Experts React: What Should a U.S. Energy Stimulus Look Like?

The economic impact of the worldwide spread of COVID-19 has been severe and is likely to have both immediate and longer-term impacts on the U.S. and global economy. The U.S. government is taking near-term measures to shore up the nation’s economy and stabilize financial markets. Multiple rounds of economic stimulus will be necessary to support the U.S. economy over the coming months and perhaps well into next year.

As was true in previous times of economic crisis, particularly the 2008 Great Recession, the energy sector can be a source of economic opportunity and a logical target of stimulus programs. Discussions around how to craft an energy-oriented economic stimulus have begun in earnest. Below, CSIS experts discuss various ways to think about the value of an energy stimulus, which sectors to target, lessons learned from previous stimulus efforts, and potential vehicles and timing for future efforts.

— Sarah Ladislaw, Senior Vice President and Director, Energy Security and Climate Change Program

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Unprecedented Support—Will It Be Enough?

Stephanie Segal
Senior Fellow
Simon Chair in Political Economy

The spending bill agreed in the early morning of March 24 between Senate leaders and the White House represents a massive fiscal response to an unprecedented public health and economic crisis. At $2 trillion, the bill represents nearly 10 percent of annual U.S. economic output. It also comes on the heels of extraordinary moves by the Federal Reserve in recent weeks to keep credit markets from seizing up. By taking aggressive fiscal, monetary, and regulatory action, U.S. officials hope to cushion the immediate economic impacts of COVID-19 and the public health measures to contain its spread by providing broad support to individuals and companies alike.

The massive spending bill has three main components: first, it provides direct support to individuals in the form of cash payments to low- and middle-income individuals ($1,200 plus $500 for each dependent child in a household) plus additional support to those already collecting unemployment. Second, it provides government support for loans, credit guarantees, and possible grants to U.S. companies, including relief for those sectors hardest hit by the pandemic such as passenger airlines, and a lending program dedicated to small- and medium-sized businesses. Third, it includes essential support to state and local governments as well as hospitals to ramp up their capacities to respond to the public health crisis.

Reports claimed that a major sticking point in the negotiations had been over government oversight of public assistance to the private sector. In the end, the legislation creates a special inspector general at the U.S. Treasury and sets conditions on companies receiving government assistance, including a ban on stock buybacks and limits on executive compensation. Conditionality was also part of government assistance provided under the Troubled Assets Relief Program, or TARP, created in response to the global financial crisis in 2008.

The United States is not alone among major economies in introducing massive new government spending: this week, Germany unveiled a €156 billion ($170 billion) supplemental budget and €600 billion ($652 billion) stabilization fund; Australia, France, Japan, and the United Kingdom have approved or are considering packages of similar magnitudes as a percent of their respective economies, with much of the assistance provided through credit guarantees and tax relief. Despite historic government actions to date, additional assistance may still be required, depending on the trajectory of the virus as well as the duration and severity of measures to contain it. In fact, House Democratic leaders have already indicated that more government support will be needed.

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Learning from the Responses to the Great Recession

Joseph E. Aldy
Senior Adviser (Non-resident)
Energy Security and Climate Change Program

Starting in December 2007, the Great Recession necessitated multiple rounds of economic stimulus over several years. These stimulus bills served as legislative vehicles for energy- and climate-related spending that could simultaneously increase economic activity and address long-term social investment needs. The October 2008 TARP bill, for example, had more pages on energy tax policy than on TARP itself. The February 2009 American Recovery and Reinvestment Act included more than $90 billion in clean energy spending. The December 2010 Tax Relief Act extended the Section 1603 grant program, which was the single largest federal support for solar and wind power investment during the recession.

Given the emerging depth of the COVID-19 recession, there will again be a need for multiple rounds of stimulus to first stop the decline in output (and contain the virus) and then to rebuild the U.S. economy. With historically low borrowing costs for the federal government, aggressive stimulus efforts can deliver a near-term boost in economic output and job creation while laying the foundation for long-term growth. A decade ago, stimulus efforts both targeted those hardest hit by the recession—for example, through expanded unemployment insurance benefits and payroll tax reductions—and made strategic investments in clean energy, health care, and education.

