How can the government spend to fight climate change?

2009-01-07

in Canada, Economics, Politics, The environment

Grass and snow

Partly for reasons of political acceptability, most approaches to pricing greenhouse gas emissions aim to be revenue neutral. This includes cap and trade and carbon tax systems where new revenues are offset by decreases in existing taxes; it also includes tax-and-dividend systems, in which that process is more fully automated. That being said, fiscal neutrality has gone out the window as governments seek (whether wisely or not) to offset the recessionary consequences of the credit crunch. That leaves us with a question: if you want to spend government money fighting climate change, how should you do so?

One option business is happy with is big subsidies for the development and deployment of big new technologies like next-generation nuclear reactors and carbon capture and storage (CCS). While such an approach may yield long-term benefits, it does risk simply funneling money from taxpayers to polluters in the near and medium term. It is also an approach that firms have already been very effective at advocating for themselves.

A more attractive option is to help finance the up-front costs of projects that both save money and mitigate emissions. This includes all kinds of unglamorous things, such as improving insulation and the efficiency of boilers, capturing waste heat in hot flue gasses, and replacing windows. Such an approach might be especially effective if directed towards public buildings such as schools, hospitals, government offices, and military facilities. That way, the government is investing in something that will improve its own medium-term financial position (important if existing debts are to be repaid, and future crises are to be managed), while also making a start towards a serious greening of government operations.

In the end, a lot of the most effective tools governments can employ cost very little. Improving building codes, requiring that vehicles be more efficient, and implementing carbon taxes all require only modest government expenditures – though they may cause other actors to incur major expenses. Approaches that are light on regulation and heavy on government spending are probably more likely to be wasteful than those based on compulsion through prices and regulation but, given the inevitability of additional fiscal stimulus in much of the world, it seems sensible to devote some of that directly to mitigation activities, while ensuring that spending not directly motivated by climate change doesn’t contradict climate change mitigation goals.

How else should a government that is feeling the urge to loosen the purse strings spend money on reducing emissions? With a new Canadian budget being tabled in ten days, it is a pertinent question.

Report a typo or inaccuracy

{ 36 comments… read them below or add one }

Anon January 7, 2009 at 11:04 am

How else should a government that is feeling the urge to loosen the purse strings spend money on reducing emissions?

1. Low or zero interest loans to homeowners and businesses wanting to invest in things that will reduce their emissions (insulation, renewable energy systems, etc)

2. Research grants on climate science

3. Financial incentives to reduce emissions from farming – no till, methane capture, etc

4. Financial incentives for states like Indonesia and Brazil to protect their forests

5. Improved public transit, as well as low-carbon inter-city transport links

6. Feed-in tariffs for renewable generation

7. Smart grid deployment and high voltage direct current transmission

There are also some areas of climate change adaptation that could be a decent target for government spending. One-off grants for people who want to relocate out of highly vulnerable areas.

Hella Stella January 7, 2009 at 11:12 am

Hot flue gasses… That sounds gross and awesome at the same time.

Anon January 7, 2009 at 11:17 am

If an individual wanted to spend a billion dollars fighting climate change, how could they be most effective?

Two ideas that jump to mind are funding lawsuits intended to stop or slow down the construction of coal power plants and providing campaign donations to politicians in exchange for supporting a carbon tax.

Another idea might be investing in textbooks and updated science courses, so the next generation of voters will be a bit harder to lie to about how the climate works.

Milan January 7, 2009 at 11:22 am

Hot flue gasses… That sounds gross and awesome at the same time.

There are facilities out there with smokestacks putting out flue gasses at 300 to 700 degrees. It doesn’t take much imagination to realize that you could run water through pipes beside those hot gases, then use the hot water to warm buildings or provide heat for industrial processes.

It’s the ultimate version of the “Shut that door! Are you trying to heat the whole neighbourhood?” syndrome.

If an individual wanted to spend a billion dollars fighting climate change, how could they be most effective?

Probably fighting deforestation in the developing world. For a billion dollars, you could do a lot to fight illegal logging: hire people to patrol the edge of protected forests, use aerial photography to identify areas where illegal activity is taking place, spend money to help prosecute illegal loggers, etc.

