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International

3D illustration of conceptual compass with needle pointing 0 percent of CO2. Concept of decarbonization

Decarbonization and Debt Forgiveness: A Path Forward

A simple debt forgiveness approach can help industries and workers feeling economic pain now and build toward a more sustainable, low-emissions future.

The economic crisis resulting from our response to COVID-19 is hitting energy intensive industries particularly hard. Airlines, hospitality, restaurants, malls, mines, and factories are shut down across the country, as are oil and gas wells, pipelines, refineries and merchant power plants. Unlike the recession that followed the 2008 financial crisis, which was largely precipitated by the actions of private sector financial firms, this economic crisis is not the fault of any of those industries.

And the US fossil fuel production industry is being hit by a double whammy. It was already in the midst of a crisis—with coal in structural decline due to declining economics and oil and gas seeing a temporary shock due to a rapid decline in oil prices caused by Saudi Arabia’s decision to break with OPEC. These factors will not necessarily be resolved once COVID restrictions are lifted. Compensating its workers and keeping their companies open with financing alone—as the relief bill does—doesn’t make much sense on its own as a solution, because those jobs and activities are not likely to come back when the COVID crisis ends. This still risks leaving them nowhere when the immediate crisis lifts.

And while most workers in the oil and gas exploration business are used to ups and downs in a boom and bust industry subject to the whims of cartel geopolitics, this is definitely not the case for workers in downstream industries and for other energy intensive sectors.

 

Smart Recovery

This is where smart recovery comes in: nudging those energy-intensive companies to invest and build back in ways that better position their business models and workers to tackle the crises of the future. Policies that provide incentives and opportunities for workers and companies shut down by COVID to come back in ways that prioritize actions they can take to avert future crises like this one or others like climate change can help. And since carbon and energy intensive industries have been hardest hit, the opportunity to incent coming back with less carbon may be (beyond public health itself) the most relevant.

Another lesson from the last recession was that the politics around the use of the recovery to boost industries that weren’t really down (while workers and folks on main street were left without jobs or real help) or were responsible for the crisis (financial institutions) was viewed as unfair and played a role in turning the politics in the long-run against government action to address issues like climate change. This suggests that we need to be very careful not to boost unrelated industries, or to put in place barriers (like riders that are difficult or impossible to achieve) for the recovery of companies that are honestly innocent bystanders to the crisis.

 

Decarbonization: Carrots, Not Sticks

Recovery incentives that provide options for companies that make it compelling to choose to decarbonize if they have been provided government support could be attractive. This focuses efforts on impacted sectors, giving them (rather than unaffected, or unrelated others) a chance to come back clean without forcing their hand.

Since virtually every energy intensive industry is likely to utilize relief financing either directly (through application for relief financing) or indirectly (having their bonds purchased by the Federal Reserve), an incentive tied to having debt or other financing from or held by the government could be effectively available economy wide.

A simple way to provide that incentive would be to forgive or reduce that debt burden, by an amount dependent on the (verifiable and additional) emissions reductions they achieve. In fact, we can apply the same approach to incentivize emissions reductions across all entities whose debt is held or issued by any government entity. If such an approach was augmented by dedicated loan guarantees or financing to bring down debt costs for executing such a transition, it could be a way to drive both rapid recovery and decarbonization.

Debt forgiveness for emissions reductions could be provided retroactively, providing an additional benefit to the stimulus relief already provided. This approach supports companies and workers who are feeling the pain now.

This is an incentive most directly aimed at carbon emitters first—a transition-first carbon reduction incentive. Since there is a “price” paid for those reductions as companies make internal decisions about shifting operations, and as relief is being provided economy wide, this approach effectively creates a relative price on carbon. However, it does so in a way that gives carbon intensive entities the first crack at reducing those emissions. That is, it is a transition-first approach to carbon pricing.

 

A viable path to sustainability and financial resilience?

An incentive-based, transition-first approach such as the one described above can create an emissions price without a shock. It puts financial resources and agency in the hands of those impacted—both by this crisis and a future one—and gives them time to develop partnerships to enable a just transition, but incentivizes them to do it fast enough to address the climate crisis. And it does this by easing the financial burdens they face moving forward through debt relief, resulting in a more sustainable and financially resilient economy.

There could be enormous benefits to deploying such a program on an economy-wide basis, building off the huge financial commitments being made to mitigate this crisis to stave future crisises.