and truly blowtorched by the El Nino year of 2016. The major meteorological organizations of the world are unanimous that the most recent four years were the warmest in the 170-year instrumental record. The October 2018 UNFCCC report on the implications of a 1.5C temperature rise galvanized the need for urgent action.
Second, in 2009 it was still plausible to claim there were no alternatives to fossil fuels. In 2019, a range of low-carbon technologies are being deployed at scale and experiencing double-digit growth. Everywhere we look we see opportunities to reduce emissions at little or no cost, or even saving money.
The third major difference between 2009 and 2019 is that a decade after the financial crisis, much of the population has still failed to recover economically. Quantitative easing helicopter-dropped money onto the economy via the exact same institutions whose recklessness caused the crisis; and in the process, protected the wealth of asset owners – including fossil fuel asset owners – and bypassed everyone else. This is not the place to discuss whether other choices could have been made; it is enough to note that a substantial proportion of Western voters are disenfranchised, resentful of incumbent decision-makers, and volatile.
Those too young to vote have caught the vibe. The Climate Strike movement, sparked by the preternaturally determined 16-year-old Greta Thunberg, has now spread to 14 countries. Anyone who thinks it will fizzle out any time soon has forgotten what it is to be young.
Also tapping into the zeitgeist – bravely and with much gusto – is up-and-coming political star Alexandria Ocasio-Cortez (known by her initials as AOC) who this month, along with veteran climate hawk Senator Ed Markey, put forward GND [Green New Deal] Resolution, H. Res 109, their sweeping vision for the decarbonization of the U.S. economy and reconstruction of society. Despite a somewhat botched launch – a draft FAQ accompanying it talked about getting rid of “farting cows and airplanes” – no fewer than 88 other House Representatives have already declared support, as have all the Democrat candidates who have so far thrown their hat into the ring for the 2020 Presidential elections, and some of those who have not.
It may be wildly ambitious and burdened with pledges on healthcare and financial redistribution, but polling shows it is resonating strongly with voters, particularly young ones. After a decade in which climate and clean energy legislation focused on the arcana of carbon trading, net metering and biofuels mandates, there is clearly a constituency for something more grandiose, more inspirational – something emphasizing purpose not policy, and scale not detail.
Let’s take a look at the GND Resolution through a few different lenses.
First up, the engineering lens
In terms of actually shifting the needle on carbon emissions, the Resolution is an absurd over-reach, calling for “meeting 100% of the power demand in the United States through clean, renewable, and zero-emission energy sources” via “a 10-year national mobilization”.
I would be among the first to argue that cheap wind, solar and batteries will be at the heart of the U.S. power system of the future (on a point of historical fact, I was!) but, with the best will in the world, it is going to take more than a decade. And even then, system costs start to escalate alarmingly at high penetration if we don’t come up with some form of affordable seasonal or longer-term storage.
As for achieving a zero-carbon power system while simultaneously exiting nuclear power (the resolution is silent on nuclear but the accompanying FAQ and numerous sources around AOC have declared this intention), if you want to remain on a Paris-compliant emissions trajectory, that is the purest fantasy.
But the biggest disappointment is that the Resolution focuses most of its recommendations on electricity, which currently supplies only around 20% of energy services. Even though this will certainly grow as transportation electrifies, as I wrote last year (Beyond Three Thirds: The Road to Deep Decarbonization), our biggest challenges lie in decarbonizing heat, industry, agriculture, long-distance freight and aviation. About these, the Resolution says only that the goal is to eliminate pollution and greenhouse gas emissions “as much as is technologically feasible”. That is very weak, given that these sectors currently account for over a third of emissions. The only solution proposed for emissions that have not yielded to these efforts is “removing greenhouse gases from the atmosphere […] through proven low-tech solutions that increase soil carbon storage, such as land preservation and afforestation.”
The GND’s demands for clean air and water are laudable, as are its mentions of public transport and access to nature. It is strangely silent on the country’s cities, towns and neighborhoods – for such a sweeping vision to say nothing about the country’s urban environment seems a big omission, given that is where most Americans live. But when it comes to the U.S.’s energy, transport and agriculture sectors, it does head off in the right direction, albeit with huge gaps and at an unrealistically fast pace.
Second up, the cost lens
The Resolution is a million miles from a fully costed plan. Publicly available estimates for its cost range from $750 billion to $1 trillion per year. Let’s start just with the identifiable capital spending.
A total of $43.8 billion was invested in renewable energy projects in the U.S. in 2018, which bought 20GW of new renewable capacity. To achieve the capacity required to deliver 80% renewable electricity in ten years would require around five to six times that build rate. Allowing for experience-curve-driven cost reductions, upgrades to the grid, and enough storage to get to very high penetration of variable renewables (though still not 100%) would require somewhere around $300 billion per year.
