Low carbon economy : post COVID green stimulus and sustainable recovery
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It is largely known that each economic crisis represents a deep breath for the planet, but this comes at the expense of companies'financial health, employment, wages, social well-being, global growth, and the list can go on.
However, who says crisis calls a cycle which loops with a recovery: when the deep breath in which greenhouse gas have dropped is offset by the new emissions related with the kickstart of the economy. For instance, CO2 emissions decreased by 1.4% the year after the 2008 financial crisis but they increased by 5.1% in 2010 when the economy activity started to recover
But awareness has evolved since the last global crisis, particularly since 2015 after the COP21 meeting leading to the Paris agreement. This was a huge step towards a new paradigm, in which the possibility of having a more ecological way of producing became a real target and in which quantifiable goals were set down. Today’s society is fighting against the Covid-19 pandemic and its negative economic implications.
The Covid-19 crisis has been very brutal, unprecedented, and striking in its worldwide spread. While most of the world’s population was in lockdown in their homes, we followed the terrifying news of this pandemic spreading fast, impacting the lives of millions of families, and putting pressure on many countries health’s infrastructure capacity. Yet we also noticed the unexpectedly fast, positive impacts on the environment: clean air and clear skies thanks to airborne particulate matter levels dropping in big cities.
Indeed, during lockdown, coal consumption has dropped massively as electricity demand fell and according to the IEA, we have seen the largest worldwide decline in coal consumption since World War II. Overall, 2.6billion metrics tons of CO2 will not be emitted as we expect global energy demand to drop by -6% in 2020 which is seven times worse than what we saw following the 2008 crisis.
Today, policymakers may see this pandemic as an opportunity to integrate the environment into the economic recovery and finally set down new rules in order to kickstart the economy, while integrating and considering the impact it may have on the planet. We will focus on the stage of this progress and whether we can combine economic recovery with the investments necessary to limit global temperatures from rising.
1 – What would a sustainable recovery look like?
No one yet knows the full extent of the COVID induced crisis and its impact on our economy and society. The current consensus however is that, without significant intervention and internationalcooperation, our GDP growth outlook is not going back to positive territory by the end of the year nor by the end of 2021. But further away from the cold economical aspects of this crisis, the health and social hazard is as threatening. The health care helplessness, the rise of unemployment and further increase in inequalities is at the heart of the concern. The environment is today the only area which has benefited from this pandemic.
One could think that climate change emergency might be put to the background with the pressing issues to address. That is exactly what should not happen. We have had the tremendous opportunity to curb CO2 emissions and if we managed to crystallize this into a structural drop, we would still have a chance to reach our Paris Agreement objectives.
A – Fiscal stimulus mechanisms available
The International Energy Agency, which monitors and forecasts energy demand and related emissions to support international discussions around climate mitigation (like the UN Conference of Parties on Climate Change -COP-), has published an exceptional report in the midst of the COVID-19 crisis, to address the idea of a green recovery linked to the economic one, when governments around the world are thinking about their stimulus packages.
The report named “Sustainable Recovery” finds that the spending need of the plan envisaged would be of roughly $1Tn per year over the next 3 years. As stated in the report, “this represents about 0.7% of global GDP today, and includes both public spending and private finance that would be mobilized by public policies. The public spending required would be equivalent to less than 10% of fiscal expenditure in recovery plans announced to date; after the 2008-09 financial crisis, green measures accounted for around 16% of total stimulus measures”.
Governments, depending on their political wing or current economical state, could choose different levers to implement a recovery plan:
- Traditional targeted government spending
- Financial incentives such as subsidies, grants and loans
- Tax incentives whether through a tax relief or burden
- Recovery through the labor market: job creation, hiring incentives, reconversion programs
- “Green Strings attached”: conditions entangled with government support
- Not a fiscal stimulus measure, but a potential global game changer: Carbon pricing mechanism
The means are manifold and so diverse that there is no unique route to THE ultimate solution, but the green stimulus should be readily implementable to boost consumption, preserve and create new jobs while contributing to greenhouse gas emissions reductions.
B – Possible recovery
The immediate response to the crisis has been through Central Banks intervention. They have lowered interest rates and ensured liquidity and access to the capital market for companies (through quantitative easing programs such as the e1,350bn PEPP – Pandemic Emergency Purchase Program- from the ECB).
From a company standpoint, in economies where central banks have the above monetary power, this helps decreasing cost of capital and improves the economics of new, capitalintensive, projects such as large-scale renewable energy development or large-scale sustainable infrastructures. But it mainly favors companies of such a size that they can access capital markets.
For the smaller companies, banks are expected to help pass down the stimuli. Indeed, part of the ECB’s easing mechanism is to facilitate liquidity access for the financial sector as well as alleviate the capital requirements burden.
But governments’ interventions need to be more sector specific and access all layers of the economy. Here is a snapshot of the most carbon intensive sectors and what developments would currently be available to them with existing technologies, as indicated in the IEA Sustainable Recovery report.
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