Magictofu January 7, 2009 at 4:56 pm

About deforestation, would protecting some forests increase the value of timber at a larger scale and indirectly finance forestry activities elsewhere? Also, would investments in better forestry practices be more economical and beneficial by keeping access to an important resource for local development?

Tristan January 7, 2009 at 5:20 pm

Unfortunately, some of this government spending should be building new power dams. I hate power dams, because of the massive ecological detestation they cause, and I especially hate site C because not only will it destroy a lot of fertile farmland, it will create this potential of immediately loosing a globally significant amount of fertile farmland if any of the peace river dams were to fail.

However, it’s starting to look like plug-in hybrids might be a big success – and there are good reasons for this. They are not technological breakthroughs – the technology to do this is at least ten years old (GM built a plug in hybrid version of the EV1 in the 90s), and they have the potential to radically reduce commuter demand on fossil fuels. They are really nasty things from a planning perspective however, because they will allow suburban sprawl to continue, and because they will shift the energy demand from fuel (which we currently know how to supply), to electricity. If people actually buy these things, the average household energy consumption will go up significantly very quickly, and although they can be charged at night (no need for increased peak power), they will need to be charged at all (need for increased total energy produced).

In other words, shifting the energy burden from an expensive fuel (oil) to a cheaper fuel (cheaper by unit of energy at least), will prevent a reduction of total energy used (no need for densification i.e. New York has the lowest energy use per capita because it is small and served by high occupancy trains). The basic truth is it takes the amount of electrical energy to move a car down a road than it does energy from gasoline – so switching to electric cars (either plug in hybrid or hydrogen or compressed air, it really makes no difference so far as the grid is concerned) will require more electrical energy, which we should try to avoid using oil to produce.

Milan January 7, 2009 at 7:06 pm

Magictofu,

About deforestation, would protecting some forests increase the value of timber at a larger scale and indirectly finance forestry activities elsewhere?

To some extent, it seems likely that curbing illegal logging would increase timber prices. For it to actually be counterproductive, it would be necessary for illegal logging to be a significant fraction of the total global supply of any particular type of wood, and for price difference to be a significant motivation for additional felling. There would also have to be additional capacity to increase legal logging.

It’s the sort of question that could only be meaningfully answered with some research and economic modeling.

That being said, sharply curbing both legal and illegal logging of tropical forests is certainly necessary to stabilize atmospheric concentrations of greenhouse gasses.

Also, would investments in better forestry practices be more economical and beneficial by keeping access to an important resource for local development?

What sort of practices? If you were cutting at a rate at or below the rate of growth, you could maintain the stock of carbon in the forest, build up an additional stock in the wood that is sold, and also earn money on the sales. Sustainable forestry would certainly be a step forward. If might even be better climatically than leaving the forest uncut.

Tristan January 8, 2009 at 4:38 am

“To some extent, it seems likely that curbing illegal logging would increase timber prices. For it to actually be counterproductive, it would be necessary for illegal logging to be a significant fraction of the total global supply of any particular type of wood, and for price difference to be a significant motivation for additional felling. There would also have to be additional capacity to increase legal logging.

It’s the sort of question that could only be meaningfully answered with some research and economic modeling.”

I disagree with the burden you presume necessary to make meaningful claims about the relation between regulating deforestation and the price of timber. Insofar as we believe that the increase in production caused by the U.S. softwood import tarriffs (which was the opposite of the desired effect, but this is not important) “hurt” the price of lumber (i.e. caused it to fall), we must believe that restricting deforestation would increase the price.

The state is not a “price taker” when it comes to the cost of lumber when that state administers a significant amount of regional or world supply (depending on cost of shipping, locality might be of some significance). We can unequivocally say that regulating deforestation, cutting the number of timber licenses granted, would increase the cost of timber.

Tristan January 8, 2009 at 4:43 am

Also, lumber is not an entirely homogeneous commodity – you can’t replace softwood lumber with hardwood in most applications, so the supply of tropical rainforest wood probably has little effect on the price of softwood lumber.