With low interest rates, government spending on clean energy and infrastructure could continue with little long-term adverse impact on deficits. A potentially long period of low interest rates avails policymakers more time for strategic climate- and energy-related investments to rebuild the U.S. economy. Instead of arbitrary sunset provisions for energy- and infrastructure-related stimulus, like a number of programs had in the 2009 Recovery Act, policymakers could consider structuring these investment authorities and appropriations as indefinite so long as long-term interest rates stay below a specified level. This would create a type of automatic stabilizer in the energy and infrastructure spending space similar to what currently exists through unemployment insurance.

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We Need a Tony Fauci of the Stimulus

David G. Victor
Senior Associate (Non-resident)
Energy Security and Climate Change Program

Who do you trust for information about how to design the nation’s largest economic stimulus? While each of us has a private answer, the country as a whole has no economic Tony Fauci to guide the hard choices and wrap the effort in legitimacy and confidence.

In a pandemic, first things must come first: flattening the curve of infection and healing the sick. But second things, like the virus itself, arrive quickly: formulating an economic response. Everyone has learned Rahm Emanuel’s lesson from 2008: “You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do the things you once thought were impossible.” When the trillions flow, everyone has grand ideas.

Nearly all those expensive visions of the previously undoable run contrary to what is needed today—credible stimulus, immediately, and confidence that more will follow as needed.

One key front of disagreement is conditionality. Should the stimulus have shoveled cash into harmed industries or link that spending to specific actions? In 2008, that debate played out around equity stakes, such as in the auto industry. This time around, the stakes were a lot more abstract, such as forcing the airlines to offset their emissions by 2050. How do you stand up a complex offsets scheme—in a global market where all the offsets are of dubious quality already—in just a matter of days?

Another front of rancor is how much should have been spent to prop up the base industry. The White House wanted to support shale drillers by buying oil for the Strategic Petroleum Reserve—a dumb idea because the prices that drillers get come from the global market where demand has cratered and where fights over supply from Russia and Saudi Arabia set the tune. What drillers need is direct support, now. The rivers of economic distress are deep and wide—in recent days the solar, wind, and energy storage industries, among many others, have warned that their supply chains are imploding. Meanwhile, the far left wants more building retrofits—a good intention mired in impracticality. People need support now, not workers from a hastily scaled industry traipsing through the house installing thermostats sometime in the next few years.

We should think strategically—steps down the road. A stimulus that does not stimulate immediately and earn public confidence this round is one that makes future rounds—when less immediate infrastructure spending can and should be on the table—a lot less likely.

The good news is that the political process has mostly weeded out bad ideas that don’t efficiently and immediately stimulate; the bad news is that trust in government is low and disaffected parties are still disaffected.

Without a Tony Fauci to help set the tune for trillions of useful spending, another key element of economic confidence has been silent: international coordination. All the major economies stimulate (and many of them are doing a lot more, scaled to GDP, than the United States), and they must begin planning for how to reopen borders and trade as quickly and safely as possible. Where is that talk today?

Clean Stimulus: The Sequel

Ethan Zindler
Senior Associate (Non-resident)
Energy Security and Climate Change Program

The 2009 Recovery Act was the most important piece of federal legislation ever in support of U.S. clean energy. Congress could write a sequel to back strategically important U.S. industries while ensuring power-sector CO ₂ emissions continue to decline. And some of the most important actions Congress could take wouldn’t cost a dime.

How much electricity demand will drop in coming months is unclear, of course. In Italy, BloombergNEF estimates aggregate consumption sank 19 percent March 3-17. If the United States posts similar figures for a prolonged period (quarters, not weeks) it could dramatically accelerate recent trends while putting the brakes on others.

Pre-COVID-19, BlooombergNEF estimated that roughly 150 gigawatts of current U.S. power-generating capacity was on the bubble in terms of economic viability, all of it nuclear and coal, out of approximately 1,100 gigawatts total. Most of these plants faced potential closures in a decade or so with many nuclear plants facing the additional complication of requiring relicensing.

If demand craters for a prolonged period, retirement conversations could rapidly accelerate, with nuclear and coal often in a zero-sum game for survival. If policymakers prioritize climate, nuclear must be the choice, given it produces no direct CO₂ emissions.

The federal government could, in theory at least, expedite relicensing existing nuclear plants. This would not be easy, but it would also not be costly. Congress might also consider a dollar per megawatt of available capacity tax credit for nuclear. (This would have to be crafted very carefully as to not disadvantage zero-carbon renewables, however.)

