Weighing Externalities of Economic Recovery Projects: An Alternative to Green Taxonomies that is Fairer and more Realistic

Abstract

Natural and man-made crises and disasters often cause untold destruction, but also provide multiple opportunities for economic redevelopment post the crisis. Like other crises the COVID-19 pandemic has spurred public and private entities to become engaged in significant redevelopment efforts. Policymakers in some countries view these efforts as an opening for not only including other issues such as deficits in infrastructure and the social systems, but also for redefining their political priorities towards a “green economy”. While pursuing various policy objectives at the same time is a prudent undertaking, it seems rather questionable that politicians, under the pressure of ecological activism, would evaluate all crisis policy measures by their effect on environmental outcomes. We are seeing this in the European Union (EU) as it is about to couple its Recovery and Resilience Facility (financed through the “Next Generation EU Recovery Fund”) with its Green Deal. In the U.S., so far, the Build Back Better package and the American Rescue Plan seem to seek separate evaluation schemes for their different policy fields. The aim of this paper is to evaluate the wide-ranging opinions that exist on the intention to make recovery support contingent on ecological effects: For example, there is the classic Tinbergen Rule which states that for each policy target there must be at least one policy tool; thus, if there are fewer tools than targets, then some policy goals will not ultimately be achieved. Likewise, long-term climate change mitigation can only be achieved with long-term policies that consider and weigh out all externalities. Moreover, embarking on long term recovery plans cannot solely be formulated and implemented on ex-ante definitions of ecological impacts. The paper raises the question whether requesting ecological effects from all recovery programs is just and fair. It contrasts the various options of coupling recovery efforts and climate mitigation with state-of-the-art approaches of valuating multiple externalities: weighing the diverse externalities of policy projects can determine which policy tools to choose. It also demonstrates the downside of a policy that are solely focuses on granting financial support, if not, a project can effectively meet a pre-specified ecological and energy goal as set up by the EU and which ranks recovery projects according to their arbitrary effect on climate change. A wider scope of decision criteria will produce more effective ways to “build back better”.

Keywords

• externalities
• post covid-19
• recovery programs
• tinbergen rule