Milan January 8, 2009 at 9:04 am

Rhetoric isn’t going to answer the question: “Would cutting back on illegal logging raise the price of wood so much that it would induce more legal deforestation than was prevented in the legal sector?”

To get a meaningful answer, you would really need to look at the internal dynamics of the global forestry (and related) industry, as well as historical data on prices.

In any event, regardless of mechanism, reduced deforestation is a critical aspect of dealing with climate change.

Milan January 8, 2009 at 9:11 am

The basic truth is it takes the amount of electrical energy to move a car down a road than it does energy from gasoline – so switching to electric cars (either plug in hybrid or hydrogen or compressed air, it really makes no difference so far as the grid is concerned) will require more electrical energy, which we should try to avoid using oil to produce.

Relatively little electricity is produced using oil. This is especially true in Canada: (2003, but more recent numbers are similar)

  • Hydro: 56%
  • Coal: 18%
  • Nuclear: 12%
  • Natural gas: 6%
  • Oil: 6%
  • Other: 2%

It is certainly likely that electric vehicles and plug-in hybrids will increase the total demand for electricity. In an ideal scenario, a lot of that would come from periods where the output from renewable sources (such as concentrating solar and wind) exceeded current demand from the rest of the grid. In such circumstances, the environmental consequences of charging the batteries would be quite minimal.

Milan January 8, 2009 at 9:17 am

Tristan,

How do you think one billion dollars of private or government money could be most effectively spent on climate change mitigation? This flowchart is informative, in terms of identifying areas where action is required globally.

. January 8, 2009 at 10:27 am

From the executive summary of the Stern Review: (PDF)

“Non-energy emissions make up one-third of total greenhouse-gas emissions; action here will make an important contribution. A substantial body of evidence suggests that action to prevent further deforestation would be relatively cheap compared with other types of mitigation, if the right policies and institutional structures are put in place.” (xiii)

Curbing deforestation is a highly cost-effective way of reducing greenhouse gas emissions. [emphasis in original]

Emissions from deforestation are very significant – they are estimated to represent more than 18% of global emissions, a share greater than is produced by the global transport sector.

Action to preserve the remaining areas of natural forest is needed urgently. Largescale pilot schemes are required to explore effective approaches to combining national action and international support.” (xxv)

“Policies on deforestation should be shaped and led by the nation where the particular forest stands. But those countries should receive strong help from the international community, which benefits from their actions to reduce deforestation. At a national level, defining property rights to forestland, and determining the rights and responsibilities of landowners, communities and loggers, is key to effective forest management. This should involve local communities, respect informal rights and social structures, work with development goals and reinforce the process of protecting the forests.

Research carried out for this report indicates that the opportunity cost of forest protection in 8 countries responsible for 70 per cent of emissions from land use could be around $5 billion per annum initially, although over time marginal costs would rise. Compensation from the international community should take account of the opportunity costs of alternative uses of the land, the costs of administering and enforcing protection, and the challenges of managing the political transition as established interests are displaced.

Carbon markets could play an important role in providing such incentives in the longer term. But there are short-term risks of destabilising the crucial process of strengthening existing strong carbon markets if deforestation is integrated without agreements that strongly increase demand for emissions reductions. These agreements must be based on an understanding of the scale of transfers likely to be involved.” (xxvi)

Tristan January 8, 2009 at 1:28 pm

Do we have illegal logging in Canada? If not, is there illegal logging in countries which supply a non-price taker amount of softwood lumber to the north American housing market? I think the illegal logging issue is just a non-issue here.

Tristan January 8, 2009 at 1:31 pm

“Relatively little electricity is produced using oil. This is especially true in Canada: (2003, but more recent numbers are similar) ”

It makes no difference what proportion of the total grid is supplied by oil when we’re talking about increasing demand for electricity putting pressure on it – what matters is where the marginal power comes from. It doesn’t seem crazy to worry that if power demand quickly increases the state might respond with coal, gas, or oil plants – aren’t these the cheapest and fastest to build?

