The contradictions of environmental Keynesianism

by Bill Blackwater

Bill Blackwater is a freelance writer and journalist living in London. He is an associate editor of the quarterly Renewal: A Journal of Social Democracy and author of the blog We Are All Wotan. His recent articles include The Denialism of Progressive Environmentalists (Monthly Review) and Two Cheers for Environmental Keynesianism, (Capitalism Nature Socialism – subscription required).

‘Environmental Keynesianism’ is a broad school of thought that argues that state spending on ‘green’ objectives can simultaneously rescue the economy from recession and the planet from destruction.

Following the collapse of Lehman Brothers these ideas gained dramatically in political traction. In October 2008 the United Nations Environmental Programme called for a “Global Green New Deal,” to which it recommended the G20 devote 1% of global GDP.

While such an approach seems highly enlightened, in reality it suffers from a fatal flaw. In order to work economically, these projects depend on continuing growth in the consumer economy – which by its own terms, this school of thought recognises as being environmentally unsustainable.

Even less well understood is the corollary: that if these projects work environmentally, they will not be economically sustainable. At least, not within a capitalist economy. What is really required is actually some form of socialised investment, which is not related to earning an economic return.

Three concepts of Keynesianism

There are in fact three distinct concepts within the policy prescriptions under discussion. Whether or not any of them can accurately be ascribed to Keynes is another point, not to be explored here.

The first is the multiplier effect. This states that a rise in state spending will lead to additional waves of private spending, as those who receive payment spend some of that income on other goods and services, with the recipients spending a proportion of it, and so on. This is the principle behind national stimulus plans, such as the American Recovery and Reinvestment Act of 2009.

The idea is that, in a recession, the government steps in to buy increased goods and services, with the aim of restoring the flow of demand through the economy. The approach of environmental Keynesianism has been to target this government spending on projects that would simultaneously lead to environmental benefits -installing insulation, for example.

The second concept harks back to the policies of FDR. Government investment in the New Deal aimed not just to inject short-term demand into the economy, but to construct infrastructure – highways, dams, and bridges – that would lead to expanded growth in the long term. Environmental Keynesianism argues that investments in green infrastructure will expand the economy in new directions.

The third concept overlaps with the second. It derives from the premise that the future development of the global economy is bound to be dominated by low-carbon technologies. Its argument is typically an appeal to national interests – by investing in R&D in the industries of the future, a government will help make its economy internationally competitive.

Short-term green stimulus, and its environmental critics

The multiplier effect was a feature of numerous national stimulus plans rolled out in 2009. They were typically attacked by environmentalists because the green components were dwarfed by much larger spending on carbon-intensive areas.

A more profound criticism was made by Tim Jackson, author of Prosperity Without Growth. He criticised the very concept of the multiplier effect as an environmental instrument, since it relies on the recipients of state money spending a proportion of their income on other things. This can only reinforce the carbon-intensive impacts of conventional consumer spending.

Despite this, Jackson remained firmly supportive of environmental Keynesian proposals, because he supported the second and third concepts, relating to the use of green investment to transform the economy.

In reality, the same objections he made to short-term green stimulus apply to long-term green investment. For the latter to work successfully as an economic investment, it must lead to an expansion in the consumer economy – with all the stresses on environmental resources, not least carbon sinks, that this would entail.

Long-term green investment: the ‘economic wing’

Those calling for state spending on green R&D and infrastructure projects fall into two camps. The first are the economic wing those (Nicholas Stern, for example) who stress that this is the key to economic expansion. Typically they compare green investment to earlier waves of infrastructure development (e.g. railways, highways, electrification), and project that it will lead to a new industrial revolution.

But there are strong reasons to doubt that. Most green infrastructure projects – e.g. wind farms – are just more expensive replacements for what we already have. To businesses and households, there will be no difference in what comes out of the socket, whether it’s been produced by a solar array or a coal plant.

This brings us to a second problem. To use Marx’s analysis, the energy sector forms part of Department I – production of the means of production – upon which Department II – production of consumer goods – is based. Advocates of green investment tend to argue that spending on low-carbon energy infrastructure will lead to new jobs and wealth. But the direct beneficiary of such investment would merely be a subsector of Department I, one which does not employ many people.

In order for investment in low-carbon energy to lead to a rise in jobs and wealth, it would need to give rise to an expansion in Department II, the conventional consumer economy. Whence else does the energy sector derive a profit? Not only would green investment only be as green as the objects of consumer spending, therefore, but in order to a) recover its increased costs, and b) lead to economic growth, it would have to lead to an expansion in consumer spending.

Long-term green investment: the ‘environmental wing’

Another group of people who make the argument for green investment stresses environmental protection over economic growth; we might call this the environmental wing. Tim Jackson, for example, is in this group. The underlying contradictions in their arguments are exactly the same as for the economic wing, since they, too, justify their proposals on economic grounds.

