Default and the Environment
What are the environmental impacts of Uncle Sam’s failure to pay his debts on time?
A journalist asked me how a default might impact environmental law. As I thought of it, I noticed that the answers were, “In a method, little or no,” and “In one other way, potentially a disaster.” The results may not amount to much. Or we could be talking about multigenerational climate impacts. There’s a number of uncertainty baked into the second answer– thus “potentially” disastrous moderately than definitely and even probably so.
The “little or no” answer refers back to the direct effect. A default would mean that the federal government wouldn’t have the funding to pay all its debts immediately. So debts would must wait in line until enough tax revenue got here in to pay them one after the other (as I understand it, within the order that Treasury receives the payment requests). A few of those payments would go for environmental grants or contracts. The delay could be a nuisance, but unless the default continued for a very long time, the delay wouldn’t be a significant issue. The grantees or government contractors would still get their money.
The “disastrous” answer refers back to the risks posed by the possible ripple effects of default, and the possible ripple effects of those ripple effects. Those could get progressively more serious the further out we glance.
None of this might become relevant. Republicans are said to be feeling optimistic a few deal this morning. If a deal does emerge, we are able to put all the troubles about default on the shelf — at the very least until we hit the brand new debt limit ihn just a few years.
The economy. Let’s start with the primary set of ripples from default, the economic ones. On the very least, there could be short-term turmoil within the financial sector. Uncle Sam’s credit standing could be downgraded, which suggests that investors would must rebalance their portfolios and banks would have too increase. Since this hasn‘t happened before, we don’t understand how bad the turmoil could be. But things could get crazy, since certainly one of the bedrock assumptions of the financial sectors could be upended – that being the risk-free nature of U.S. government debt.
In any event, in the event that they had to extend their reserves, banks would give you the chance make fewer loans, which puts the brakes on businesses generally. Corporations may additionally hold off from making latest investments until they saw which way the wind was blowing. That might start a snowball effect.
Macroeconomics is something of a dark art, through which theories abound and data is inconclusive. The experts appear to think that a recession is probably going, perhaps a really serious one. They is likely to be right of their theories. Or even when the theories are flawed, this could possibly be a self-fulfilling prophesy as businesses assume that a recession is coming and that they should head for the exits.
Assuming that there could be a reasonably serious recession or freeze-up on latest investments, that might be a extremely bad thing just once we’re attempting to quickly revamp a serious sector of the economy. If investment freeze up, it’s going be hard to construct all those latest EV and battery plants, solar and wind farms, and transmission lines. Tax credits and grants which can be already on the books will help, but they is probably not large enough to induce corporations to take the danger of major investments.
The results of a default-driven recession: the energy transition is placed on hold while carbon emissions from fossil fuels proceed — emissions that may stay within the atmosphere warming the planet for 200 years or more.
There are some uncertainties here beyond whether or not we have now a recession. Emissions could possibly be somewhat lower temporarily due to the decline in energy use in an ailing economy, but this might be less important than the recession’s impact on clean energy investment. And the federal government’s response to the recession could also matter.
If the federal government directed stimulus funding to the clean tech sector, that might also make a difference. However, depending on who’s in power, we could see a rollback of existing climate policies.
That brings us to the subject of political ripple effects.
Domestic politics. If it’s hard to predict the economy, it’s even harder to predict politics. If there’s a recession, the query is who gets blamed and who advantages.
In a single likely scenario, the answers are Biden (blame) and Trump (profit). Biden gets blamed because he’s the President, and he’s speculated to maintain the economy. Trump advantages because he’s Biden’s clearest opponent and since the recession raises the extent of disaffection and anger within the country, which is to Trump as blood is to Dracula.
We’ve seen the harm to environmental policy he can do in Trump’s first term. A second term could be at the very least as bad and doubtless worse. In fact, it’s also possible that the Republicans would get blamed for sparking the crisis, strengthening the Democrats politically and opening the door to stronger climate policy. Unfortunately, a number of pretty sensible political commentators think the “Blame Biden”scenario is more likely. That might well put Trump back within the White House.
International repercussions. Even within the scenario where there’s no serious economic fallout, default will tell the world that the U.S. is just too politically dysfunctional to even maintain basic government functions like paying the debt. Under Biden and Obama, the U.S. played a positive role in international climate negotiations. It could possibly be harder to proceed playing that role — and exponentially harder after a possible second Trump term.
If there’s a serious recession, it’s unlikely to be confined to the U.S. At that time we might must worry concerning the political fallout in other countries and whether the effect could be strengthen the hand of Trump-like populists. If Brazil fell back under Bolsonaro’s spell, for instance, the Amazon forest would literally be on the chopping block. And all that carbon gets released, with multi-generational impacts.
That’s the “potential disaster” scenario, not only for the direct victims of the recession but for later generations.
Uncertainties. But as I said at the start, there are real uncertainties about this. In any case, the U.S. hasn’t defaulted before, so we have now no direct experience to guide us.
A number of this hinges on the economic impact of default. Perhaps we’ll get really lucky — the U.S. defaults and the financial world rolls with the punch. Consequently, the ripple effects are milder, as hopefully are the political effects. That might occur — in spite of everything, in the long term, the U.S. is sweet for the cash.
One positive sign is that we’re only per week from possible default and markets aren’t freaking out, so possibly it really isn’t that big a deal. (Wherein case, Biden shouldn’t be willing to provide up much to forestall default, either.) In that scenario, default grow to be just one other pressure point, like government shutdowns, that give Republicans some leverage that they periodically use , with bad but not catastrophic consequences when the trigger is pulled.
However, I’m not stuffed with faith within the likelihood that financial markets can be governed by long-term economic fundamentals. (Remember 2008?) The indisputable fact that markets haven’t shown an enormous response may simply mean that they’re taking it as an article of religion that default can’t occur. In that case, they is likely to be all of the more shocked if not panicked if default does occur. And let’s face it, default would mean that even without Trump ‘s direct involvement, our politics have reached a latest level dysfunction and instability. That in itself poses systemic risks.
What are the percentages that we’ll actually see a default? Of the 2 major credit agencies, Moody’s says it’s confident that there won’t be a default because there’s never been one, while Fitch put the U.S. on a “negative watch” yesterday. We’ll know by early June.