IMF lead evaluator: Aligning the stars for clean energy

Nicoletta Batini, lead evaluator in the IMF's Independent Evaluation Office (IEO), produced the IMF working paper - Building Back Better: How Big Are Green Spending Multipliers? - with Mario Di Serio, Matteo Fragetta, Giovanni Melina, and Anthony Waldron.

Noting that, although IMF working papers do not necessarily represent the views of the IMF, its board or the IEO, Batini stressed these issues are central to the IMF's outlook.

There does not have to be a "trade-off", she said, between investment in clean energy and rebuilding economies. "Some people thought that if you go green, you sacrifice economic growth, you sacrifice jobs. And so we were ready to explore this question and we prepared a working paper."

Keynesian multiplier

The working paper's authors use the Keynesian multiplier to measure the economic impact of investment in clean energy. This includes solar, hydro, wind, thermal, biomass and nuclear, and also they looked at biodiversity and conservation spending.

"The Keynesian multiplier is one of the fundamental concepts in macroeconomics. It basically calculates the ripple-effect of government spending on the rest of the economy. When there is a slump, like now, Keynes theorised that boosting the incomes of those who receive government contracts and benefit payments helps them go on to spend and invest more, and these can in turn help to reverse the economic decline of a country," Batini said.

A lot of money has been spent on stopping the pandemic, on supporting lives and livelihoods, and so putting scarce resources where they are most effective is essential to pulling economies back onto their feet, she said.

"As the COVID pandemic comes amidst the climate crisis, and the biodiversity crisis, ideally one would also like to focus this same spending onto green transitions. We don’t just compute green multipliers, we compare them to non-eco-friendly multipliers, from spending on things like fossil fuel energy generation, or subsidies, to unsustainable land uses; for example, public spending to support highly mechanised and chemicals intensive industrial crop and animal farming methods."

The authors utilised a new international data set, part of which was specially assembled for their working paper, with contributions from the International Atomic Energy Agency, the International Energy Agency, the OECD-Nuclear Energy Agency, and World Nuclear Association, among others.

"The study finds that every dollar that we spent in the past on key carbon neutral, or carbon sink, activities, from zero-emission power plants, for example nuclear plants, to the protection of wildlife and ecosystems, can generate more than a dollar's worth of economic activity," Batini said.

"This means that, if you spend on these activities, you are creating debt, but that debt is going to pay back itself; so it’s not weighing on debt. Crucially, the estimated multipliers associated with green market spending are about two-to-seven times larger than those associated with non-eco-friendly expenditure, depending on sectors, technologies and horizons, in line with all the impact studies at the sectoral level. Among green energy multipliers, nuclear displays the strongest multipliers by far, especially in the first year. Then the multiplier loses significance."

The core results of the working paper are driven by three factors, Batini said.

First, green activities are more labour intensive than non-eco-friendly activities because they use far more of their overall investment budget for hiring people and relatively less on acquiring land, machines and supplies, or energy itself to run the power plants.

The second is that green activities imply a higher domestic content; for example, clean energy spending, including on nuclear, relies more on local labour and there are big ripple effects locally.

And third, green investments tend to produce far more jobs at all pay levels, and there are sectoral studies on nuclear that show nuclear tends to pay higher wages at all levels than other activities, including some of the renewables.

Developing world's right to develop

"It is natural for those concerned about the pace and the risks of global climate change to hope that developing nations can be persuaded to forgo the energy-rich lifestyles that wealthy nations and citizens have enjoyed so far," she said, "or that the people in those countries are ready to pay extra for clean energy, even when dirty forms are cheaper and easier to get."

Such hopes are misplaced, she said.

"Just as the farmers and workers of North America and Europe did in the nineteenth and twentieth centuries, the urbanising middle classes of a lot of emerging countries and developing countries are now buying cars, refrigerators, water coolers and air conditioners almost as soon as they can afford the gas and the electricity bills. They're eating more meat and taking more long trips, and no one had the power, let alone the right, to tell them not to."

This means that any bold plan for saving the climate that fails to meet the massive increase in energy demand during this century is very likely to fail, she said.

"This is not just my opinion; I think it's the opinion of the IPCC and many others that are global earth champions. If average per capita energy demand rises to current US levels by the year 2100, then we're looking at some very big numbers for the planet's demographic growth projections."

This requires "an energy miracle", she said, which is not impossible.

"In our paper we don’t take a stand on which source is best suited to perform that miracle, but it seems clear to me that one should act aggressively to apply all that's tried and true, and already operating, to make sure that we can rapidly deliver as much clean energy as possible to satisfy this growing demand.

"For developing countries, we've seen these kinds of miracles happen. They went from having no communications to jumping straight into mobile communication technology. So the solution is feasible, if we can align the policy, finance and technology stars that we have in front of us."