The environmental wing tends to build up an economic case for green investment as follows. They assume that the business-as-usual costs of energy production are sure to rise:

• fossil fuels will get more scarce and thus expensive;
• ongoing use of fossil fuels would lead to dangerous climate change and economic costs; and,
• governments are likely to impose increasing costs on carbon.

They then argue that investing in low-carbon energy projects will lead to financial savings compared to business-as-usual. Often, they conclude that such investments are guaranteed to make a profit – and that the higher the oil price or carbon tax, the bigger the profit.

One problem with these arguments relates to the rebound effect, whereby an increase in resource efficiency tends, by lowering prices, to increase demand. The environmental wing typically argues that investments in energy efficiency will make a return by generating cost savings. But in order for these savings to be realised as a benefit they must be spent.

The question is: on what will households and businesses spend this windfall? Further personal consumption and business investment will simply reinforce the unsustainability of the consumer economy. In essence, the economic case of the environmental wing depends on the rebound effect.

A contrasting problem would arise if an increase in the costs of energy cancelled out the rebound effect. There are good reasons to believe a low-carbon energy system would be more expensive than that in place today (e.g. wind farms don’t generate when it’s not windy, and still require gas/coal plants as standbys). This could mean that all savings are absorbed by meeting the higher costs of energy. There would then be no boost to demand, and the economy would be saddled with the costs of low-carbon investment.

Economics of climate change

The overarching problem with the environmental wing is their conflation of

1. savings compared to a counterfactual future scenario, with
2. a profitable return on current investment.

Climate change is a key example. As a new phenomenon, it represents a new cost. Investing in low-carbon infrastructure, imposing carbon taxes, and building flood defences may reduce the new costs imposed by climate change in the future, compared to doing nothing. But that is not the same as reducing an existing cost and enjoying a cashable windfall one could spend on other things – and use to pay back the original investment.

Meanwhile, carbon mitigation is itself a new cost. It will be a drag on today’s economy (compared to other investment that might create more jobs and commercial opportunities), and may simply slow down the rate at which we become poorer in the future.

Environmental macroeconomics

The environmental wing generally misunderstands the implications of its proposals. Typically they realize that the ideas of the economic wing are environmentally unsustainable, but not that their own are economically unsustainable – within a capitalist economy, that is. In practice, growth is smuggled into their assumptions as a theoretical constant. Without this assumption, their proposals do not make the conventional economic sense they claim.

Tim Jackson, for instance, envisions a no-growth economy (in practice, one that contracts until reaching a steady state), and still expects investment in the low-carbon economy to generate a return. But a return means an increase in real purchasing power over what one could have enjoyed with the original funds. This, in turn, requires the whole economy to grow. There are a number of reasons for this.

First, if the economy stops growing, there would be a deflationary implosion in which it actually contracted.

Second, for an investment in one sector of the economy to do well, other sectors of the economy must also grow; e.g. as already discussed, wind farms will only make a profit from business and household consumption.

Third, if the economy contracts, then even if an investment (in wind turbines, say) does well on its own terms, an investor might end up with a greater share of tomorrow’s economy, but still be only able to buy a lesser value of goods and services.

Fourth, if investments are funded out of borrowing rather than savings, future earnings from those investments would have to be higher than today’s costs plus interest – impossible in an economy that has permanently contracted.

Conclusion

To summarize, if the proposals of environmental Keynesianism do well economically, they will harm the environment. And if they are environmentally effective, they will not be economically sustainable in a capitalist economy that requires ceaseless growth.

Environmentalist supporters of these ideas tend to believe their own proposals are both environmentally and economically sustainable. But this mistake often comes from conflating the future savings that would come from avoiding dangerous climate change, with a growth in profits that could earn a return on current investment. As climate change is a new cost, reducing its future effects will not eliminate an existing cost burden and free up resources we can spend in other ways.

In all, environmental Keynesianism is a failed theory of how capitalism can save itself from itself. There is no reason to believe it can both stimulate growth and fit within environmental limits.

The implication is that a much more radical approach is required – something which goes beyond Keynes, whose policy toolkit was restricted to rescuing the capitalist economy from its occasional depressions. Keynesianism is not the answer, because it is all about expanding demand, while our environmental problem today requires reducing demand.

But what must be remembered is that investments in climate change mitigation and adaptation are necessary. They will not make us richer; but if we accept that, we can also accept that we are not going to get richer anyway, because growth must be curtailed to avoid environmental disaster. What is required is a new mechanism for directing a significant proportion of current resources into such projects – one not based on earning an economic return.

Fundamentally this means capitalism is incompatible with a rapid transition to a low-carbon world. It is thus essential that the state take a decisive role in allocating economic resources for the common good – and that more environmentalists come to recognise this.