Tristan January 8, 2009 at 1:42 pm

I don’t see a pragmatic difference between spending solutions and market solutions – market solutions to climate change are all based around externalizing a previously unpaid for cost, and market people oppose market solutions because they think this cost is too expensive, not worth it. Also, market based people rarely take the problem of externalities to be a serious problem, otherwise we’d have more market radicals calling for big government. But this is exactly what it seems we should do – regulate the hell out of industry by way of carbon taxes or a cap and trade system, and then, at the same time, supply everyone with subsidies such that companies that reduce their carbon emissions become disproportionately more profitable than ones that don’t. In other words, take Dion’s plan, which was meant to be revenue neutral, and make it revenue negative – but not by lowering the tax, rather by creating easy credit companies can access to pay for smart efficiency upgrades. These upgrades would have to be evaluated by people, so we should probably create a bucket of jobs to do that.

Milan January 8, 2009 at 2:00 pm

Do we have illegal logging in Canada?

Probably some, but it’s peanuts compared to what’s happening in Asia and Latin America: in terms of both economics and associated GHG emissions.

If not, is there illegal logging in countries which supply a non-price taker amount of softwood lumber to the north American housing market? I think the illegal logging issue is just a non-issue here.

Stopping tropical deforestation is essential to stabilizing climate. Many people also argue that it is a fairly cost-effective way to reduce greenhouse gas emissions, starting from our current position.

You can disagree that stopping illegal logging is a good route to avoiding deforestation, and you can argue that avoiding deforestation in general isn’t as cost effective as analyses like the Stern Review have claimed.

One reason why it is politically easier to tackle illegal logging is that it already violates the sovereignty of the host state. For Canadians to help the government of Brazil enforce their own forestry policies is a lot less controversial than for Canadians to try to alter those policies.

It doesn’t seem crazy to worry that if power demand quickly increases the state might respond with coal, gas, or oil plants – aren’t these the cheapest and fastest to build?

The economics at the margin ought to determine what kind of new construction is undertaken, yes, though the economics of the energy market are seriously distorted. Gas is the cheapest and fastest sort of power generation to build but, if utilities anticipate that the rise in demand will be permanent, they may opt for other options.

Certainly, policies to encourage more low-carbon transport should be undertaken alongside policies intended to encourage more low-carbon electricity. That being said, the calculations I have seen indicate that it is better in climatic terms to use electricity from coal plants to power electric vehicles than to use vehicles with conventional gasoline engines.

But this is exactly what it seems we should do – regulate the hell out of industry by way of carbon taxes or a cap and trade system, and then, at the same time, supply everyone with subsidies such that companies that reduce their carbon emissions become disproportionately more profitable than ones that don’t.

One option would be to establish a tax-and-dividend scheme, then pay out some of the dividends early. It would be similar to a government grant, in the short term, but it would be followed up by increased prices for all carbon intensive goods. That would encourage people to direct their spending towards things that will decrease their future carbon tax expenditures (as well as increase the net size of their future dividend payments).

Milan January 8, 2009 at 2:11 pm

This is an interesting graphic: deforestation in the United States between 1620 and 1992.

No doubt, something comparable could be cooked up for Europe.

Tristan January 8, 2009 at 4:38 pm

“You can disagree that stopping illegal logging is a good route to avoiding deforestation, and you can argue that avoiding deforestation in general isn’t as cost effective as analyses like the Stern Review have claimed.”

I’m not disagreeing with either of these points. What I’m disagreeing with is the idea that Canadian lumber is the same commodity as the lumber produced by illegal logging. There is no more connection between the amount of logging Canada allows and illegal deforestation in other than countries than between it and illegal mining, or illegal production of gucci handbags. If we log less softwood lumber, this will not affect how much hardwood lumber is logged somewhere else anymore than it will affect how many computers are made somewhere else.

Milan January 8, 2009 at 4:57 pm

My original claim is that a private individual who wanted to spend a billion dollars as effectively as possible on climate change mitigation should consider preventing illegal deforestation in Latin America and Asia as a promising strategy for achieving that aim with those means.

If you were going to spend $1B fighting climate change, what would you do?