As for renewables, pre-COVID-19, BloombergNEF expected 2020 to set a record for new wind and solar additions at approximately 25 gigawatts. It has yet to revise that forecast, but build levels could certainly be lower now as value chains are disrupted, and demand becomes uncertain.

Federal tax credits were U.S. renewables’ lifeblood when Congress passed the 2009 stimulus bill. Entering 2020, wind and solar were far less reliant on these, but circumstances have obviously now changed, particularly as natural gas prices are near all-time lows. Extending the deadline by which the investment tax credit and production tax credit can be applied by solar and wind developers could help but may also prove insufficient. In the last serious downturn, Congress temporarily made such credits "refundable," meaning developers could receive their value in cash. This remains important because wind and solar projects rely on third-party “tax equity investors” whose willingness to fund projects wanes when they worry about their own profitability.

Congress could also intervene to fast-track permitting for the 800-megawatt Vineyard Wind offshore project slated to be built off the coast of Massachusetts. The Department of Interior has dragged its heels in approving what would be the first such major project of its kind in the United States. Getting Vineyard Wind moving could potentially mean thousands of jobs in southern New England. It could also pave the way for the United States to at last launch a real offshore wind market domestically. Again, this wouldn’t cost a dime.

Finally, Congress could revisit the Department of Energy’s loan guarantee programs. These were not originally intended to support projects that use proven technologies but were modified under the last stimulus bill. They could again be put to use to effectively make zero-interest capital available to developers. Like other measures in the 2009 stimulus bill, this worked last time around and could be effective again in 2020.

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States Can Help Guide the Federal Government on Stimulus

Sarah Ladislaw
Senior Vice President; Director and Senior Fellow
Energy Security and Climate Change Program

Now is not the time for big, energy-related stimulus packages in the United States. The global economy is grinding to a halt as world leaders struggle to stay ahead of a deadly pandemic. Stimulus efforts today should focus on protecting the vulnerable and tending to the foundations of the economy. Of course, these early stimulus efforts will include opportunistic maneuvers to extract concessions, as we saw in the debate on the Coronavirus Aid, Relief, and Economic Security Act in Congress, like better environmental performance or a trade-off to support one industry in exchange for support for another, but that is only natural. The real strategic stimulus opportunity should come after the emergency stimulus—and even after subsequent rounds of targeted emergency stimulus for struggling sectors or states in the rebuilding phase.

At some point, the pandemic will be actively managed, and the economy will be in need of more strategic support to build new opportunities for economic productivity gains and to bolster strategic industries. The energy portions of this package should include infrastructure spending, support for innovation, and a combination of strategic goals, policy reforms, and spending designed to put the United States on a pathway to a competitive, low-carbon, and resilient energy future.

U.S. states are at the leading edge of energy policy right now, and while state energy strategies differ significantly across the country, states co-located in various regions of the country have a common interest to cooperatively approach the development of their energy sectors, particularly in places where states are attempting to rapidly decarbonize. States also have a shared interest in resolving issues related to shared infrastructure and regional energy markets that could be included as the policy underpinning of an energy stimulus package. They also have a shared interest in building robust regional innovation hubs and policies that encourage the development of clean industry and job creation. States will be hard hit by the economic fallout of the pandemic and will likely be engaged in an ongoing negotiation with the federal government about how to constructively tailor additional support. While federal stimulus packages tend to favor federal policies and national approaches, this time around states can and should play an important role in shaping the approach to energy-related stimulus.

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New World, New Deal

Kartikeya Singh
Senior Associate (Non-resident)
Energy Security and Climate Change Program and Wadhwani Chair in U.S.-India Policy Studies

As politicians finish horse trading and tie a ribbon on the largest government stimulus package in U.S. history, the writing is already on the wall: this is just one step in further changes that need to be made in how we manage this country. Anyone who thinks that we will be living in or returning to the same world we used to live in once this wave of the coronavirus is reigned in is delusional. What this crisis has demonstrated is that in order for us to survive as a species, we need collective compassion and strong government institutions that we can have faith in.

First, we should recognize that the United States is in a privileged position to have deep coffers that can be tapped to send out checks to those who are struggling to make ends meet during these unprecedented times. If anything, this is a great pilot for what universal basic income might look like in a world where technologies of the fourth industrial revolution may cause unemployment at a massive scale. Second, knowing how unjust the current form of capitalism has been and the many externalities that it has failed to take into account, leveraging the United States’ vast capital to reshape how its businesses operate and the social safety nets it provides in exchange for economic assistance is an imperative. This is a unique opportunity to hit the reset button and make U.S. industries more innovative and competitive in a market that will be operating in a climate-constrained, automated world.

Time was not on the side of this Congress to provide necessary economic relief to many households while also providing something to industry with extensive conditions. We can only assume that little legislation will happen between now and next February, and the virus may take further tolls on the health of members of Congress, hindering their ability to legislate. So if not in this stimulus, future ones should focus on making our industries more sustainable, innovative, and competitive while simultaneously ensuring that U.S. society has the safety nets it will have needed anyway to operate in a world that seemed distant but that we have been thrown into unprepared thanks to the coronavirus.

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A Stimulus Is a Chance to Restore Faith in the Institutions Needed to Fight Climate Change

Lachlan Carey
Associate Fellow
Energy Security and Climate Change Program

The best thing any stimulus could do for the climate right now is to boost public trust in the institutions we will need down the road. Americans’ faith in their institutions, and especially their federal government, has been in decline since the Nixon administration. The consecutive disasters of the Iraq War and Great Recession meant the proportion of Americans who “trust the government in Washington” had reached just 17 percent by 2011 and has basically remained at rock bottom ever since. This will need to change if it is to implement the deep decarbonization agenda required to stabilize our climate.

This trend is particularly damaging for enacting climate change policy, which requires public faith in key institutions such as scientists, policy experts, politicians, and international organizations. One paper in the journal Global Environmental Change found evidence from 35 countries that a lack of trust in institutions reduces public perception of climate change risk and, subsequently, the willingness to support policies that address the issue. It is unsurprising then that millions of Americans still don’t see climate change as a concern, let alone one worth spending trillions of dollars on.

The COVID-19 disaster has the potential to crater public trust even further. Evidence suggests that the 1918 Spanish Flu, for example, created generalized mistrust within affected societies that had permanent consequences on social trust and economic growth. COVID-19 is shaping up to have an economic impact on the scale of the Great Depression, which could bottom out public trust completely. What’s more, public institutions haven’t exactly been a beacon of hope under the Trump administration, which has often seemed more concerned with the stock market and media coverage than how to best save human lives.

If Americans are to trust their government with creating a low-carbon economy in a matter of decades, they need proof that government is up to the task. This means supporting workers and communities most affected by the crisis for the next 60-90 days. It means a wartime mobilization of necessary health care equipment and infrastructure. It means bailing out major sectors so more people don’t lose their jobs. It means preventing a health and economic crisis that would strangle our politics and economy for a decade.

It means restoring our faith in the possibility of American government.

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The Coronavirus Rules

Kevin Book
Senior Associate (Non-resident)
Energy Security and Climate Change Program

As the urgency and scale of the coronavirus pandemic stress the conventions of policy and economics, it may be time for a new energy policy rulebook. If so, the first rule is that there may not be any rules. Exigent real-world circumstances can override established decision structures and economic constraints. For example, a month ago, the notion of a Texas Railroad Commission joining in a pro-rationing partnership with the Organization of the Petroleum Exporting Countries might have sounded insane. Now it merely seems unlikely.

Second, governments are poised to get a lot more powerful (and Cold War-era statutes already vest the U.S. government with tremendous emergency authorities). The third congressional aid package did not give the Department of Energy the $3 billion it requested for the purpose of filling the Strategic Petroleum Reserve with crude oil. It turns out that the Department of Energy may be able do it anyway by invoking national security powers in the 1950 Defense Production Act.

Third, globalism (the ideology) and globalization (the cross-border investment thesis) may be headed toward a “global divorce.” The Great Recession showed how fiscal stimulus stoked protectionism: countries that spent tomorrow’s money on yesterday’s factories jealously guarded their investments. Virus-induced value chain breakdowns could accelerate de-globalization, driving new investment in domestic industrial capacity to replace globally sourced critical goods. That could increase energy demand (at least until overcapacity and inefficiency pare it back).

Considering these three rules together, it is likely some troubled U.S. energy companies will apply to the $454 billion credit pool in the third stimulus. One of the “strings” the new law attaches is a government ownership stake. Depending on how final terms “ratchet” on nonperforming loans, the United States could get closer to having new class of state-owned energy companies, formally aligning U.S. molecules with U.S. politics. Inconceivable? Under the new rules, maybe not.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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