COVID-19 recovery and climate policy

KEYWORDS:

• Climate policy
• economy
• COVID-19
• green recovery
• just transition

Introduction

The global crises of COVID-19 and climate change present unparalleled challenges, with policymakers now at a crossroads.

The COVID-19 pandemic unleashed sickness and death worldwide and a global economic crisis that is still unfolding today. A swift and sweeping response has come from governments around the world, triggering roughly $8 trillion by April 2020 in economic stimulus and recovery spending (IMF, 2020a). Most of the spending has been in developed countries, with later estimates suggesting that stimulus announced by G20 and other major economies surpasses $17 trillion today (Beyer & Vandermosten, 2021). Debt crises in developing countries are expected to deepen due to the pandemic as their governments’ borrowing increases, in turn diminishing their ability to meet financial obligations; increased debt payments lower their ability to spend on other priorities from health to basic infrastructure services or acting on climate change (von Lüpke et al., 2020). The challenges of the pandemic itself have been exacerbated by a legacy of economic and racial inequality and by a failure to sufficiently invest in basic health care and infrastructure services for all (Phillips et al., 2020). The same could be said of the challenges for effective climate change policy and spending, notably where a lack of investment in basic infrastructure services increases the vulnerability of the poor to climate change (Revi et al., 2014). The rise in climate-related (un)natural disasters has compounded risks and impacts from the pandemic, threatening local and global recovery efforts and disrupting the already too slow pace of climate adaptation responses (Phillips et al., 2020; Ranger et al., 2021).

But amidst the human suffering, the pandemic’s crisis conditions have created new opportunities to break down political, economic, and social inertia to spark real, transformational change. These opportunities were recognized early in the pandemic by many international organizations, including the UN, UN Climate Change, the IEA, OECD, and IMF, all advocating for a ‘green recovery’ and calling on governments to ‘build back’ or ‘recover better’. At the Petersberg Climate Dialogue of May 2020, for example, UN Secretary General Antonio Guterres identified a ‘rare and short window of opportunity to rebuild our world for the better’.¹ These calls were motivated in part by the vast sums of money announced by some governments for economic stimulus and recovery spending.

There were hopes that these unprecedented financial flows would be directed towards investments that would not only generate economic recovery, but also boost efforts towards decarbonisation, greater climate resilience, and wider achievement of the sustainable development goals. For Patricia Espinosa, Executive Secretary of the UN Climate Change secretariat, there was ‘an opportunity for nations to green their recovery packages and shape the twenty-first century economy in ways that are clean, green, healthy, safe and more resilient’.²

The climate crisis and its real-world impacts are no longer distant threats. Climate change is here and now (IPCC, 2021). The question is what are we doing to respond? Will these twin crises shake policymakers out of lethargy to go beyond good intentions and embrace transformational change (Kinley et al., 2021)? How can we act to slow the pace and scale of climate change, particularly in the face of the post-pandemic world order? How can governments take advantage of this unique situation and use unprecedented levels of public spending to build a climate-safe economic recovery?

Early understanding about the twin challenges of managing both the pandemic and global climate change reveals striking similarities and possible lessons for effective responses. Focused on governance issues, Klenert et al. (2020) compare approaches and conclude that both show how delay in action is costly and will exacerbate inequalities already embedded in our current economic systems. To be effective, they argue policy responses must engage citizens and overcome human and institutional biases to promote true change; they also point to the need for transparency as we navigate the complex science-policy interfaces that will inevitably guide policy responses to both. Their research suggests that effective responses require multiple forms of international cooperation and collaboration.

Governments have indeed acted swiftly and in similar directions to jump start economic recovery following the pandemic. But of the roughly $17 trillion in stimulus funding that has been announced, only a small fraction of this stimulus so far targets green outcomes. Research suggests instead that most of the stimulus will have a net negative impact on the environment (Beyer & Vandermosten, 2021). Although the level of public spending is nearly 10 times higher than what was observed in response to the Great Recession 2007–2008, the share committed to greening the economy remains much lower (Jaeger et al., 2020).

In the energy sphere, for example, G20 governments have committed around $278 billion to clean sources of energy, but this is still outweighed by funds dedicated to supporting fossil fuels (around $311 billion) (Energy Policy Tracker, 2021).³ There are some examples of leadership, such as the EU, which has directed all its recovery funding in the energy sector to clean energy (Energy Policy Tracker, 2021). Countries whose spending on clean energy substantially outweighs that on fossil fuels include Italy, Japan, the Netherlands and Spain. In general, however, governments appear to be failing to decisively align recovery efforts with their commitment to climate and other environmental action (Buckle et al., 2020; Mountford, 2020). A recent assessment of China’s stimulus effort also shows this worrying trend (Gosens & Jotzo, 2020). Failing to use the economic recovery effort to tackle both the COVID-19 economic crisis and climate change, simultaneously, is a lost opportunity.

