Opportunities and Risks for Green Economic Recovery

In our most recent (August 19th) webinar in the series of Conversations on Climate Change and Energy Policy, sponsored by the Harvard Project on Climate Agreements (HPCA), I had the pleasure of hosting Rachel Kyte, Dean of the Fletcher School of Law and Diplomacy at Tufts University.  This webinar series features leading authorities on climate change policy, whether from academia, the private sector, NGOs, or government.  In this case, my guest has had her feet planted firmly in more than one of those realms.  Previously Dean Kyte served as a Special Representative of the U.N. Secretary-General, and before that was Vice President and Special Envoy for Climate Change at the World Bank.  A video recording and transcript of the webinar are available here.

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Due to the global COVID pandemic, the webinar was executed remotely.  The consequent economic downturns have made many countries think about the design of their respective economic recovery packages, including the possibility of greening recovery policies and instruments.  This was the topic of Rachel Kyte’s presentation, “Using the Pandemic Recovery to Spur the Clean Transition – Opportunities and Potential Pitfalls.”

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Citing the fact that 180 nations are in severe recessions, with some possibly teetering on the brink of depression, Dean Kyte describes the current moment as an opportunity to “pivot to a trajectory that would get us closer to being on track for the kind of economic pathway forward that we would need to reach zero net emissions by mid-century … in order to combat the worst impacts of climate change.”  Leveraging that opportunity, however, will be complicated, Kyte explained, noting that the severe economic stress caused by the pandemic is “testing the boundaries of international solidarity.”

“We are about to see over the fall, I think, some of the cumulative impacts of the economic crisis on our financial systems. And we can see that the traditional mechanisms and multinational cooperation which we rely upon in order to attack issues of global public good are straining. They are straining with COVID and they are straining with the impacts of climate change,” she says.

It is imperative, she argues, for citizens, institutions, and governments to recognize the severity of the situation, and muster the political will to address the severe economic pains caused both by the pandemic and unmitigated climate change.

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“We will really be putting pressure on the systems that are normally in place to support that – the IMF, the multinational development banks, the role of central banks,” she points out. “In these economic crises, it is the least well off, the most vulnerable, and the most vulnerable to climate change, who are impacted the most. And what we’re looking at is wiping out the advances that have been made in poverty alleviation over the last few years. That has huge impacts for the way we think about vulnerability to climate change going forward.”

Over the short-term, however, Rachel Kyte acknowledges that economic contractions have reduced carbon dioxide (CO2) emissions, as global energy demand is expected to fall by about six percent in 2020, compared with 2019. But demand will pick back up when economies rebound, she notes, unless there are systematic efforts to change it. Those efforts, she remarks, can be strategically incorporated into economic relief packages that will continue to emerge.

“There are, I think, a number of think tank groups, [and other] regional bodies now suggesting that there are clear policy priorities in order to be able to hit that sweet spot of short-term recovery, but also a cleaner and faster pathway down the energy transition,” she remarks. She specifically cites the need for green “shovel-ready” projects aligned with rescue plans for distressed industries that adhere to a pathway of deep decarbonization and increased energy efficiency. Rachel also discusses the need for smart private finance and investment in green technologies, and sufficient international cooperation necessary to spare developing countries crushing debt loads that would cripple their climate change mitigation efforts.

Referring to the nature of such a green energy pivot, she remarks that, “We’re at a moment where we need both scaffolding and scholarship or new design. The scaffolding is that we have an international system that helps us respond to pandemics, that helps us respond to economic crises, and that should help us to respond to climate change. And that system is really underperforming, at risk, and under strain.  So, we have to in this immediate phase put scaffolding around it and help it limp forward and help us all limp forward together.”

During the webinar, after concluding her presentation, Dean Kyte fields questions from the audience, including the risks of economic rescue packages that worsen the effects of climate change, the potential for reductions in Overseas Development Assistance budgets to the developing world, the challenges of green aid in Africa, obstacles facing the United Nations Framework Convention on Climate Change (UNFCCC) in making substantive progress, Mexico’s mixed record on climate change policy, and potential incentives to encourage developing countries to adopt green recovery trajectories. 