Tristan January 8, 2009 at 6:16 pm

This is a difficult question. The state doesn’t even have a penny, let alone 1B purely as a fiscal actor – it is always at the same time a legislative and monetary actor as well. All the straightforward ways to mitigate climate change are to reduce something – and when you spend money, this is inherently an increase of something. The economy needs to shrink, not grow – but the goal of government spending is to grow the economy. So, I suppose I’d spend money to grow the economy in climate change mitigating areas like windpower or hydro dams (*cringes*), but I’d offset the growth by raising taxes and interest rates.

I’d probably also bail out the auto industry, but with conditions – strict MPG figures, and also longer and transferable warranties on new cars – powertrain warranties of 250 000km rather than 120 000km. This is easily achievable with current technology. (Of course the warranty would be conditional on sticking to the manufacturer’s service regiment, which they could determine within reason). California has already done something similar to this by legislating that all timing belts will last 160 000km (it spurred innovation – at first manufacturers simply had a different change interval for Californian cars, but the belt would usually fail before the interval destroying the engine at great embarrassment to manufacturer. This was too expensive, so innovation in belt technology was quickly improved to the point where 160 000km is the standard timing belt change interval in all cars today). This would have the effect of encouraging people not only to keep their cars longer, but discourage in general the “it needs to be new to be good” consumer mindset. While the constant production and throw out economy works great when China will make all our goods – but if we want to start making them ourselves and with decreased emissions, they need to in general last longer, so the state should legislate and spend to encourage longevity of consumer goods.

Magictofu January 9, 2009 at 10:52 am

Milan, I misunderstood your original point about illegal logging: I thought you were talking about the numerous examples of forests being set aside as some kind of semi-private conservation areas through various foundations.

That being said, I think government sponsored deforestation is as much if not more problematic than illegal logging in terms of its magnitude. I’m not sure how a country like Canada could influence other governments to change their practices though.

I have read a few times in various articles that forests where logging is practiced in a more sustainable way tend to be fairly good carbon sinks as opposed to protected mature forests which sequester large quantity of carbon but have an almost neutral effect on the atmosphere (they emit about as much CO2 as they consume).

R.K. January 9, 2009 at 12:42 pm

Another good spending option would be providing job training for people who want to leave declining industries like auto manufacture, or who want to shift into industries that support the transition to a low-carbon economy, such as renewable power or building efficiency improvement.

. January 9, 2009 at 2:40 pm

Obama’s ‘green’ stimulus plan resonates overseas
(01/09/2009)

During the campaign, Obama pledged to spend $150 billion over the next decade on clean energy, creating an estimated 5 million jobs.

The package hasn’t been outlined in detail, but is expected to include doubling alternative energy production in the next three years and building a new electricity “smart grid.” Obama also said he plans to modernize 75 percent of federal buildings and improve energy efficiency in 2 million homes to save consumers billions of dollars on energy bills.

“In the process, we will put Americans to work in new jobs that pay well and can’t be outsourced,” he said, citing the building of solar panels and wind turbines, constructing fuel-efficient cars and buildings and developing low-carbon technologies that “will lead to even more jobs, more savings and a cleaner, safer planet in the bargain.”

Tristan January 9, 2009 at 7:08 pm

Actually, I think the best way to spend to reduce climate change is to spend not to avert recession, but to avert the suffering caused by a recession. Allow the recession to happen – encourage it by limiting the money supply, but heavily fund food banks etc…, and spend on social housing, and prevent foreclosures. Concentrate on the production of the essentials, like food and computers.

Milan January 9, 2009 at 7:14 pm

Hearing Obama talk about a $300 billion unfunded tax cut certainly makes me nervous. US government finances are in terrible shape, and it is probably necessary to both raise taxes and cut spending in the medium term.

While I can see the value of preventing a deep recession, there is also considerable value in fiscal prudence and making it clear that the country is in for a long period of post-Bush reconstruction.

Tristan January 10, 2009 at 4:31 am

The tax cut will be funded by China. China is buying the right to chose the date when the U.S. is struck with hyper inflation.

Milan January 19, 2009 at 3:13 pm

Here is some discussion of energy efficiency programs in the US that “save energy, cut pollution, reduce the deficit, help poor people, and of course create jobs.”