A growing body of evidence, including in this Special Issue, suggests that investing in a green and just economy will deliver better growth for the future. By provisioning social safety nets, basic infrastructure services and pathways for sustainable development, IMF research underscores the value of public investment (IMF, 2020b): every 1% of GDP spent in this way generates 2.7% of additional GDP growth and 10% growth in private investment; every $1 million in infrastructure spending could generate 2 to 8 jobs with traditional infrastructure compared to 5 to 14 jobs if the spend is directed to research and development, green electricity (e.g. solar or wind) and energy efficiency. The IMF estimates that that additional public spending on the order of 1.3% of global GDP is needed to plug the large and ongoing infrastructure financing gap, to address climate change adaptation, mitigation as well as the 2030 Sustainable Development Goals (SDGs) (IMF, 2020a). Tackling these investments together amounts to over $20 trillion over the next two decades in public spending, yet it holds the promise to fundamentally shift the quality of economic growth and to limit climate change.

Measures that score well on economic multipliers and emission reductions can align recovery from COVID-19 with climate action. Other measures are better avoided, as suggested in analysis by Hepburn et al. (2020). They survey finance experts from G20 countries and assess 25 major fiscal recovery archetypes by speed of implementation, economic multiplier, climate impact potential, and overall desirability. Bailing out airlines, for example, scores poorly on both economic multiplier effects and climate impact metrics, suggesting the temptation to rescue airlines is best avoided. In lower- and middle-income countries, rural support spending is of particular value to the recovery. The articles in this volume explore other ways to reform and shape finance policies to deliver a post-pandemic green recovery.

Any potential misalignment between COVID-19 recovery packages and climate action could reverse progress previously made towards long-term, net-zero GHG emission pathways (Buckle et al., 2020). This analysis from the OECD highlights the implications of the pandemic economic recovery for the ambition and future of countries’ Nationally Determined Contributions (NDCs) intended to achieve Paris Agreement goals, noting that where stimulus spending offers support for fossil fuel infrastructure, this will lock in future GHG emissions in future. There is much at stake.

This Special Issue

This Special Issue presents 11 new papers, published in response to a Climate Policy call for papers issued in May 2020, during the first phase of the pandemic. The invitation to submit papers was broad and wide-ranging: the Climate Policy editorial team was looking for high-quality analysis that could shed light on the interactions between the evolving pandemic and the climate emergency, and in particular how the recovery packages that were just starting to be announced might be harnessed to accelerate the transformation towards a lower-carbon, climate resilient and more equitable world. It is rare for Climate Policy to issue an open call for papers in this way, but in this case, the motivation was clear: there was an urgent need to bring forward new research so as to further an emerging understanding and narrative around what is good practice in COVID-19 recovery and how this can and should align with climate change policy. Many papers were received in response to the call – clearly, the research community was as eager to explore these topics as the editorial team – and the most innovative and insightful among them can be found in this Special Issue. They broadly cover four main themes:

• - economic evidence and perspectives, on how best to align economic policies to combat climate change and recover from COVID-19;

• - governance and emerging notions of good governance around the interface between COVID-19 recovery measures and climate policy, from the international to the local level of action;

• - sector strategies for a just and green recovery in a select number of sectors (industry, fossil fuel supply sector, air transport); and

• - financial policies, including a framework for new policies that could underpin a pathway to a sustainable recovery and a proposal for a new financial mechanism with well-being and quality of growth at its centre.

Economics of aligning recovery with climate action

The economics of a recovery are a key input to policymaking and can help establish a foundation for action designed to ensure recovery packages deliver not only similar growth to pre-pandemic levels, but a higher quality of growth.

In this volume, Pollitt et al. (2021) use the E3ME macro-econometric model to quantitatively examine the impacts of COVID-19 and alternative pathways for recovery, while noting the technical difficulties in doing so. They describe two potential recovery packages, one of which could be described as ‘green’. The modelling results show that the green recovery package could support the global economy and national labour markets throughout the recovery period to 2030, outperforming an equivalent conventional stimulus package, while simultaneously reducing global CO₂ emissions by 12%. Drawing on lessons learnt from the 2008 to 2009 global financial crisis, the authors show how different policies in the green recovery plan can have different relative impacts. Notably for example, car scrappage schemes that promote the uptake of electric vehicles have the largest impact on GDP and jobs, while policies to promote investment in renewables, energy efficiency and electric vehicles have the largest impacts on emissions. Overall, the green recovery plan boosts production levels in all sectors of the economy (except for energy and utilities). It also boosts the consumer services sector as well as the investment sector, both of which have been heavily affected by the pandemic.

