Killing coal

Time to make coal history

Coal is at the toxic heart of the fossil fuel economy

Around the world the mood is shifting. Xi Jinping has adopted a target to cut China’s net carbon emissions to zero by 2060. Under Joe Biden, America will rejoin the Paris agreement, which it adopted five years ago. In the financial markets clean-energy firms are all the rage. 

This month Tesla will join the S&P 500 share index—as one of its largest members.

Remarkably, in a realm where words are cheap, there has been action, too. In America and Europe the consumption of coal, the largest source of greenhouse gases, has fallen by 34% since 2009. The International Energy Agency, an intergovernmental body, reckons that global use will never surpass its pre-covid peak.

Yet coal still accounts for around 27% of the raw energy used to power everything from cars to electric grids. Unlike natural gas and oil, it is concentrated carbon, and thus it accounts for a staggering 39% of annual emissions of CO² from fossil fuels. If global emissions are to fall far enough, fast enough, the task now is to double down on the West’s success and repeat it in Asia. It will not be easy.

Coal came of age in the Industrial Revolution. In the rich world its use in furnaces and boilers peaked in the 1930s and faded as cleaner fuels became available. Consumption in the West has recently collapsed. 

In Britain the last coal-fired power plants could close as soon as 2022. Peabody Energy, a big American coal miner, has warned that it may go bankrupt for the second time in five years.

Although carbon prices accelerated the shift in Europe, the Trump administration has favoured America’s coal industry with deregulation and political support—and still it has declined. One reason is competition from cheap natural gas produced in America by fracking. 

Tax credits and subsidies have prompted renewables to scale up, which has in turn helped drive down their costs. Solar farms and onshore wind are now the cheapest source of new electricity for at least two-thirds of the world’s population, says Bloombergnef, a data group. 

As coal faces cleaner rivals and the prospect of more regulation, banks and investors are turning away, raising coal’s cost of capital.

This is a victory, but only a partial one. In the past decade, as Europe has turned against coal, consumption in Asia has grown by a quarter. The continent now accounts for 77% of all coal use. China alone burns more than two-thirds of that, followed by India. Coal dominates in some medium-sized, fast-growing economies, including Indonesia and Vietnam.

If the aim is to limit global temperature rises to 2°C above pre-industrial levels, it is no good waiting for Asia’s appetite for coal to fade. New plants are still being built. Many completed ones are not yet fully utilised and still have decades of life in them. 

Nor is it enough to expect a solution from “clean coal” technologies, which aim to capture and store emissions as they are released. They may help deal with pollution from industrial uses, such as steelmaking, but they are too expensive for power generation.

Hence Asia needs new policies to kick its coal habit, and soon. The goal should be to stop new coal-fired power plants being built and to retire existing ones. Some countries have taken a first step, by imposing new targets and bans. 

The Philippines has declared a moratorium on new plants; Japan and Bangladesh are slowing construction, too. China’s new five-year-plan, which will be published next year, may limit coal use. It should set its cap at current levels, so that the decline can start immediately.

If targets are to be credible, Asian countries must tackle deeper problems. The strategy that worked in Europe and America will get them only so far, because the mining firms, power stations, equipment-makers and the banks that finance them are often state-controlled. Market forces and carbon taxes, which use price signals to change incentives, are therefore less effective. And coal politics is treacherous. 

The coal economy forms a nexus of employment, debt, tax revenues and exports. China has used its Belt and Road Initiative to sell both mining machinery and power plants. Across the region, local governments depend on coal for revenues. Many will defend it ferociously.

One step in fighting regional lobbies is to redesign power systems so that renewables can compete fairly and incentives work. Most renewables provide only intermittent power, because the weather is changeable. National smart grids can mitigate this by connecting different regions. 

Too many of Asia’s electricity systems muffle market signals because they are locked into legacy long-term supply contracts with coal firms, and because they are riddled with opaque subsidies and price caps. Removing these so that markets and taxes work better will let renewable power undercut coal.

The other step is to compensate losers. The lesson from destitute mining towns in south Wales and West Virginia is that job losses store up political tensions. Coal India, the national mining colossus, has 270,000 workers. 

From Shanxi province in China to Jharkhand in India, local governments will need fiscal transfers to help rebalance their economies. Banks may need to be recapitalised: China’s state lenders may have up to $1trn at stake.

Europe and America have shown that King Coal can be dethroned, but they cannot be bystanders as Asia works to complete the revolution. Coal powered the West’s development. In 2019 coal consumption per person in India was less than half that in America. 

