Environmental policy and the economic downturn

This paper considers how environmental policies should respond to macroeconomic downturns. It first explores the implications of the global economic downturn of 2008--9 for environmental policies, focusing in particular on the example of action against climate change. The arguments for and against activist fiscal policies in general are then reviewed, and the case made that a demand-induced downturn provides a very good opportunity to undertake a necessary step change in the public spending component of environmental policies and to start working through a backlog of public investment to improve the environment. Fiscal policy should be used to improve the allocation of resources across time and space. Recent fiscal stimuli are considered in the light of this discussion. It is also argued that there is little cause to delay the introduction of price signals to internalize environmental externalities. But the levels at which such signals should be set requires careful analysis; changes over the business cycle may be warranted, depending on the nature of the environmental externality and the cause(s) of the business cycle in question. Copyright 2010, Oxford University Press.