How to pay for a Green New Deal

Green stimulus packages are being proposed worldwide for a post-Covid recovery. But with sovereign debt levels soaring, how will it all be paid for?

(Photo By Chip Somodevilla / Getty Images)

Not even in the wildest dreams of Extinction Rebellion protesters would 2020 have yielded such dramatic boons to their cause. The UK’s first nationwide Covid-19 lockdown led to major reductions in personal consumption, and a dramatic 31 per cent fall in greenhouse gas emissions in April was accompanied by vast improvements in London’s notoriously poor air quality.

But lockdown also led to a record drop in GDP, and an economic crisis that will likely lead to unemployment not seen since the 1980s. This year’s second suspension of economic life, due to end in December, could yet provoke another “lost decade”, making the austerity era of the 2010s look like a time of plenty.

What’s more, when lockdown restrictions were eased in the summer, carbon emissions quickly recovered. Despite the biggest drop in demand for fossil fuels in almost three decades, and despite weeks of lockdown in countries worldwide, the year-on-year carbon reductions witnessed in 2020 would not be enough to fulfil the cuts written into the 2015 Paris Agreement, which aims to limit global warming to below 2 degrees centigrade.

The climate crisis, coupled with the need for a major economic stimulus in the wake of Covid-19, has amplified calls for investment-led green recoveries across the world. In their most ambitious form, these projects are referred to as Green New Deals (GND).

“The Green New Deal encompasses both the economy and the ecosystem,” Ann Pettifor, director of the PRIME economics think tank, a fellow of the New Economics Foundation, and author of The Case for a Green New Deal, told Spotlight. For her, GNDs don’t just offer a chance to rebalance the economy away from financial services and restore public accountability over rapacious markets. They would also help move away from the low-wage, low-productivity, gig economy employment model, providing high-skilled jobs that, crucially, would help avert climate disaster.

“It is not just about the ecosystem. Before, lots of greens were prepared to leave the economy to others… They didn’t think it was their patch. That was a mistake.”

The pandemic has altered perceptions of what is economically and politically possible, from liberal democracies imposing unprecedented limits on the free movement of citizens, to spending-averse fiscal conservatives presiding over levels of public spending not seen in decades. Enthusiasm for green recovery is evident on the right and left.

At the end of June, in a speech in the West Midlands town of Dudley, Boris Johnson promised a “New Deal” and “a prodigious amount of government intervention” to “build back greener”. The next day, his Cabinet Secretary, Michael Gove, made a speech praising Franklin Delano Roosevelt and quoting the Italian Marxist, Antonio Gramsci.

“There are plenty on the right that want to co-opt the idea”, says Pettifor, “but not actually undertake the transformation that’s necessary.”

The idea of the GND isn’t new. After the collapse of Lehman Brothers in 2008, former prime minister Gordon Brown proposed his own package of green stimulus measures designed to lift the country out of recession.

A little over ten years later, the idea has been popularised by US Democratic congresswoman Alexandria Ocasio-Cortez. Her Green New Deal Resolution promises “national, social, industrial, and economic mobilisation on a scale not seen since the Second World War”, to provide “prosperity and economic security for all people of the United States”.

Transportation would be overhauled. Buildings would be refitted to maximise energy efficiency. A rapid transition away from fossil fuels would be accompanied by massive investment in clean energy production, carbon capture, and research and development into green technologies.

Republicans have derided Ocasio-Cortez’s GND, and the populist right has weaponised the issue, presenting supporters as effete coastal liberals, more concerned about rainforests than the livelihoods of blue collar America (particularly the ten million who work in the oil and gas industry). Last year, Donald Trump mocked the GND on Twitter, claiming it would “eliminate Planes, Cars, Cows, Oil, Gas & the Military [sic]”.

But their protestations didn’t prevent president-elect Joe Biden from including a $2trn green stimulus package in his election pledges. In Europe, the president of the European Commission, Ursula von der Leyen, has set out a less ambitious plan to achieve EU-wide carbon-neutrality by 2050, the so-called European Green Deal. This £900bn package will be the cornerstone of the EU’s Covid-19 economic recovery.

Von de Leyen, Pettifor says, is “trying really hard” to get her plan through “that very cumbersome institution that is the European Union”. And China, the world’s largest emitter, is “doing more than we think” – partly because the ruling Communist Party fears internal unrest as a result of climate migration. The Chinese government, which has already established itself as the world’s premier investor in renewables, has now pledged to become carbon-neutral by 2060.

In the UK, Boris Johnson has announced a “green industrial revolution”, but the £12bn price tag has been denounced as inadequate, and many fear the measures don’t come close to what’s needed. What’s more, the government’s green investments are somewhat offset by their £27bn commitment for new roads.

Nevertheless, state-funded capital investment, industrial strategy, and public intervention in the market are firmly on the agenda. Johnson’s adoption of these policies repudiates four decades of the Conservatives’ laissez-faire orthodoxy, lifting key aspects of Labour’s programme (the opposition’s 2019 manifesto promised a green industrial revolution funded by a £250bn National Investment Bank).