All of this and more can be heard and seen at this website.  I hope you will check it out.

Previous webinar in this series – Conversations on Climate Change and Energy Policy – have featured Meghan O’Sullivan’s thoughts on Geopolitics and Upheaval in Oil Markets, and Jake Werksman’s assessment of the European Union’s Green New Deal

The next HPCA Conversation on Climate Change and Energy Policy is scheduled for September 8th with guest Joseph Stiglitz, University Professor at Columbia University.  Click here to register in advance for that webinar.


How Have Companies Responded to the Coronavirus Pandemic and Climate Change?

We have just released the latest episode of our podcast, “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.”  In this latest episode, I engage in a conversation with Rebecca Henderson, the John and Natty McArthur University Professor at Harvard University.  She shares her perspectives on how large organizations are changing in response to the coronavirus pandemic and global climate change.  A full transcript of our conversation is available here.

Rebecca makes her home at Harvard Business School, where she was the founding co-director with Professor Forest Reinhardt of the Business and Environment Initiative.  She is also a Research Fellow of the National Bureau of Economic Research, and a Faculty Fellow of the Harvard Environmental Economics Program.

In this podcast episode, we first discuss how the attention given to environmental matters has changed at business schools in the three decades since she received her Ph.D. in Business Economics at Harvard and joined the faculty at the MIT Sloan School of Management, prior to moving on to Harvard Business School.

Henderson’s research and writing explore how organizations respond to large-scale technological shifts, most recently in regard to energy and the environment.  This has also given her a special perspective to think about the role of the private sector in responding to the Covid-19 crisis.  In this regard, she notes that she is reminded that “when organizations decide they must change, they can change,” pointing to the quick shift to remote work across many sectors, the effort by biomedical firms to speed up supply changes, and the ways in which retail and grocery distribution channels are mobilizing their resources. “You’re seeing profound changes in methods of operation across the economy,” she remarks.

“The potential upside is that this emergency is making it very clear that the stability of the entire community is critical to the success of business,” Rebecca states. “I think the emergency is also highlighting that one needs a strong, effective federal government to deal with problems like this. I think both of those insights could conceivably translate into business pressure for coherent climate policy in ways that could be very helpful.”

“Climate change can seem distant; it can seem invisible. Why should I worry about it? To see the whole economy mobilized when the threat becomes very, very concrete reminds me that, as we think about climate change, we have to find a way to make that threat as concrete as possible. So that’s one thing I take away from the current moment.”

All of this and much more is found in the newest episode of “Environmental Insights: Discussions on Policy and Practice from the Harvard Environmental Economics Program.” Listen to this latest discussion here, where, by the way, you can also find a complete transcript of our conversation.

My conversation with Rebecca Henderson is the ninth episode in the Environmental Insights series.  Previous episodes have featured conversations with:

“Environmental Insights” is hosted on SoundCloud, and is also available on iTunes, Pocket Casts, Spotify, and Stitcher.


What Can Economics Really Have to Say About COVID-19 Policies?

Recently, economists and other policy analysts have called for the use of benefit-cost analysis to assess existing and proposed public policies to address the novel coronavirus pandemic, the incidence of COVID-19, and the deaths that may follow.  These calls for a benefit-cost perspective have unfortunately generated both confusion and controversy; and – most important – are unlikely to be persuasive to key decision makers.  But ignoring economics when considering alternative policy responses to the pandemic would be a mistake.

Fortunately, a different type of economic analysis is available, which is much more likely to be acceptable to policy makers, and would enable government authorities to identify policy instruments that minimize costs to achieve given objectives.  I’m referring to cost-effectiveness analysis, which differs in important ways from the benefit-cost analysis now being recommended by my fellow economists, as well as others.