Next, the Resolution calls for “upgrading all existing buildings in the United States and building new buildings to achieve maximum energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification” – something that is being done in a very limited way today. Assuming a modest $20,000 retrofit for each of the 128 million homes in the US, that gives a cost of $2.6 trillion. Spread it over ten years and it comes to another $260 billion per year.
We have to add something for the electrification of transport, public transport and high-speed rail. It’s hard to pick a figure because the details are so vague, as we have seen. But let’s allow $200 billion per year. Add another $120 billion to support the decarbonization of industry through research, development and deployment support – assuming incentives equivalent to 10% of gross annual business investment are needed to move the needed – and $50 billion for agriculture – just over twice the current total level of U.S. agricultural subsidies. Then there is water infrastructure, clean air and environmental remediation and resilience, for which we could add, say, another $50 billion per year.
That brings the estimated total annual capital investment to $980 billion per year. This is, of course, very much a back-of-envelope figure, as the text is heroically (and presumably deliberately) vague, but it confirms that the hard capital spending part of the GND would indeed be somewhere around the trillion-dollar per year mark.
It is important to note that while this capital spending might also be harnessed to deliver the jobs pledge contained in the Resolution, it does not include funding for any purely social expenditure, such as health care, training and education, supporting family farming and access to nature, and nor would it deliver affordable housing.
Next, the finance lens
So, could the GND’s trillion dollars or so per year of capital spending be financed? On the surface there is no a priori reason why not.
According to the Federal Reserve, the net wealth of U.S. households reached $109 trillion at the end of 2018, up from $60 trillion at the end of 2009. Even assuming that all of the GND capital spend is financed domestically, diverting $10 trillion over ten years into the GND’s clean energy, infrastructure and transport plans would absorb less than 10% of the nation’s savings.
That seems like a reasonable investment if it solves all of the nation’s climate and environmental challenges, particularly if investors continue to bear down on their carbon-intensive investments, as described in my piece at the end of last year (Two Business Cycles to Prepare for A Low-Carbon World)? If it were as simple as that, count me in!
The first big caveat is whether this really would be investment, or just spending. Politicians tend to call anything they want to spend money on “investment”, but the word can only really be applied honestly to situations where funding applied today results in revenues or savings tomorrow which could – assuming the right sectoral policy – find their way back to the provider of capital. Everything else is not investment, it is expenditure, whether it builds a physical asset or not. While the major part of the GND’s $1 trillion of capital costs could easily fall into that category, inevitably some large minority would not – such as most spending on environmental remediation and resilience.
Focusing on the true investment portion – still clearly in the high hundreds of billions of dollars per year – and how that might be financed, once again the Resolution provides very little to go on. Its single line on finance states that the GND’s goals and projects would include “providing and leveraging, in a way that ensures that the public receives appropriate ownership stakes and returns on investment, adequate capital (including through community grants, public banks, and other public financing).”
The most charitable interpretation would suggest this refers to traditional public-private partnership approaches, with a few modest new public finance institutions thrown in for political theatre. Aside from the huge scale of the figures involved, there is no obvious reason this couldn’t be made to work.
A more likely interpretation is that the Resolution is channeling the “entrepreneurial state” views of British economist Mariana Mazzucato. Mazzucato has done a great research job identifying the state’s role in the origins of the technologies that created our modern world. However, since multinational corporations tend to use the technology but then find ways of avoiding tax, Mazzucato feels that the state should remunerate itself for its “entrepreneurship” by retaining an ownership interest in the technologies in whose development they have played a role, a view against which it is easy to argue.
Of course, the least charitable interpretation is that the GND represents a vast socialist land grab, intended to effectively nationalize the U.S.’s energy and transport sectors by declaring the current assets obsolete and funding an entirely new set from the public purse.
The second big caveat does not, in fact, relate to whether GND assets could be financed – the answer is of course they could if structured correctly – but to whether enough of the nation’s economic activity can be diverted to deliver the relevant physical assets in the first place. Last year U.S. GDP was $20.4 trillion, so $1 trillion of GND spending would represent 4.9% of economic activity.
The favorite economists of the GND movement are the high priests of Modern Monetary Theory, or MMT as it is known in the chat rooms. According to MMT, governments can simply print money for any goal at which they want to direct unused economic capacity without unleashing inflation. I am not convinced. According to the Congressional Budget Office, at the end of 2018 U.S. economic output was 0.5% above its long-run potential. The U.S. has only ever run over 2% above its long-run economic potential for short periods, always followed by inflation, recession, or both.
The truth is that you could only deliver the GND’s capital assets by redirecting activity from elsewhere in the economy on a fairly grand scale. In part, obviously, economic space would be freed up by the associated shutdown of the nation’s oil, gas and coal industries, but their domestic spending reaches only around $200 billion per year. Something else would have to give, and at some point the sponsors of the GND will have to tell Americans what it is to be.