It is in Asia’s long-term interests to topple coal, but the short-term political and economic costs are large enough that action may be too slow. If politicians in Europe and America are serious about fighting global warming, they must work harder to depress coal elsewhere. That includes honouring prior promises to help developing countries deal with climate change.

Ultimately, though, the responsibility will lie with Asia itself. And the good news is that it is overwhelmingly in Asia’s interest to do so. Its people, infrastructure and agriculture are dangerously exposed to the droughts, flooding, storms and rising sea levels caused by climate change. 

A growing middle class yearns for their governments to clean up Asia’s choking metropolises. And renewable energy offers a path to cheaper power, generated at home, as well as a source of industrial employment and innovation. Coal’s days are numbered. The sooner it is consigned to museums and history books, the better. 

Why inflation could be on the way back

The global economy may be shifting as it did four decades ago

Martin Wolf

Are we about to move into a new era of unexpectedly high inflation, rather than the below-target inflation we are used to? Many dismiss this view. But the boy who cried wolf was right the last time. 

A book just out is crying wolf insistently. Notably, it states that, as a result of today’s fiscal and monetary largesse, “as in the aftermath of many wars, there will be a surge in inflation, quite likely more than 5 per cent, or even on the order of 10 per cent in 2021”. That would change everything.

The prediction comes from The Great Demographic Reversal by Charles Goodhart, a respected academic, and Manoj Pradhan, formerly at Morgan Stanley. Its prophecy of imminent inflationary doom is in fact less significant than its analytical framework. 

These authors argue that the world economy is about to shift regimes. The last time this happened was the 1980s. The big shifts four decades ago were not so much the desire to bring inflation under control, but globalisation and the entry of China into the world economy. 

That era, they argue, which was one of low inflation and high, rising indebtedness, is now ending. Its inverse will soon follow.

In the 1980s and 1990s, the economies of China, the former Soviet empire and other developing countries opened up. The Uruguay Round was agreed, which led to the birth of the World Trade Organization, to which China acceded in 2001. International economic integration advanced apace, notably through trade, but also via direct investment from high-income countries. 

The global labour supply for production of tradeable goods rose enormously. The big trading economies had falling birth rates and still youthful populations, reinforced by the entry of women into their labour forces. So the workforce grew faster than population and output per head rose ahead of that per worker.

All this together, argue Messrs Goodhart and Pradhan, caused a fall in the market power of labour in high-income countries, higher profit shares in gross domestic product, rising domestic inequality, falling global inequality, a “savings glut”, weak inflationary pressures and declining real interest rates. There was a surge in indebtedness.

Now, they argue, all this is going into reverse. Globalisation is under attack and no other economies can replicate what China did. Ageing hits the growth of the labour force and exacerbates fiscal pressures. Not least, they assert, as the number of consumers rises relative to that of producers, inflationary pressure will increase. 

Moreover, as the labour force shrinks and globalisation weakens, the market power of labour will re-emerge, exacerbating these inflationary pressures.

These shifts will, they add, create huge policy dilemmas, especially given the extended balance sheets of governments and non-financial corporates. If the relationship between unemployment and inflation were to shift as adversely as the authors suggest, would central banks tighten as much as they might need to, in order to contain inflation? 

How would the authorities handle the waves of defaults? How would governments bring their deficits back under control in a world of structurally low growth (partly due to ageing), higher interest rates and pressures to raise spending? 

If they failed to do so, would the central banks keep printing money or permit national insolvency? In brief, are we confronting a rerun of the 1970s, in worse circumstances?

The authors are correct in arguing that the world economy is undergoing big structural shifts. Ageing and a weakening of globalisation in the production of goods are well under way. Moreover, this process includes China. That combination will transform our economies.

Yet it is also vital to remember how little we know about how such shifts might play out in the real world. What if we had known in 1980 that China was going to open up its economy to the world and launch the biggest investment boom in world history, culminating in an investment rate of 50 per cent of GDP? 

How many would have predicted that the macroeconomic situation a few decades later would be one of excess savings, low real interest rates, ultra-loose monetary policies and debt overhangs? Most would surely have assumed that booming China was about to import savings massively and so raise real interest rates and export net demand, instead.

Similarly, Messrs Goodhart and Pradhan may be right that, in their brave new world, the desire to save will tend to fall faster than that to invest, the savings glut will turn into a shortage, and real interest rates will soar. But the difference between desired savings and investment is a narrow one. 

It is quite possible, instead, that, with slow economic growth and continuing declines in the relative price of capital goods, corporate retained profits will continue to exceed investment in high-income economies. 

The Chinese corporate sector might also follow suit. If so, demand might stay weak and real interest rates low for a long time, reinforced by the huge private-sector debt overhangs in all these economies.