First, I should note that in principle, sensible arguments can and have been made in favor of the use of benefit-cost analysis.  I endorse the use of such analysis to assess the wisdom (efficiency) of a wide range of government policies (through what is known as Regulatory Impact Analysis in the U.S. government), and I have been teaching these methods, under the rubric of “net present value analysis,” in my environmental economics course at Harvard for some 30 years.  This type of analysis facilitates the identification of efficient policies that generate the greatest net benefits, that is, benefits minus costs.

So, to be perfectly clear, I enthusiastically endorse the work being carried out by economists and others to execute such benefit-cost analyses of COVID-19 policies.  My concern, however, is that in the current context, policy makers are likely to be highly resistant to embracing this type of analysis for assessing existing and potential pandemic responses.  Rather than throwing out the (economic analysis) baby with the (benefit-cost) bath water, I am suggesting that other forms of economic analysis — namely cost-effectiveness analysis — can be useful, and the results of such analysis should be seriously considered by policy makers.

The problem is that executing benefit-cost analysis requires evaluating not only the costs, but also the benefits of policies in economic terms.  In the COVID-19 context, that is difficult enough on the cost side because of the great uncertainties involved, but at least those costs – largely the loss of GDP due to slowdown in economic activity – are fundamentally financial.

The benefit side – primarily the reduced risk of mortality – requires estimates of the value of a statistical life (VSL), which typically draw upon empirical evidence from markets in which people receive higher wages for taking on more risky jobs (in sectors such as mining, forestry, and commercial fishing).  The concept and use of VSL – estimated by the U.S. Environmental Protection Agency to be about $10 million per life saved – is well accepted by economists, but is highly controversial among nearly everyone else.

For these reasons, politicians are reluctant, to say the least, to adopt the benefit-cost paradigm to help them formulate better policies to address the current pandemic.  But much of the confusion and nearly all of the controversy could be avoided by employing cost-effectiveness analysis, in which economics is brought to bear only on the cost-side of an issue.

I need not tell readers of this blog that this is an approach that is frequently employed in the environmental realm to examine alternative policies that would bring about a given degree of environmental benefits, that is, a given reduction in environmental damages.  For example, in the case of carbon dioxide (CO2) emissions, a variety of analyses have found that cost-effective approaches would cost just 25% of what the costs would be with some other approaches.

In the current, COVID-19 context, take some policy objective as given (presumably not a reckless one such as reopening “large sections of the country” by Easter Sunday with “packed churches,” as President Trump had recently promised).  Rather, a policy objective to be used in such analysis might be a specified maximum mortality number, a specified mortality risk reduction, or – more simply – a specified case transmission rate.  Then, the economic costs of achieving that objective by using various alternative policy instruments can be estimated and compared.  At a minimum, these policy instruments would include – among others – the current approach of social distancing of nearly the entire population to suppress the curve of new incidence; and a targeted approach to reduce transmission – more testing, more contact tracing, and more and better facilities for those who need to be separated from others or treated.

For example, one recent study estimated that the current practice of widespread social distancing may be expected to save some 1.2 million lives at an economic cost of $6.8 trillion.  Without resorting to trying to value human lives, the question is “simply” how much would it cost with an alternative, more targeted policy to save a similar number of lives?

By the way, the uncertainty that plagues various aspects of these and other policy approaches can be taken into account in the cost-effectiveness calculations.  Likewise, constraints – whether physical (such as limited availability of ventilators or cotton swabs), economic, institutional, or political – can all be included in the analysis.  In my work as an environmental economist (focused on climate change policies), we do this regularly.  My professional cousins – health economists, principally in schools of public health – are equally or more familiar with these approaches, and are well equipped to make the cost comparisons.

In this way, without the confusion and controversy that arises with trying to quantify the economic benefits of mortality risk reduction, economic analysis can still play an exceptionally important role by identifying policies through cost-effectiveness analysis that can help achieve sensible objectives with as little sacrifice as possible of the many other things we value.