The economic aftermath of the impact of Covid-19 could be far worse than the virus itself. With people self-isolating and schools closed, a shutdown of the hospitality, entertainment, travel and non-food retail industries will decimate economic activity.
Governments around the world are announcing stimulus packages to invigorate economies ravaged by the sudden shock, borrowing significantly to keep the system going. The U.S. has proposed a $2 trillion package and the U.K. £350 billion ($408 billion) while the European Central Bank has proposed a €750 billion ($810 billion) package. As always, however, the devil is in the detail – where will the stimulus go?
Reports of smog clearing in China, fish in the canals of Venice and a potential dip in greenhouse gas emissions due to lower economic activity have highlighted the silver lining in these terrifying times offers clear insight into the impact our activities have on nature. The head of the International Energy Agency recently warned, without structural changes enabling the energy transition, the stimulus proposed to support economies amid coronavirus woes may tank the future of clean energy.
Last chance saloon
There is a significant risk a short term focus on rebuilding economies could drive an explosion of fossil-fuelled economic activity. History tells us when an economic downturn leads to a fall in emissions it can be temporary, and can even result in an increase in emissions as governments attempt to return to business as usual. A paper published in Nature Climate Change in December 2011 stated the 2008 financial crisis, for example, was followed by emissions from fossil fuel combustion and cement rising nearly 6% in 2010, after a 1.4% reduction in 2009.
China’s relaxation of the Covid-19 control measures which saw economic activity fall 40% has prompted a resurgence of emissions and pollution. According to satellite data, nitrogen oxide emissions alone are up 50% from mid-February. The oil price is plummeting as Saudi Arabia continues to pump the fossil fuel despite a collapse in global demand, changing the dynamics of the economic argument that has seen such rapid growth in renewable energy, especially solar.
A bail-out of oil and gas, airline and other polluting industries seems such a backward step. At the very least, social and economic justice issues could be addressed by ensuring any state support comes with strings attached, from part public ownership to support for unionization, expansion of healthcare provision and more.
A ‘green stimulus’ could address environmental commitments through the implementation of measures to meet the Paris Climate Agreement of a maximum 2 degrees Celsius of global heating. The principles behind the Paris Agreement and the UN’s sustainable development goals are reflected in the EU’s ‘sustainable taxonomy’ call to “do no significant harm” to the environment and in the call for climate change adaptation measures. Embedding that in corporate policy in exchange for a bail-out seems like common sense.
What makes this opportunity different is that by ensuring any stimulus package focuses on green measures we could re-frame our ideal of economic growth. There have been numerous roadmaps published illustrating how a green deal could create millions of new jobs and clean up the environment, from the EU’s Green Deal to the Green New Deal in the U.S. New ideas are being promoted as well, as Sunday’s open letter from academics appealing to the U.S. Congress for green stimulus illustrates.
Properly implemented, a green stimulus could result in a smarter, cleaner, more resilient and more equitable economic framework. We know old models are no longer fit for purpose and we have the technology and processes to ensure success with new approaches. What we may lack, however, is a sufficiently loud voice to be heard by nervous politicians and unconvinced bankers. There are already dissenters, though, who convincingly proclaim the way our economy has been operating is not working.
The transparency agenda is already at work in financial markets, through calls for reporting on environmental, social and governance issues as well as climate risk. Understanding risk, whether from the impact of fossil fuel use, extreme weather events or new diseases is about understanding levels of probability and impact. The Global Risks Report 2020 produced by NGO the World Economic Forum warned climate change is hitting harder and faster than expected, just as citizens around the world are increasingly protesting against inequality and economic conditions. The report, published in January, even warned health systems were ‘unfit for purpose’ before the coronavirus fully hit the world outside China.
Investors make decisions based on what they think the future will look like – their assets and liabilities need to match the risks expected. What’s clear is that traditional approaches for assessing risk are out the window. There are more extreme events in prospect with an higher impact than can be predicted using historical models. That means one of the most important elements of managing future risk is building resilience into the system – climate-related and economic.
Covid-19 has not only shown us how interconnected and interdependent the world is, but what’s possible through international co-ordination and action. To date, movement on international climate negotiations has been slow as countries have become increasingly nationalistic and anti-globalist. That has only been exacerbated by the pandemic we are living through, with many nations now unable to commit resources to raising climate change ambitions. There is a strong chance the COP climate change gathering planned in Glasgow in November will be postponed, further delaying the chance to hit 2030 targets.
And yet, if the stimulus provided for a post-coronovirus world focuses on new ways of doing things, the real economy could overtake action by the international community of climate negotiators and mark 2020 as the beginning of a better, brighter future.
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