Bizarrely, House Minority Leader John Boehner referred to them as “the same kind of wasteful spending that we have seen in the past.”

. January 26, 2009 at 4:41 pm

LABOR: Bipartisan panel formed to study critical work force requirements for ‘low-carbon’ economy (01/26/2009)
John J. Fialka, E&E reporter

Over the weekend, the White House provided more details on President Barack Obama’s $820 billion stimulus package, which includes funds for adding 3,000 miles of electric transmission lines to the grid, installing 40 million “smart” utility meters and weatherizing at least 2 million homes. Meanwhile, there has been much talk in Congress of finding “shovel-ready” projects to include in the huge stimulus package.

The problem confronting both schemes, however, is that some of their major goals will require skills far beyond wielding shovels.

. February 6, 2009 at 12:10 pm

Question of the day
Posted by David Roberts at 7:49 PM on 05 Feb 2009

Obama: Well, let’s think about it. We’re going to weatherize homes, that immediately puts people back to work and we’re going to train people who are out of work, including young people, to do the weatherization. As a consequence of weatherization, our energy bills go down and we reduce our dependence on foreign oil. What would be a more effective stimulus package than that? I mean, you’re getting a threefer. Not only are you immediately putting people back to work but you’re also saving families on your energy bills and you’re laying the groundwork for long term energy independence. That’s exactly the kind of program that we should be funding.

Magictofu February 13, 2009 at 10:02 am

Maybe not the best place to mention this but I thought your readers might like this article:

http://www.thebigmoney.com/articles/hey-wait-minute/2009/02/11/surprise-economists-agree

“A consensus is emerging about the costs of containing climate change.”
(…)
“If you look closely at what climate economists are saying, you can discern two areas of basic agreement. First, there is a broad consensus that the cost of climate inaction would greatly exceed the cost of climate action—it’s cheaper to act than not to act. ”
(…)
“The second area of consensus concerns the short-term cost of climate action—the question of how expensive it will be to preserve a climate that is hospitable to humans. The Environmental Defense Fund pointed to this consensus last year when it published a study of five nonpartisan academic and governmental economic forecasts and concluded that “the median projected impact of climate policy on U.S. GDP is less than one-half of one percent for the period 2010-2030, and under three-quarters of one percent through the middle of the century.”

Milan February 13, 2009 at 10:14 am

Estimates that the cost of mitigation are both encouraging and relatively common. Nicholas Stern and McKinsey have both made them.

The problem is less one of expense and more one of generating cooperation while overcoming entrenched interests.

Milan February 13, 2009 at 10:17 am
Tristan February 26, 2009 at 4:45 pm

Ok, I figured this out.

The state wants to stimulate the housing sector, and be green. Seems impossible, since we have a glut of housing? Maybe not.

Offer interest free loans for the difference between building a conventional home and a passive home – (inspect to make sure a passive home has actually been built). Allow home owners to pay back the interest free loan with the money they save in decreased energy bills.

Milan February 26, 2009 at 4:54 pm

That is only one of many possible approaches:

  1. Mandate higher efficiency standards for new buildings. Provide grants or tax cuts to decrease the added cost.
  2. Set up a feebate system, where people pay a tax on inefficient homes and the money is used to fund credits for efficient ones.
  3. Mandate that whenever someone renovates a building, they need to bring the whole structure up to a minimum standard. This may not need to be as high as the standard for new buildings, but it should be higher than nothing.
  4. Pay people to go door-to-door installing free insulation and weather stripping. Republicans might go nuts (handouts to the poor!), but it would be a better investment than just dumping the money into banks.

I am sure a dozen other approaches could be dreamed up pretty easily.

. March 30, 2009 at 10:46 am

Brown accused over green spending
By Roger Harrabin
Environment analyst, BBC News

Prime Minister Gordon Brown has been accused by a think tank of failing to harness his economic stimulus for the benefit of the environment.

The New Economics Foundation says that among rich nations, the UK has invested the least in clean technology.

It called UK performance pathetic, but the Treasury said the fiscal stimulus could not be looked at in isolation.

It said it expected to drive over £50bn of investment in the low-carbon sector between 2008 and 2011.

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Previous post:

Next post: