U.S. Election Results: Now What for Climate?
By Kelly Sims Gallagher and Amy Myers Jaffe
The website “Restoring American Leadership,” which chronicles the transition plans of U.S. President-Elect Joe Biden, includes a vision specifically on climate change. It calls on the United States to go further than just rejoining the Paris Climate Agreement to build “a more resilient, sustainable economy – one that will put the United States on an irreversible path to achieve net-zero emission, economy-wide, by no later than 2050.” The plan references multiple ways to accomplish net zero goals including promoting climate smart agriculture, building greener and more resilient public transportation infrastructure, and decarbonizing the power sector as well as creating additional union jobs via a major program upgrading existing buildings.
The transition planning, as described, misses the opportunity to put U.S. actions into a global perspective. We offer some suggestions for the new administration, based on the Climate Policy Lab’s research, on how to marry national domestic climate policy with international challenges and opportunities.
The United States needs to engage emerging economies to follow its lead in tying growth to climate friendly strategies.
Climate change is a global problem, one that is particularly difficult to solve because energy and economic development are inextricably linked.
Job number one for the Biden Administration will be to get the coronavirus under control and launch an economic stimulus. The stimulus must be a jobs and economic program for this century. Building back better must put the United States in a position to compete with China and Germany in all the green and high tech industries where they are increasingly challenging American dominance, whether in industrial internet, energy storage, or electric vehicles. The United States should create a low-carbon growth model that other countries will strive to emulate.
Just like the United States, emerging market nations have to consider how to provide jobs and improve human welfare amidst the rising need to decarbonize and adapt to climate disruption. The most important task is to mainstream climate into all development finance, whether through export-import banks, development banks, development aid, or bilateral means. The United States either needs to provide a compelling counter point to China’s Belt and Road Initiative (BRI) or work with China and other major financiers to green development finance everywhere.
But climate-proofing development finance is not enough. Our research shows that power sector reform is needed not only in the United States but across much of southeast Asia and Africa before coal use will be retired to the extent needed to achieve goals set out under the Paris climate agreement, much less under more ambitious targets.
To create green growth pathways, financial incentives for many utilities across multiple geographies need to be restructured to encourage efficiency and cleaner fuels and agriculture, forestry, and food security need to be tied more closely to sustainable practices that both promote yields, improve soils, and sequester more carbon. More effective pricing of carbon is one approach to achieve these ends. Our review of carbon pricing policies suggests carbon pricing systems do lead to reduced emissions and would be most effective if gradual escalations were more robust and if at least a portion of the revenue generated from carbon pricing would, in turn, be invested in other emissions reduction activities.
The United States should work with international institutions such as the World Food Programme, UNDP, the World Bank, and the Green Climate Fund to catalog evidence-based methods for green growth to share with client nations as they seek to build restore their economies in the aftermath of the COVID-19 pandemic. It should support individual countries as they seek to boost domestic climate finance, whether through development banks or through national climate funds. Our research shows that engaging state-owned enterprises and national development banks is important to launching successful efforts to promote renewable energy and energy innovation.
The United States needs to collaborate with other important financial market regulators and central banks to address climate risk in international financial markets.
There is a growing body of evidence that global financial markets are underestimating the risk of climate change and its related costs when valuing firms, municipal governments, and sovereign debt. While the U.S. equities markets are reasonably efficient with regard to reflecting financial information (i.e., equity prices tend to reflect financial statement information promptly and without bias), the same cannot be said for information on public companies’ exposure to climate risk. Sudden repricing of the equities or bonds of climate-affected entities could reverberate through the entire financial system. Climate change-related shocks can reverberate across credit markets by creating uncertainty in mechanisms for the settlement of counterparty obligations when there is price volatility or through minimum capital requirements for banks and other financial institutions as lenders. Failure of private insurance markets in certain geographies, industries or asset class is yet another way climate risk can lead to instability in financial markets.
Our research suggests that the United States needs to fashion better disclosures that can help make latent risk more visible, thereby increasing the chances that political leaders will focus on potential solutions. Better U.S. disclosure requirements should start with the U.S. Security and Exchange Commission (SEC) which should establish permanent disclosure standards related to material climate risks and then in turn coordinate with other foreign equivalents. The Federal Reserve Board should also proceed with its proposal to establish capital requirements and specifically target the level of capital requirements for insurers and reinsurers of the energy and other industries subject to high levels of climate risk.
Internationally, the United States should work with the World Bank and International Monetary Fund to help countries whose budgets are highly dependent on fossil fuel related revenues to prepare to make reforms and adjustments to diversify their economic future.
The United States needs to restore its support for Mission Innovation.
We have studied government commitments to Mission Innovation (MI), a key component of the Paris climate agreement that aimed to lower the technological costs to combat climate change. Overall, government research, development and demonstration (RD&D) spending by Mission Innovation countries rose nearly 40% from 2015 levels. This investment has paid out in multiple ways, including contributing to the substantial drop in costs for several clean technologies that were targeted by the initiative. MI has also promoted clean tech development in major emerging market economies that will help those countries diversify their economic base.
The United States should re-up its financial commitment to MI and look for opportunities to join multi-lateral public-private partnerships where they will enhance job growth for American firms. The United States also must increase its energy innovation spending to keep pace with other countries such as China to ensure America remains a dominant and competitive player in energy innovation, which is a vital national security interest.
The United States should create a national green bank that can support infrastructure and new industries focused on digital innovation and clean energy development.
Use of national development banks can play a constructive role when paired with well-designed market-based tax incentive programs and well-defined government targets such as renewable portfolio standards (RPS). Our research shows that national development banks (NDBs) have helped promote green energy innovation and deployment in Germany, China, and India. Of course, funds from an NDP must be coupled with proper regulatory design, but specialization of a government-owned financial bank can actually promote better regulatory design by focusing expertise in a public institution that can advise political leaders on sound policy formation while at the same time providing a ready first investor to overcome risk aversion and needed capital patience for long duration energy technology and infrastructure investment.
The United States needs to organize a major investment initiative in digital innovation and clean energy or it risks losing its economic competitiveness and technology leadership to other countries who are promoting ambitious national plans. The European Union, South Korea, and China have already announced hundreds of billions of dollars dedicated to developing and deploying clean energy technologies. If the United States fails to mobilize with an initiative of its own, our research shows it could be left on its back foot in export markets in the years to come. Our research also shows that public-private ventures can foster innovation hubs that can spread innovation culture. Creating new institutions such as regional investment incubators, a national green bank, and public-private partnerships as part of a stimulus package would ensure that the United States creates jobs not just for the next year or two but over the coming decades.
While the United States certainly needs its own green bank to rebuild America, it could also work with other countries to establish a global green bank devoted to the low carbon transition. Why not reach out a hand to the UK, Germany, Korea, Japan, China and others to establish such a facility? Sounds like a great way to rebuild alliances and restore trust in American leadership.
Kelly Sims Gallagher is the Academic Dean and a Professor of Energy and Environmental Policy at The Fletcher School, Tufts University. Amy Myers Jaffe is the Managing Director at Climate Policy Lab and Research Professor at The Fletcher School, Tufts University.