This blog was first published on VoxEU & CEPR
Many governments worldwide are currently considering fiscal recovery packages to address the Covid-19 crisis. This column analyses the impact of past green fiscal stimulus on employment. Focusing on the American Recovery and Reinvestment Act after the Global Crisis, it finds that that the green stimulus was particularly effective in creating jobs in the long run, but not in the short run. Hence, while green stimulus packages are useful to reorient the economy and direct it onto a green trajectory in the longer run, they are less effective in restarting the economy quickly.
The many proposals for the COVID-19 recovery also include calls for green stimulus packages. Such packages are thought to both restart the economy as well as help it transition to a cleaner, more sustainable path (e.g. Helm 2020, Agrawala et al. 2020). Lockdown policies have had adverse impacts on labour markets and economic growth (Bick and Blandin 2020) and governments may be tempted to use green fiscal packages to stimulate short-run activity and create jobs, while at the same time preserving environmental goals. Green stimulus packages, just as the ones implemented during the 2008 Global Crisis, typically include government spending on building retrofits, green infrastructure programs as well as large-scale support for clean R&D. We summarize recent evidence on the impact of the 2008 American Recovery and Reinvestment Act (ARRA) green fiscal stimulus and discuss policy implications for a post-pandemic green recovery.
No evidence for short-term employment gains
How effective is a green stimulus at jumpstarting the economy? In a recent study (Popp et al. 2020), we conduct an ex-post evaluation of the employment impact of the green stimulus under the ARRA implemented during the Global Crisis. Green investments, which constituted approximately 17% of all direct government spending in ARRA, included spending on renewable energy, public transport and clean vehicles, energy efficiency, building retrofitting, and modernizing the electric grid (Aldy 2013). We analyse how local US labour markets benefited from green and non-green ARRA funding and carefully address endogeneity issues that may arise in the distribution of spending.
Figure 1 illustrates the main finding of the impact of green ARRA investments on total employment. While green ARRA investments had a large positive effect on job creation, there is little evidence of significant employment gains in the short-run. Instead, nearly all the jobs created were created in the long-run during the post ARRA 2013-2017 period. The employment effect during this period amounts to approximately 15 jobs created per $1 million of green ARRA spending. These results suggest that the green ARRA worked more slowly than other stimulus programs, such as construction and highway infrastructure, which had significant effects on short-run job creation (e.g. Wilson 2012, Garin 2019). Hence, green stimulus investments may be less suited as a tool for an immediate restart of the economy.
Reshaping the economy in the long-run
Rather than boosting overall economic activity in the short-run, green ARRA investments were more successful at reshaping the economy towards green sectors by increasing the local demand for green skills. We find that the ARRA green stimulus appeared to be most effective in communities which had workers who already possessed the skills required for green jobs. These skills are mostly technical and engineering skills needed to operate, maintain and develop green technologies (Vona et al. 2018). We find that in such communities, ARRA created jobs in both the short- and the long-run, where nearly all of the new jobs were manual labour positions.
Implications for policymakers
For policymakers in countries committed to reducing emissions, these results imply that green investments may be particularly effective at reorienting the economy and directing it onto a green path during the post-pandemic recovery. The key challenge is a careful selection of the types of technological and infrastructure investments that can bring both job creation and environmental benefits in the medium to long-run. For instance, investments in green R&D are not a useful policy tool to boost job growth immediately, but transport electrification, recycling equipment and power sector infrastructures may have a faster while still only middle-term impact.
For policymakers in countries not yet on a green path, the role of green investments for reshaping the economy must not be ignored either. While the focus of a first round of stimulus spending will be on investments best able to restart each country’s economy quickly, subsequent investment rounds can be used as an opportunity to invest in resilient infrastructure. It would not make sense to massively invest in dirty assets, which run the risk of becoming ‘stranded’ due to technological, market or policy changes (van der Ploeg 2016). The Covid-19 crisis may trigger long-term structural transformations in the economy that are largely unpredictable now. For instance, demand for fossil fuels might fall as business travellers realize the potential of replacing face-to-face gatherings with video conferencing. This implies that creating a ‘just transition’ fund to retrain workers for the green economy should remain a high priority in an ambitious green Covid-19 stimulus package. Bringing workers back to jobs in industries soon to become obsolete is not a good long-term investment.
Aligning incentives with complementary carbon pricing measures
Green stimulus programs may have larger environmental benefits when complemented with carbon pricing policies, such as carbon taxes or cap-and-trade systems. Agrawal et al. (2020) summarize the concerns over the environmental effects of past green stimulus packages and highlight that ambitious carbon pricing policies were a missing ingredient of the US green ARRA package. Carbon pricing mechanisms create demand for new clean technologies, such as electric vehicles powered in part by a charging infrastructure developed using green stimulus funds. Strong carbon pricing signals also help mitigate the rebound effects of energy-efficient investments. In other words, accompanying green stimulus packages with carbon pricing can contribute to a better alignment of incentives for a post-pandemic green recovery.
Just as carbon pricing can enhance green stimulus investments, a green stimulus will enhance the prospects of carbon pricing. While the net effect of carbon pricing on employment may be small (Yamzaki 2017, Metcalf and Stock 2020), new studies suggest that carbon pricing may reduce jobs in specific sectors, particularly for lower skilled manual labour (Marin and Vona 2019, Yip 2019). The good news is that jobs created by green investments often employ workers who are left behind by carbon pricing. Moreover, carbon pricing schemes generate revenues for governments which help finance recovery plans with minimal distortions to the economy as a whole (Benassy-Quéré and Weder di Mauro 2020). Part of these revenues can also be returned to households as direct lump-sum transfers, which can help mitigate the impact of the economic crisis, especially for low-income households (Goulder et al. 2019).
Written by David Popp, Francesco Vona and Joëlle Noailly
You can read the original blog here.
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