Mintz-Woo et al. (2021) focus on whether the COVID-19 economic crisis is changing the case for carbon pricing as a key policy for climate action. They note how carbon pricing schemes can indeed help governments meet their immediate need for diversified revenue streams, particularly given decreased tax receipts and greater use of social safety nets due to the COVID-19 economic crisis. The authors argue that the case is even stronger for introducing a carbon price during the COVID-19 crisis than under normal conditions and can contribute to a more sustainable COVID-19 recovery. The greater price burden due to a carbon price is likely to fall more on producers than consumers during this post-pandemic period. They note that many of the costs of revamping supply chains are already being felt and that with a carbon price, idled labour capacity can more easily be incorporated into firms with lower carbon-intensity. Especially in the context of policy developments in the EU and the US, the case is strong for introducing carbon pricing as part of recovery measures designed to re-equilibrate the post-pandemic economy towards low-carbon activities.

Engler et al. (2021) look at empirical evidence in Germany for how the COVID-19 economic crisis is influencing public opinion and acceptance of climate policy measures. They do not find a major relationship between economic conditions and support for climate action. However, they show that where individuals have concern about their own personal economic well-being, this concern also extends to weakened support for climate action, especially where these might raise the daily costs of living (e.g. fuel taxes). On a positive note, if climate policies can be shown to be pro-poor or financially beneficial for under-privileged groups, public opinion and support for these measures is heightened in the post-pandemic social context. This analysis underscores the importance of ensuring that climate policies deliver on the promise of a ‘just’ transition. That is, the social dimensions of climate policy are key to success as the distributional impacts will matter in ensuring wide public acceptance of climate policy.

Notions of good governance – from the international to the local level

The COVID-19 pandemic has demonstrated the central role that governments can play – even in liberal market economies – in tackling emergencies that are perceived as such. The speed and decisiveness with which democratic governments felt able to strictly regulate the daily lives of citizens, and intervene radically, swiftly, and expensively in the functioning of economies, took many by surprise. This begs the question as to how such strong governance could be brought to bear with similar focus on the climate emergency.

The COVID-19 pandemic, however, has also shed light on longstanding national and global governance flaws, which mean that – mirroring the impacts of climate change – the poor and ethnic minorities have been hit the hardest, both in terms of health and livelihoods. These are the concerns of Mattar et al. (2021), who document powerfully how racial and other inequalities have heightened vulnerabilities to both climate change and COVID-19. The authors advocate for policymakers to adopt principles of climate justice and a just transition as a governance framework for COVID-19 recovery strategies, pointing to opportunities to rectify injustices through carefully targeted policies that align with the needs of vulnerable people. Mattar et al. (2021) caution that this will require genuinely inclusive policymaking and finance, which recognize and embrace diversity and intersectionality.

To ensure a green and just recovery, it will be important to listen to, identify and meet the needs of different kinds of local communities. Teicher et al. (2021) look at suburban institutional, political and governance issues in the context of COVID-19 recovery, arguing that suburban settlements lag on climate action, yet in the sub-national landscape they are increasingly important in North America and beyond. Suburban settlements in Canada and the US continue to grow steadily and make up the majority – 66% and 55%, respectively – of total population today in each country. In the context of urban flight due to the pandemic, the authors argue for a more expansive approach to subnational urban recovery and climate action. Such an approach includes suburban settlements, lest the popular movement around cities for climate fails to deliver on its potential. Steps toward a green recovery could include expanding suburban capacity, and for organizations engaged in suburban planning, adopting promising practices for equitable, integrated adaptation and mitigation. Teicher et al. (2021) argue this approach could be an ideal use of recovery funds, with the potential to parlay immediate action into long-term gains. While governments have always subsidized the suburbs, COVID-19 recovery offers a narrow window to redirect and enhance those subsidies to suburban actions that bring the management of climate impacts within reach.

Turning to the international level, Obergassel et al. (2021) explore five key governance functions through which international institutions – UNFCCC, G20 and others – could contribute to ensure COVID-19 recovery packages help deliver sustainable recovery that is low-carbon and climate resilient. This could include actions to provide guidance, establish rules and standards, deliver transparency and accountability, highlight successful means of implementation, and promote collective learning. They call for governments, acting through the UNFCCC’s Conference of the Parties (COPs), to take stock of the ‘Paris-compatibility’ of financial support for international recovery, adopting further guidance as necessary to steer future actions.

