Costs of the Green New Deal

With the government shutdown finally over, Speaker Nancy Pelosi is poised to begin advancing the policy agenda of the Democrats. High on the list will be the loosely defined Green New Deal, a federal spending program that will cost $2 trillion or more and move the electric power sector to complete reliance on renewable energy sources. According to Representative Alexandria Ocasio-Cortez, the Green New Deal would include basic income programs and universal health care programs, further escalating the cost. But those are well beyond the scope here.

While the goal of the Green New Deal to significantly cut global carbon emissions is vital, its approach of huge deficit financed and politically engineered spending programs may be the worst imaginable. Consider three significant consequences of this policy plan. First, the Green New Deal could unintentionally inhibit clean technology and energy efficiency innovation because the federal grants will inevitably be earmarked for investments that can be defined using only tools and technologies already at hand. Blunt spending programs will force contractors to sell what they know to meet government deadlines rather than encouraging research and development into the next generation of low carbon technologies.

{mosads}Second, an increase in federal spending on green infrastructure projects such as wind farms or solar fields could significantly suppress private sector spending in this key energy category. If a community, for example, is considering installing solar panels at a local school and the federal government offers grants for this type of investment, the obvious choice would be to finance them with federal dollars instead of local dollars. In this case, total renewable investment would not increase, but it adds a layer of bureaucratic complexity to the administrative burden.

A recent report by the Congressional Budget Office reviews evidence of this investment dynamic with respect to federal transportation spending. One recent estimate found that each dollar increase in federal highway spending from the 2009 stimulus bill reduced state spending on highway projects by 81 cents. While the offset may be smaller for new federal spending on green projects, there will surely be some, with the net increase in green energy investment less than the federal spending.

Third, the Green New Deal will influence lawmakers on decision making because funding allocations will undoubtedly be determined by political forces rather than market forces. Some lawmakers will insist on a certain level of investment in solar projects, while others will demand more money for wind turbines or geothermal power. The final allocation will depend on the relative clout of the lawmakers and will inefficiently differ from the allocations that consumers and producers would demand.

In short, the Green New Deal would be a deficit financed expansion of federal bureaucratic power to dictate investment decisions in one of the most dynamic sectors of the economy. Responding to the threat of climate change by growing the government and further centralizing energy market decisions puts at risk the free market economy that our nation has relied on for economic growth for more than two centuries.

Fortunately, there is a better approach of using a carbon tax to impose an explicit price that reflects the burden imposed by emissions. That would have the advantage of harnessing market forces, not political will, to achieve desired outcomes. By increasing the return on investment from clean energy sources and low energy technologies, a free market strategy would drive new investment in existing green energy technologies while also encouraging innovative technologies to come to market. An added advantage is that a carbon tax will not increase the deficit but will instead raise revenue that could be used to reduce other more distortionary taxes.

Green New Deal advocates refuse to accept advantages of this approach, recently writing that they “will vigorously oppose any legislation” with market mechanisms. Americans should not allow ideological fixation to stand in the way of addressing environmental challenges. Experts from across the spectrum recognize the need for policymakers to address climate change. As lawmakers move toward action, they must understand the importance of building the right program design. An approach that incentivizes energy consumers and producers to advance societal goals is far superior to a framework in which politicians make “better” choices than the market and force a less than efficient plan on the economy.

Alex Brill is a resident fellow at the American Enterprise Institute. He was previously chief economist with the House Ways and Means Committee.