Can we warm a cooling economy by cooling a warming planet? Can we warm a cooling economy by cooling a warming planet?

By Gianluca Di Pasquale

EY Global Green Economies & Infrastructure Leader and Future Cities Co-Leader

Start-upper and a social entrepreneur. Business mentor. Interested in working for big things that will shape the future.

13 minute read 19 Nov 2020

Governments can help their economies recover from the COVID-19 pandemic in a way that’s sustainable and less damaging to the environment.

In brief
  • The COVID-19 crisis has universally ravaged lives and jobs.
  • Moving to a low-carbon economy will produce jobs, but green policies and investments don’t automatically achieve green outcomes. Implementation is key.
  • Making green recovery lasting will require a collective effort from all of society.

Across the world, the COVID-19 pandemic has devasted lives and livelihoods, with the necessary lockdowns causing the deepest economic downturn since the Great Depression.

Governments have been forced to address a dual challenge: unprecedented demand for financial support and public services, coupled with dwindling tax revenues from economic activity. The amount of economic stimulus globally has exceeded US$12t. And in many countries, public debt, already high following the Global Financial Crisis (GFC), is now at historic levels.

The global pandemic brings with it a chance for radical change

The immediate tasks of governments are to address the health care crisis and restore economic growth.

In this context, the aims of the Paris Agreement – to keep the rise in global temperature to below 2% and pursue efforts to keep it to 1.5% – may appear an unnecessary distraction. But as the recent US wildfires and other extreme weather events around the world vividly demonstrate, the devastating impacts of climate change can’t be ignored.

While the economic slowdown caused daily global greenhouse gas emissions to fall 17%¹ by early April, compared with last year’s average, they’re quickly rising again as economies reopen. The world can ill-afford to achieve much-needed economic growth by resuming the polluting ways of the past. Instead, we must see the pandemic as a one-off opportunity to bring radical change – and make sure the economic recovery is sustainable.

Moving to a low-carbon economy will produce jobs and prevent human harm

Even before the pandemic, the World Bank estimated that a transition to low-carbon, resilient economies could create 65m new jobs by 2030.

What’s more, without urgent action, climate change could push a further 100m people into poverty by 2030, and displace 143m in just three regions.² Yet, according to Bloomberg New Energy Finance, as of July 2020, the top 50 economies had dedicated only around 5% of their national stimulus packages to sustainability initiatives.

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Chapter 1

Preparing for the future includes avoiding the mistakes of the past

The GFC was a different kind of crisis, but governments can still learn from its lessons.

The proportion of stimulus governments are earmarking for sustainability measures is much lower today than after the GFC. Yet even that response failed to address the climate crisis – and the recovery led to more carbon emissions, not fewer.

Of course, much of the initial stimulus spending during the current crisis has focused on providing short-term relief on a scale not seen during the GFC. Predominantly, it’s gone on protecting employment and preventing insolvencies.

Nonetheless, governments can take steps to avoid repeating past mistakes. As they deal with the present and look to the future, they should make sure that:

  • Short-term measures don’t hamper or even reverse the progress made on longer-term sustainability goals – for example, by stimulating more polluting consumption or bailing out carbon-intensive industries unconditionally.
  • As far as possible, the policies and investments in their longer-term recovery strategies support a sustainable economic regrowth.
  • Their green stimulus plans deliver what they’re meant to, without unintended negative consequences.
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Chapter 2

The EU is leading the way in sustainable recovery

In making its recovery plans, the EU is continuing a long tradition of considering the environment.

Pre-pandemic, the European Union (EU) already had a solid track record of cutting greenhouse gas emissions while growing its economy. It’s also been first off the blocks in its efforts to transition to a low-carbon economy. Under its long-standing Green Deal, the European Commission has committed to supporting Member States to achieve a climate-neutral Europe by 2050.

The Commission has been clear that despite causing an historic 12% contraction in the EU economy,³ the pandemic far from derails this deal. In fact, COVID-19 makes its aims more urgent. And the Commission is determined to achieve an economic recovery that’s environmentally sustainable.

EU governments are digging deep to fund climate action

On 21 July, the EU governments agreed an unprecedented economic rescue package, Next Generation EU, and a seven-year budget. Their combined value was €1.8t (US$2t). 

Around one third of the total value is dedicated to climate action. That means incentivizing Member States to invest in developing clean energy sources; developing rail infrastructure; stimulating the electric vehicles market; promoting sustainable agriculture; and improving energy efficiency in buildings and industry.

Member States were given until 15 October to submit their national recovery and resilience plans (RRPs). These plans are to propose co-funded investments that will achieve environmental sustainability goals, while creating jobs and economic growth. To be eligible for funding, the proposals also need to come with policy and market reforms that reinforce, rather than undermine, any investments.

Individual countries also have dedicated stimulus packages

Germany had already announced that of its €120b stimulus package, €40b (US$45b) would be a Package for the Future to support green initiatives. This will focus on green infrastructure, including renewable electricity and rail modernization and developing a green hydrogen industry. 

In early September, France unveiled a €100b stimulus package, of which €40b will come from its EU RRP. Of the €100b, the Government earmarked €30b for greening the economy, with €6b for better insulating homes and public buildings, €2b investment in hydrogen and further investments in green industries.

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Chapter 3

Beyond the EU, the picture is mixed

Although many governments have bailed out carbon-intensive industries, there are signs of a shift.

Outside of the EU, very few national governments have committed their stimulus efforts to tackling climate change. In fact, in many cases, government bailouts have actively supported “brown” industries, including fossil fuels, air travel and automotive.

According to the Energy Policy Tracker, G20 governments have so far pledged US$204b of stimulus support to fossil fuels. That’s 52% of all public money committed to the energy sector, compared with 35% for clean energy.⁴ Yet taking action now to prevent irreversible damage to our environment will dramatically reduce the future costs of mitigating or adapting to climate change.

The United States has allocated only a small percentage of its stimulus to green measures

As the world’s largest economy and second-largest carbon emitter, the US has a tremendous opportunity to leverage the current crisis as a catalyst for a green recovery. After the GFC, clean energy sectors received around US$90b, including funding for renewable energy and energy efficiency (51%), mass transit (20%) and modernizing the electricity grid (12%). 

This time, of the nearly US$3t total stimulus announced so far, only an estimated US$26b (1.1%) has been allocated to green measures. The majority of this funding is to support public transit in urban and rural areas.⁵ However, President-elect Joe Biden has pledged to transform clean energy and environmental justice, with a plan committing US$2t for clean energy and infrastructure investment.

China’s initial green stimulus is also small, but it plans to invest in low-carbon technologies

As the world’s largest carbon emitter, China’s actions on climate change are particularly crucial.  To date, its post-COVID-19 green stimulus spend is estimated at just 1.9% of total, at just US$1.4b.⁶

But the Chinese Government has announced far-reaching plans for spending on so-called “new infrastructure” to facilitate the transition away from fossil fuels. Estimated to cost US$1.4t over the next five years, it will fund a wide range of low-carbon technologies. These will include electric vehicle charging, high-speed rail and long-distance power transmission to bring renewable power to cities. 

Japan is making positive moves too, by “redesigning the energy sector”

At 21.1% of GDP, Japan has the largest stimulus package to date. But according to Vivid Economics, so far, it hasn’t focused its stimulus on measures on making its economy more sustainable.⁷

On the other hand, the Japanese Government says it’s working on “redesigning the energy sector”. It aims to use renewable energy and carbon capture technologies to become “a hydrogen society”.

Other measures include constructing carbon-neutral data centers and investing in the electric vehicle industry. Japan’s Environment Minister, Shinjirō Koizumi, also recently launched an online tool at a virtual meeting he convened with ministers worldwide. The tool allows countries to share their experiences of designing climate-compatible recovery packages for their economies.

Overall, Australia is lagging behind – but there are localized signs of action

Australia is said to be having a “gas-led recovery”: it’s subsidizing more gas pipelines, and isn’t using the pandemic recovery to lock in low-emissions energy.

Its US$148b fiscal stimulus has focused on supporting businesses and households and not on green initiatives.⁸ And in South Australia, the regional government has deferred taxes and permit fees in the oil, gas and mining sectors.

More positively, Australia is looking at developing its lithium battery manufacturing industry and becoming a leader in producing and exporting green hydrogen resources. Regional governments are also considering initiatives that will both decarbonize and bring fast economic growth.

The UK is a leading net zero emissions proponent but, so far, its stimulus does little to support this

In June 2019, the UK became the first major economy to pass a law committing it to achieving net zero greenhouse gases emissions by 2050. But its green stimulus is significantly smaller than that of its neighbors, France and Germany.

So far, it’s pledged a £3b (US$3.9b) green stimulus package to retrofit public sector buildings and provide grants for improved home insulation. It’s also provided a £1.6b (US$2b) bailout of Transport for London and pledged £2b (US$2.6b) to improve cycling and pedestrian infrastructure.

The Prime Minister has announced further plans for a national infrastructure spending package to focus on core economic infrastructure, including energy networks, road and rail, flood defenses and waste.  This could represent a significant opportunity to embed green objectives into the recovery.

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Chapter 4

A shining example in Asia

South Korea is using the crisis to kickstart environmentally sustainable economic growth.

South Korea impressed the world with its pandemic response, and it’s now doing the same with its plans for economic recovery.

In July, its Government announced one of the largest green stimulus packages seen to date. The US$135b Korean New Deal commits to US$62b of green funding before 2025. It includes significant funding for renewables (solar and wind), implementing “smart grids” and support for electric and hydrogen vehicles and energy efficiency in buildings. Also included are circular economy initiatives, such as reducing and re-using energy in factories, using smart power grids, carbon capture and storage, and re-using industrial materials. 

The deal also has a target of creating 319,000 jobs by 2022 and 659,000 by 2025 by investing in advanced technology and skills.

Crucially, the investments are complemented by reforms, including setting an end date for the use of fossil fuels and targeting zero net emissions by 2050.

But even South Korea can’t yet claim to have perfect green credentials. The Government recently bailed out a coal power plant manufacturer and replaced some “dirtier” fossil fuels with another, albeit cleaner, one. (Liquefied natural gas, or LNG.)

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Chapter 5

Four ways to green your economic recovery

Green policies and investments don’t automatically achieve green outcomes. Implementation is key.

To make sure their sustainable recovery plans succeed, governments should focus on four things.

1. Incentivize reform

There’s a danger that the financial support governments give to carbon-intensive industries, such as airlines and automotive manufacturers, could cancel out their green investments. And many countries are still making significant investments in fossil fuel industries as part of their economic rescue packages. To avoid jeopardizing efforts to tackle climate change, governments should make such support conditional on the recipient implementing climate-neutral policies and practices.

Government spending isn’t the principal driver of emissions reduction. In the energy sector, for example, its investment will only represent a fraction of the total needed. The International Energy Agency estimates the sector would need to spend US$1 trillion per year over the next three years to achieve a sustainable recovery and meet the Paris climate agreement goals.⁹ Mobilizing and incentivizing private sector investment will be crucial to the transition.

The other major driver of carbon emissions is how the world’s businesses and consumers decide to produce and consume energy. As a result, governments must match any spending on green technologies with comprehensive policies to mandate or incentivize more sustainable consumption.

2. Have a joined-up approach

Governments risk hindering their own efforts to achieve a sustainable recovery if they invest without considering possible dependencies and knock-on effects. For example, after the GFC, Germany’s scrappage scheme for fuel-inefficient vehicles had an unintended consequence: citizens swapped smaller cars for larger ones, then drove their new cars more.

There are also lessons to learn from the post-GFC green stimulus about selecting projects. Funding for large, complex engineering projects tended to produce disappointing results, particularly if the technology or the market weren’t as mature as first thought. Scalable, modular technologies proved to be the most effective programs, along with increased funding for existing, tried-and-tested initiatives. Fortunately, more than 10 years on, technologies are more mature, affordable and scalable.

Effective policy implementation is crucial too. After the GFC, the Australian Government had to abruptly stop a Home Insulation Program it had introduced. The reason – poor insulation practices and serious health and safety issues, meaning it failed to achieve target energy efficiencies. Meanwhile, the high-profile bankruptcies of stimulus-recipient green technology companies Solyndra and Abound Solar in the US serve as a reminder of the importance of adequate oversight and monitoring of green stimulus investments.

3. Make the green recovery fair

Governments should focus on investing in green infrastructure projects, chosen for their potential to quickly create large numbers of jobs across the country. This need for an immediate boost to economic activity and jobs must be balanced with the need for good quality, sustainable employment. That means employment that’ll build both skills and future resilience.

The investments must create jobs where they’re most needed, and not exacerbate existing regional disadvantages. Crucially, there must be a plan to replace or otherwise compensate for jobs lost in carbon-intensive industries and regions during the transition. 

To that end, the EU will boost its Just Transition Fund with €10b. This fresh funding will mobilize extra public and private investment to help retrain, upskill and redeploy workers in those industries. On top of that, any projects the EU funds under the national RRPs must show they make a positive, inclusive impact on employment.

India provides another example, with its only significant green stimulus measure to date.  The US$839m it is spending on afforestation and forest management aims to provide large numbers of rural jobs, as well as improving the natural environment.

4. Forge lasting partnerships

Economies can only make an environmentally sustainable recovery through the combined actions of governments, business and citizens. And it’s a task best tackled in partnership.

Governments need to collaborate effectively across all their constituent parts, as well as mobilizing a coordinated response across the whole of society. New coalitions must form between key players – governments, regulators, investors and companies. These coalitions must work together to achieve the twin aims of rapid economic growth and a fair, sustainable transition to a low-carbon economy.

The #EUvsVirus hackathon orchestrated by the European Commission in April is a great example of this. In it, thousands of citizens, organizations (including EY) and administrators collaborated to find creative solutions to COVID-19-related challenges. 

Business is already backing the sustainable growth agenda. Investor groups with trillions of dollars under management are calling on governments to work with investors, companies and workers to deliver a just and sustainable recovery. Governments will need to capitalize on their support.

Final words

In the aftermath of the 2008 global financial crisis, the focus was on investing for economic growth. And the failure to invest effectively to tackle climate change meant the world missed a significant opportunity.

Now, it’s incumbent on all of us to make sure we don’t squander the even greater opportunity this crisis presents. Let’s use it to create a future fit for generations to come.

Summary

Governments have an opportunity to invest in green initiatives to stimulate economic growth. However, green policies and investments won’t, by default, achieve green outcomes. The way governments work together with an ecosystem that extends to the private sector to implement their green agenda will be fundamental to success.

About this article

By Gianluca Di Pasquale

EY Global Green Economies & Infrastructure Leader and Future Cities Co-Leader

Start-upper and a social entrepreneur. Business mentor. Interested in working for big things that will shape the future.