Aligning sector strategies

Sector strategies represent a way to directly tackle climate change and the post-COVID economic recovery simultaneously. Chiappinelli et al. (2021) focus on industrial activity relating to basic materials in the EU to look at how COVID-19 stimulus could be used to jump start low-carbon development in these sectors, which are so critical to achieving net-zero emission goals by 2050. They estimate that with investment of €28.9 billion, up to 20% of EU’s basic materials could be produced through low emission processes or additional recycling by 2025, with technologies that are commercially available or at pilot scale today. The paper proposes elements of a policy package that can create a framework favourable for investments in these technologies and tackle the barriers that will otherwise slow progress. The policy package centres on getting carbon prices right through targeted use of the EU Emissions Trading System (EU ETS) and creating price-based incentives for private investment to shift, as well as use of green public procurement, e.g. in the case of hydrogen, and regulatory reforms to raise demand for low-carbon materials (see also Mintz-Woo et al., 2021, on the case for carbon pricing). These policies should ideally accompany the EU recovery package to give credibility to investors that the business case for low-carbon or green materials will last beyond the recovery period.

Managing a just transition away from fossil fuels and fossil fuel industries is among the central challenges of climate policy and raises the question of how these industries are being treated in recovery packages. Le Billon et al. (2021) focus on fossil fuel production industries and consider the potential for economic recovery in the post-pandemic period to be ‘climate-positive’. Assessments suggest that current recovery stimulus programs enable fossil fuel producers to follow a ‘dirty’ recovery path rather than a ‘green’ one, further postponing climate action and entrenching economic dependence on fossil fuels. The authors argue for action to target both supply-side and demand-side actors and their behaviours. On the supply-side, relevant actions include creating ‘just transition’ task forces and dedicated funds in producer countries, as seen in the case of Canada and Germany, phasing-out subsidies for fossil fuel production and transportation infrastructure, managing the decline in fossil fuel production and incentivising fossil fuel companies to pivot to other sectors, including renewables. From the demand-side, actions include restricting construction of new coal-fired (and gas-fired) power plants, managing demand growth through efficiency rather than additional supply, supporting the early retirement of coal-fired plants and replacement by low-carbon alternatives, and financing renewables rather than fossil fuel energy systems. A climate-positive COVID-19 recovery thus not only requires the greening of recovery packages in major consumer countries, but also strong and differentiated policies to help fossil fuel stakeholders – including workers, communities, companies, and governments – to more actively pursue a green and just energy transition.

In another key sector, the aviation industry, transitioning to low emission strategies is essential to achieving ambitious climate goals and, not surprisingly, the industry also features prominently in COVID-19 recovery packages. Duong (2021) look at the aviation sector in the EU, in the context of market destabilization due to the pandemic and its impact on climate policies targeting aviation. Their focus is on the EU ETS and the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), and how the implementation of these two market-based climate policies can deliver emission reductions even in the face of the pandemic. Examining current policy options being debated in the EU, the authors recommend the adoption of a hybrid option, which would help maintain international, intra-EU and European Free Trade Association flights under the EU ETS scope to achieve EU climate targets, and at the same time, still integrate some features of CORSIA’s design in implementation. The authors recommend a swift phase-out option of free allowances under the EU ETS, in conjunction with plans to develop sustainable aviation fuels.

Financial policies for a just and green recovery

The final section of this Special Issue considers sustainable financial policies looking at possible actions and mechanisms to use the strength of the financial sector to tackle the twin challenge of a post-pandemic economic recovery and climate change. The Paris Agreement contains a broad objective to align finance flows with pathways for low emissions and climate resilient development. Meeting this objective suggests the need for reform of policies in the financial sector, yet such reforms are lagging (D’Orazio, 2021). The COVID-19 pandemic makes alignment of financial policies with climate change goals even more urgent as the role of public finance has grown substantially and as financial policies are being designed to stimulate private sector investment to drive the recovery.