It is not even clear that globalisation was the main historic driver of changes in labour markets. It was just one element in a set of transformations — new technologies, the shareholder-value-maximisation model of corporate governance, the rising role of finance and growing monopoly power.

Doubts about these theses are warranted. But it is also dangerous to extrapolate the present into the future. In 1965, few imagined that postwar Keynesianism would shortly die. The world of “lower for longer” may similarly vanish. Big changes are in process. We need to think rigorously about how our future may differ from our past.

What’s Ahead for the U.S. Economy?

The U.S. economy seems stuck in neutral for the near term as the numbers of new COVID-19 cases reach new highs in nearly all states, although President-elect Joe Biden’s proposals could bring relief on several fronts, according to a recent post-election press briefing held by the Penn Wharton Budget Model (PWBM) on November 12. 

The PWBM is a nonpartisan research organization that provides economic analysis of the fiscal impact of public policy.

The implications of the unrelenting pandemic were at the top of the agenda during the briefing. “R,” or the effective reproduction number to measure secondary infections, is currently racing as if one’s foot were “on the gas pedal,” noted John Ricco, senior analyst at PWBM.

“When your R is bigger than 1, you get explosive growth,” Ricco said. “Our analysis shows that the number of states where R is greater than 1 — in that danger zone — is almost near 50 right now. It’s a pretty dire situation.”

In addition to monthly or quarterly government data, the PWBM team developed its own “high-frequency economic trackers” including data on Google searches for unemployment claims and cell phone location data to “track how the recovery is going on in real time,” said Ricco. 

For instance, it found a plateauing of the “social contact rate,” or how frequently people come together in close physical contact, which is a desirable trend. But that trend also puts an upper limit on the recovery, and employment trends reflect that, he added. 

“We’re basically stuck in neutral right here until the virus is suppressed.”

In the near term, regarding non-pharmaceutical interventions, the stress ought to be on getting right individual behavior to contain the spread of the pandemic, Ricco said. 

“Beyond that, the recovery will depend on what happens in six months or so with the vaccine, and any fiscal response.”

Parsing the Biden Plan

In a study of the proposals by President-elect Joe Biden, PWBM found that over the 10-year budget window of 2021–2030, the Biden platform would raise $3.375 trillion in additional tax revenue and increase spending by $5.37 trillion. 

Including macroeconomic and health effects, by 2050 the Biden platform would decrease the federal debt by 6.1% and increase GDP by 0.8% relative to estimates under current law. But in the run-up to 2050, GDP decreases by 0.4% in 2030, and stays flat in 2040, the study noted.

GDP growth dips in the near term because of some distorting effects of changes to the tax system and in health care benefits, said Kent Smetters, PWBM’s faculty director, who is also Wharton professor of business economics and public policy. 

As higher tax rates hurt high-income people more under the Biden plan, they end up dampening capital investments. But “as people get greater access to health care, there’s little less pressure on them to work,” said Smetters. “That means labor becomes a scarcer as they have fewer workers, and hourly wages actually go up.”

Over a 10-year period, the largest new revenue-raisers in the Biden tax plan are the corporate tax ($1.4 trillion), payroll taxes ($992.8 billion) and individual income taxes ($944 billion). Over that same period, the two biggest areas of new net spending would be education ($1.9 trillion) and infrastructure and R&D ($1.6 trillion). Housing, social security benefits, health care and expanded paid leave are the other spending areas.

The study noted that most provisions of the Biden tax plan focus on raising taxes on corporations, capital income, and ordinary income of high-income filers. Two major provisions of the Biden proposals are (a) implement a Social Security “Donut Hole,” or a band of non-taxable wages between the current annual taxable maximum threshold of $137,700 and $400,000 for the 12.4% payroll tax that finances the Social Security Trust fund; and (b) repeal elements of the Tax Cuts and Jobs Act (TCJA) for high-income filers.

Previous PWBM studies have analyzed those and other features of the Biden plan, including raising the corporate tax rate, taxation of capital gains and dividends at ordinary rates, limiting itemized deductions, and eliminating fossil fuel subsidies.

Who Gains, Who Loses

One PWBM chart traces the impact on individuals by age group and adjusted gross income, which shows “who would prefer to live in a Biden world,” said Richard Prisinzano, PWBM’s director of policy analysis. “It’s the older rich people that don’t like Biden’s world,” he noted. “They face a lot of taxes, and they don’t get a lot of benefits from the spending program. At the other end, the lower-income folks really do like Biden’s world.”

