Will President Biden's Low Carbon Policy Efforts be Slowed Down by the Gruenspecht Effect and Slow Economic Growth?

 In recent decades, U.S Clean Air Regulations have focused on reducing the emissions of new cars, new factories and new power plants.  Old cars, old factories and old power plants have often been “grandfathered” and haven’t faced regulations.  Given the durability of capital, this differential regulation creates long lags between “cause” and “effect”. In this case, the cause is the new regulations and the effect is environmental progress.

The Gruenspecht effect refers to an economist who in his Yale PHD thesis argued that the Clean Air Act can unintentionally make air pollution worse in the short run if car drivers keep their old cars longer because regulation raises the price of new cars (a regulation induced substitution effect).  Rob Stavins wrote a nice survey paper on this issue.

I remind you of these points because President Biden seeks to enact an aggressive set of low carbon policies.  If they are enacted, when will their effects be observed?

If the U.S slips into low economic growth over the next 5 years because of rising regulations and taxes, this will actually slow down the diffusion of the new green capital that will be mandated by the Biden Administration.  Why?

When people are poorer, they are less likely to buy new cars.  Academic economists will recognize that I’m talking about non-homothetic Engel curves.  See my 2011 paper with Lucas Davis. 

This point generalizes. When an economy slows down and expectations about medium term growth are bleak, new investment in capital slows down and older capital is relied upon to deliver the required services.  The updating of the capital stock (and thus the incorporation of the new green capital) is slowed down during bad times.  This suggests that President Biden needs an economic boom to accelerate his low carbon agenda.

Matt Kotchen and my 2011 paper takes this logic a step further.  We document that when a state is in a recession that its residents are less concerned about the climate change challenge.  Many environmentalists believe that recessions are good for the environment because the economy slows down.  We challenge this conventional wisdom and argue that to have a meaningful change in creating a bipartisan “low carbon economy”, a society needs to be in an economic boom so that there is broad support for pursuing medium term goals.  Our core thesis is about to be tested.

I do agree with green tech optimists that if the price of low carbon technology goes to zero (so solar panels and electric vehicles) that their diffusion will grow sharply.  My family owns a famous electric vehicle and we may soon buy solar panels.   But, is the price of low carbon technology really shrinking to zero so quick?  

So, the question I want you to consider is the following;  Does President Biden need an economic boom in order to achieve his important low carbon goals?  I believe that the answer is yes.  

Finally, note that unlike the new capital regulation approach — a carbon price would treat all capital equally and wouldn’t introduce any perverse capital substitution incentives.  In fact, such carbon pricing would accelerate investment in green R&D that promotes the next generation of low carbon transportation and power generation.  The tricky political economy here is for the Biden Administration to figure out how to offset the negative income effects of this tax through strategic transfers to non-environmentalists. Yes, I support explicitly purchasing the “veto” of those who do not prioritize the issue of climate change. Greens need to vote with their pocket book the blocking coalition’s veto.