Earlier this month, Labour called on the government to bring forward £30bn of capital spending as part of shadow chancellor Anneliese Dodds’ Green Economic Recovery. Dodds claimed that investment in the energy sector will support 400,000 high-skilled, low-carbon jobs at a time when dole queues are growing across the country.

Those proposals, however, have provoked splits within Labour. Members of the internal pressure group, Labour for a Green New Deal, claim they are a retreat from the more full-blooded policies put forward at the last conference. “We welcome Labour’s plan for 400,000 green jobs,” a spokesperson told Spotlight, “but call on the party to be braver and go further”.

Read more: How the Green New Deal was born

The government’s own plans for a green post-Covid economy don’t compare favourably with European equivalents. France, for example, has allocated £27bn to green investment, and Rishi Sunak has recently shown a reluctance to spend as freely as a more profligate Number 10 might have hoped.

And yet the government has, until now, shown a willingness to use unconventional monetary policy in the service of higher public spending and sustainable recovery. The Chancellor has announced that the government will release the UK’s first “green gilts” or “green sovereign bonds”, which will be sold on the markets to fund green infrastructure projects. A relatively new financial innovation, green sovereign bonds have already been issued by the Swedish and Danish governments, poster children of Scandinavian social democracy, and also by Germany, the home of the social market economy.

In the outset of the most severe economic crisis in living memory, three years after Theresa May told a struggling NHS nurse that “there is no magic money tree”, the Conservatives, says Pettifor, “have overnight discovered that there is in fact a magic money tree”. In April, the UK became the first country to embrace so-called “monetary financing”, in which the Bank of England electronically creates new money to meet the Treasury’s spending needs.

This was the first time the Bank, (which is wholly owned by the government), had directly purchased government debt. The move was cautiously billed as a temporary measure to help weather the recession. Some, however, such as the pressure group Positive Money, have called on the Bank to adopt this radical policy more permanently, even by creating money to purchase the new green gilts in a version of what some have labelled “People’s Quantitative Easing” (QE).

Since the 2008 financial crisis, central banks have engaged in multiple bouts of QE, a vast monetary experiment that has pumped huge amounts of new money into the financial system via the indirect purchase of government bonds from private investors. But never before has this money creation funded public infrastructure or green investment. It has been used to provide much-needed liquidity to creaking financial systems.

In conventional economics, money printing conjures images of hyperinflation, of wheelbarrows full of worthless banknotes in the Weimar Republic. But inflation since the financial crisis has remained low, in no small part due to low wage growth. After the 2008 crisis, the UK became the only advanced economy in the world to see wages decrease while the economy expanded. Now, in 2020, plummeting demand will likely suppress inflationary pressures, at least in the short term.

Since 2009, £895bn of new money has been created by the Bank of England through QE, roughly equivalent to nine years spending on the NHS, or 18 years spending on schools. The lion’s share (£450bn) of this new money has been created in the last nine months.

“It just goes to show that when it comes to the crunch, the Tories will do this stuff”, Pettifor says. “In a crisis, ideology goes out the window.”

Left-wing supporters of GNDs want the multi-billion pound programmes to be funded by a mix of traditional borrowing (at historically low interest rates), some form of QE, and taxation on the wealthy and big polluters. In August, the Office for National Statistics claimed that the government’s debt had topped £2trn, 100 per cent of GDP. The alarming headlines, however, disguised the fact that over a third of this public debt was owned by the Bank of England. It is, in effect, money we owe to ourselves. A further chunk of the debt is owned by domestic private investors, while less than a third is held by investors based overseas.

According to supporters of GNDs, governments with their own central banks and the ability to issue new currency backed by millions of relatively wealthy taxpayers, do have the leeway to finance big infrastructure projects with unconventional monetary policy.

But not everyone is convinced. Philip Booth, a senior academic fellow at the Institute of Economic Affairs, a free market think tank, says that proponents of activist government policy on the climate often “ignore fundamental principles of economics”.

Many think that loose fiscal and monetary policy will eventually lead to serious inflation, and could even cause a run on the currency as the government finds itself unable to pay its debts.

“If you’re going to decarbonise the economy”, says Booth, “we can’t pretend it isn’t going to cost money. Saying that you’re going to print money to do it, or that we’re going to somehow transform the economy and create lots of green jobs, doesn’t answer that basic point. Jobs are a cost of producing something, they’re not a benefit.”

But as we continue through this new period of social and economic disruption, a new orthodoxy is slowly emerging. The International Monetary Fund and the German government, both formerly known for their fiscal conservatism, now advocate for higher levels of borrowing to “protect lives and livelihoods”. BlackRock, the world’s largest asset manager, makes a “strong case for spending on infrastructure, education and renewable energy”, predicting an age of “fiscal and monetary coordination”, with governments and central banks “going direct”, and working in unison to provide successive rounds of stimulus through the downturn.

Higher spending, higher taxation, higher levels of government debt, and a larger, more interventionist state, are fast becoming part of a new normal. And, as we emerge from second waves of Covid-19 and further lockdowns, Green New Deals in various forms look set to be part of the policy mix to combat our economic and ecological crises.

This article originally appeared in our supplement on energy and climate change. Download the full edition here.