And if you open up the question beyond just energy, infrastructure and transport to include universal healthcare, job guarantees, affordable housing and so on, then the sums involved quickly mount into multiple trillions per year, a very meaningful proportion of the U.S.’s economic activity.
Fourth, the international lens
The GND Resolution is surprisingly light on the international front. In particular, staying silent on the Paris Agreement. You would think its sponsors would want to recommit the U.S. to the major international agreement governing climate action, but apparently not.
Instead, what they suggest is “enacting and enforcing trade rules, procurement standards, and border adjustments with strong labor and environmental protections to stop the transfer of jobs and pollution overseas and to grow domestic manufacturing in the United States”. This is Trumpism with climate characteristics!
The only other relevant line in the Resolution commits the U.S. to “promoting the international exchange of technology, expertise, products, funding, and services, with the aim of making the United States the international leader on climate action, and to help other countries achieve a Green New Deal.” Needless to say, there are no details, and definitely no budget.
For a document so brimming with commitment to righting historic wrongs against disadvantaged communities and groups within the U.S., the insouciance with which the GND deals with the developing world is striking.
Remember that $50 trillion increase in U.S. household wealth in the last decade? In Copenhagen in 2009, it was agreed that the developed world – not just the U.S. – would be investing $100 billion per year in the developing world by 2020. By 2018, the figure reached around $70 billion and the cumulative total by 2020 will be about $500 billion. That’s just one percent of the increase in U.S. household wealth in the intervening period, mainly investment, not aid. And yet it draws withering fire from those opposing climate action, and the GND Resolution says nothing?
And finally, the political lens
Which brings us finally to the politics. Both supporters and opponents of the GND are playing a high-stakes political game. The GND Resolution represents much more than an overly ambitious trillion-dollar-a-year capital investment program for the U.S.’s energy and transport sectors. It is also a call for a climate-compatible industrial policy – and frankly there is much to like about that aspect.
I have written before about the need for a serious clean energy and transport-oriented innovation policy, supported by policies in areas like taxation, education, building standards and trade. In fact, in researching this piece, I rediscovered a 10-point policy plan to drive clean energy investment, which I wrote over a decade ago (Time to Plot a New Future for Policy on Clean Energy).
The GND also contains much that is good on inclusive governance – demanding that free, prior, and informed consent of indigenous peoples be obtained for all decisions relevant to them, supporting frontline and vulnerable communities, and so on. I am on the record as being disgusted with the low level of diversity in the energy sector (An Energy Sector Transformed Must Be an Energy Sector Reformed).
It is when the GND spirals off into a political manifesto for the redistribution of economic value and power in US society that it becomes very difficult to support. But I am not the greatest expert on U.S. politics – for that you need to follow BNEF’s long-standing Head of Americas and all-round U.S. political maven, Ethan Zindler.
Maybe the GND was just intended to start a debate, to get more people working on real legislative proposals to follow. In that case, however, surely its sponsors would have gone out of their way to avoid conflict within the Democratic Party. They have made no such effort. Instead, the GND seems as much about moving the Democratic Party to the left as it is about actually addressing climate change – maybe the occupation of Nancy Pelosi’s office by supporters of the GND was a feature, not a bug.
Or maybe the Resolution is only meant to serve as a rallying call for the 2020 elections. Once it has helped deliver both houses of Congress and the Presidency, this thinking goes, there will be time to craft and pass real, thoughtful, costed policies. If this is the strategy, it’s an extremely risky one: the more scrutiny the GND Resolution receives, the more its tax-and-spend over-reach and its political posturing will come under fire.
For opponents of the GND, the risk is more long-term and strategic than tactical – do they really want to dig themselves in as implacable opponents of climate action, particularly if public sentiment is moving away from them on the issue? In one poll at the end of 2018, the Yale Program on Climate Change Communication and George Mason University found 81% of registered voters, including 64% of registered Republicans, supported shifting the U.S. to 100% renewable energy within 10 years.
In particular, the Green New Deal achieves extraordinarily high polling among young voters. The Pew Research Center has even found some signs of Republican millennials peeling away from their elders on the environment, with 60% saying the government is not doing enough on the climate, versus 30% of their older party colleagues. The Climate Strike movement – to all intents and purposes the international teen chapter of the GND movement – could hardly have been better designed to embarrass the complacent and inauthentic politicians. One of the enduring images of 2019 will be elderly entitled know-it-alls – usually male but not always – being hectored by articulate, scientifically literate teenage girls.
How will all this play out? Who knows. Vladimir Ilyich Lenin, who knew more than most about political timing, once said: “There are decades where nothing happens; and there are weeks where decades happen.” After a decade of post-Copenhagen consensus, the 88 weeks through to the 2020 U.S. elections might well set the tone of climate politics for the coming few decades.
Michael Liebreich is founder and senior contributor to BloombergNEF. He is a former board member of Transport for London, and an advisor to Shell New Energies.