In calculating the impact at the individual level, PWBM used a dynamic model that covers entire lifetimes, compared to conventional models that look at tax changes only in one year. It found that in a Biden regime, working-age and lower-income people benefit, whereas higher-income young workers and wealthy retirees lose. Almost 80% of the increase in taxes under the Biden tax plan would fall on the top 1% of the income distribution.

Under the Biden tax plan, households with adjusted gross income (AGI) of $400,000 per year or less would not see their taxes increase directly but would see lower investment returns and wages as a result of corporate tax increases, the PWBM study found. Those with AGIs at or below $400,000 would see an average decrease in after-tax income of 0.9%. But after-tax incomes would fall by 17.7% for those with AGIs of more than $400,000, who make up the top 1.5% of taxpayers.

In distributing the corporate income tax to households, PWBM assumed that 75% of the tax falls on capital owners and 25% falls on workers in the form of lower wages over time. These lower wages and lower investment returns are included in its calculation of the “effective tax rate.” 

That rate stays mostly unchanged between current law and the Biden plan for all but the top 0.1% of households, who will experience a bump from 30.6% to 43% if the tax changes are implemented in 2021.

Where the Money Will Be Spent

The PWBM study grouped the new public investments in the Biden plan into three categories: education, infrastructure and R&D.

The education plan, which will boost spending by $1.9 trillion over 10 years, includes provisions for universal pre-K schooling, two years of debtless college education and free public college for students from low-income families. The infrastructure and R&D plans totaling $1.6 trillion cover investments in water infrastructure, high-speed rail, clean energy R&D, 5G and artificial intelligence.

The study expected every dollar of new federal spending to stimulate an additional 62 cents from state and local governments for every dollar. PWBM has modeled each of those public investment categories as boosting the productivity of both private capital and workers, thus increasing wages, interest rates and GDP.

PWBM noted that other areas that will see new spending in the Biden plan, over 10 years, are housing ($650 billion), social security ($290.7 billion) and health care ($352 billion). In health care, the study estimated that Biden’s proposals would lower average prescription drug prices by about 60%, by allowing consumers to import those drugs from abroad and for Medicare to negotiate prices.

Biden’s plan to ease immigration policies will take time to reverse the historically low levels to which immigration had fallen in the Trump regime. The pandemic will stifle immigration, and it will return slowly to historical levels only by 2050, the PWBM study predicted.

The Immigration Booster

Biden’s immigration plans will see distinct outcomes on several fronts. Granting legal status to undocumented immigrants will reduce emigration rates as documented immigrants emigrate back to their countries less often than those that are undocumented, the study noted. 

Furthermore, “fertility increases since immigrants have more children, and this increase, in turn, has downstream demographic and economic effects such as a slightly younger population.”

With friendlier immigration policies, “the pie gets bigger … and it builds up the economy in a general sense,” said Prisinzano. He noted that such policies attract “high-ability people” who contribute to patents, boost productivity levels and GDP growth.

All said, “a lot of the economy is still based on what happens with the pandemic,” said Prisinzano. But there are no easy options for policymakers. “There are benefits in trying to keep some of the businesses that are struggling. There’s also a benefit to not doing anything that would encourage people to do unsafe things like go out in the economy and try to do things.”

Smetters noted that some of the recent surge in economic activity is because of the increase in social contact rates. “That could also lead to more shutdowns, and it could rebound and drag things in the opposite direction. It’s really hard to have a simple story behind it, because a lot of this has to do with people’s perceptions.”

Another round of economic stimulus is certainly something that policymakers are considering. The PWBM does not make policy recommendations, Smetters said as a disclaimer before noting, “If one were to do a stimulus, certainly doing it today is going to be more effective than waiting a while.” 

A stimulus focused on lower-income people who are more likely to consume that money will prove more effective than if it is targeted at others who are less likely to consume, and instead save that money, he added. 

Job Creation Is the New Game in Town

Even if a successful rollout of a new COVID-19 vaccine causes the current health crisis to recede by next spring, the unemployment crisis will remain. That is especially true in the United Kingdom, where fiscal stimulus is urgently needed to avert a lost decade – if not a lost generation – of growth.

Gordon Brown, Robert Skidelsky

EDINBURGH/LONDON – In the wake of the COVID-19 pandemic, both the US and European economies are gearing up for large-scale job creation. US President-elect Joe Biden has pledged to invest $700 billion in manufacturing and innovation, plus $2 trillion in a “Biden Green Deal” to combat climate change and promote clean energy. 

Meanwhile, Germany has abandoned years of thrift by backing a €750 billion ($887 billion) European Union recovery fund and, like France, will maintain its own national job retention and job creation program throughout 2021.