D’Orazio (2021) reviews progress and potential for G20 country policies to create financial stability in the post-pandemic context, while also addressing climate-related financial risks. She argues that there is no evidence that G20 financial policies to address the pandemic are also addressing sustainability challenges, most notably climate change. This failure introduces new financial risks and jeopardizes long-term financial stability. The author proposes a macro-prudential strategy for G20 countries, aligned with the goals of the Paris Agreement, and comprised of a policy framework and range of instruments designed to steer financial flows to sustainable investments that minimize climate-related financial risks. Specifically, D’Orazio proposes the use of ‘green enhanced’ capital requirements, climate-related large exposure limits, an internationally harmonized green taxonomy of investments, and enhanced climate-related disclosure requirements as a means to build resilience in the global financial system to climate change in the context of post-pandemic recovery.

Another critical need in the face of COVID-19 recovery is to ensure a steady and sufficiently high level of international climate finance to flow from developed to developing countries in order to promote investment in low-carbon, climate resilient infrastructure and practices. Hourcade et al. (2021) focus on this question, notably on how the international community can support a wave of low-carbon investments, compatible with the ‘well below’ 2°C target of the Paris Agreement, around the world. Noting the upfront risks of low-carbon capital investments, they propose to use public guarantees to catalyse the necessary investment. Specifically, the authors outline basic principles of a multilateral sovereign guarantee mechanism able to maximize the leverage effect of public funds so as to redirect global savings at scale towards low-carbon investments. This proposal has a double benefit of bridging the infrastructure investment gap in developing countries and of reducing tension between developed and developing countries by provision of climate finance at scale. Through a simulation of the mechanism, the authors illustrate how use of guarantees from AAA-rated sovereigns, calibrated on an agreed-upon ‘social value of carbon’, is compatible with public-budget constraints of developed countries, while also accelerating ‘climate finance’ to meet or exceed the $100 billion + pledge of the Paris Agreement. In this way, by mobilizing finance for low-carbon investment, a multi-sovereign public guarantee mechanism could help secure a safer and fairer economic recovery from the COVID-19 crisis and avoid locking developing countries into carbon-intensive pathways.

Towards a just and green recovery for better well-being and growth

It is important to note the absence in this Special Issue of coverage of key climate adaptation policies and disaster risk preparedness even though such policies are a central pillar to effectively tackling the COVID-19 crisis and climate change. Specifically, public investment in basic infrastructure and services to provide access to health care, clean water and clean energy services is essential to limit the spread of disease and morbidity due to the pandemic, on the one hand, and to limit the overlapping impacts of climate-related disasters on the other. Countries need to recover from the socio-economic impacts of COVID-19. Where societies were already fragile, this will likely require development finance, including targeted use of international climate finance, and include mechanisms for debt relief, debt forgiveness and conditional finance, among others (von Lüpke et al., 2020). These are sensible, multi-hazard disaster risk management policies and investments that will build resilience both to the pandemic and to climate change (Phillips et al., 2020). They are justifiable as part of COVID-19 recovery packages, but also as core elements in the necessary scale up of investment in climate adaptation and resilience building measures; they are an urgent a priority for national and local governments representing constituencies with large numbers of people without access to basic healthcare or infrastructure services (e.g. see Revi et al., 2014, on urban adaptation and development).

When the call for papers that resulted in this Special Issue was posted, hopes were high that, from the unfolding economic calamity and human tragedy of COVID-19, there could emerge a historic opportunity to finally turn the modern world onto a greener, fairer and more resilient path. Now, 18 months on, those hopes are tempered by realism, as the scramble back to business as usual has so far outpaced forward-looking transformation. But these are early days yet. The social and economic repercussions of COVID-19 are still unfolding and taking on new dimensions, as they intersect with other political and economic forces; at the time of writing, for example, both China and the EU are facing energy shortages. At the same time, Working Group I’s contribution to the Sixth Assessment Report of the IPCC, released in August 2021, confirmed that the climate crisis and its real-world impacts are no longer distant threats (IPCC, 2021). The papers in this Special Issue present insightful lessons and fresh perspectives on how to address these two ongoing crises of our time with policies and strategies that can reinforce each other. A key message that all the papers share is a sense of optimism: that the COVID-19 pandemic, for all the pain it has caused, has generated new levers and momentum for effectively and equitably tackling climate change. The papers demonstrate how, if innovative thinking and political courage are brought to bear, these levers can still be actioned. The stakes for people, governments and global cooperation have never been higher.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 Support Grows for a ‘Better Recovery’ from COVID-19. At https://unfccc.int/news/support-grows-for-a-better-recovery-from-covid-19.

2 Climate change and COVID-19: UN urges nations to ‘recover better’. At https://www.un.org/en/un-coronavirus-communications-team/un-urges-countries-%E2%80%98build-back-better%E2%80%99.

3 See https://www.energypolicytracker.org/region/g20/ for regular updates.