By contrast, the United Kingdom’s chancellor of the exchequer, Rishi Sunak, has fallen behind the curve. Back in March, many expected that Britain would experience a V-shaped recovery. As this prospect faded, it became clear that Sunak’s rescue operation needed to be matched with a viable recovery plan.

The consensus view is that both the UK and the global economy will be smaller in 2021 than they were in 2019. The International Monetary Fund predicts that the global economy will be 6.5% smaller than was forecast before the COVID-19 crisis, with a legacy of unemployment at least double the pre-pandemic norm.

These gloomier forecasts have prompted international calls for the reinstatement of active fiscal policy, with the IMF urging rich-country governments to start large public investment programs. 

In its latest Fiscal Monitor, the Fund says that increasing public investment by 1% of GDP could boost GDP by 2.7%, private investment by 10%, and employment by 1.2%.

The IMF’s call to action is particularly important, because the Fund was a champion of fiscal retrenchment during the 2008-09 global financial crisis, despite the obvious need for stimulus. Its earlier macroeconomic model, like those of most other economists and policymakers at that time, was based on the flawed theory that market economies have a natural tendency to reach full employment. 

This ignored the truth, most persuasively articulated by John Maynard Keynes, that in the absence of government stimulus, economies can remain naturally stuck in recession for a long time.

The Bank of England, too, has changed its tune. The BOE is about to inject an additional £150 billion ($198 billion) into the UK economy, in addition to the more than £200 billion it already has pumped out in 2020, and now realizes that it cannot do all the heavy lifting. 

Businesses will not invest, no matter how low the cost of capital, until they see a market. That is why the BOE has now joined the US Federal Reserve and the European Central Bank in calling for fiscal stimulus.

Before COVID-19, monetary policy seemed to be the only game in town. Now, if we are to avoid mass unemployment and the consequent loss of demand in the economy, job creation must become the overriding priority after the lockdown.

To its credit, the UK government brought forward £8 billion in infrastructure spending this past summer. But that is a mere fraction of what is needed. The government is now frontloading its £40 billion, five-year investment plan into the next two and a half years, and giving priority to big environmental projects and social housing. 

Retrofitting homes and local amenities could quickly create many jobs, with immediate multiplier effects.

Regional and local job and training schemes are essential to the longer-term task of reallocating work and skills toward the labor market of the future. The lesson of the UK’s 1998 New Deal for Young People and the 2009 Future Jobs Fund is that such programs must offer not only training and work experience but also assistance with job searches and incentives for employers to hire people on a permanent basis.

We estimate that one million young Britons under the age of 25 are neither working nor in training or education. But the government’s Kickstart job-creation scheme, which was launched belatedly earlier this month, has offered job placements to young people only for six-month periods.

The government expected that Kickstart would secure placements for 300,000 young people, but perhaps only around 100,000 will be enrolled in the scheme by the end of 2020. Ministers assumed that 5% of UK employers would take on young people, but outside of the retail and logistics sectors, thousands of firms are instead planning redundancies and will almost certainly not offer employment on anything like the hoped-for scale in the coming months.

If we are to assist the other 900,000 or so under-25s in need of help and create the estimated 1.5 million youth placements that will be required over the next year, the public sector will have to become the employer of last resort. 

So, rather than passively responding to a rise in unemployment, fiscal policy should aim to replace Karl Marx’s “reserve army of the unemployed” with a buffer stock of state-supported jobs and training schemes that expands or contracts with the business cycle.

What we need above all from UK policymakers is an updated full-employment commitment in the spirit of Keynes and US President Franklin D. Roosevelt. An essential condition for this is the coordination of monetary and fiscal policy. 

The BOE should retain its anti-inflation mandate, but policymakers should not use this to cut off necessary fiscal stimulus.

Earlier this month, the BOE echoed then-ECB President Mario Draghi’s famous 2012 pledge to save the euro by stating that it “stands ready to take whatever additional action is necessary” to boost the economy. 

To boost the credibility of such forward guidance, the government could give the BOE a dual mandate to fight both inflation and unemployment, while the bank could state that it will not tighten monetary policy until unemployment falls below its pre-crisis level of 4%.

A successful rollout of Pfizer’s new COVID-19 vaccine (and possibly others) could return life to a semblance of normality by next spring. But even if the health crisis recedes, the unemployment crisis will remain. UK policymakers must act now to avert a lost decade – if not a lost generation – of growth.

Gordon Brown, former Prime Minister and Chancellor of the Exchequer of the United Kingdom, is United Nations Special Envoy for Global Education and Chair of the International Commission on Financing Global Education Opportunity. He chairs the Advisory Board of the Catalyst Foundation.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.