As the world is fighting the Covid-19 pandemic, governments have to undertake new policies to help the global economy to recover. In addition, global warming remains an essential issue in today’s world, and an urgent shift to sustainable resources is needed. In light of this concern, many countries are interested in combining policies to make the economic recovery from Covid-19 environmentally sustainable. We call the mix of these policies green stimulus programmes.
What is a green stimulus?
In their report published in 2010, Strand and Toman define a green stimulus as “the application of policies and measures to stimulate short-run economic activity while at the same time preserving, protecting and enhancing environmental and natural resource quality both near-term and long-term.” The aim of a green stimulus is thus to respond to economic shocks while providing environmental benefits. It can take many forms, from tax cuts or subsidies to infrastructure and spending programmes.
But how to green the recovery from the Covid-19 crisis? We can draw lessons from the experience of green stimulus packages introduced in response to the 2008 global financial crisis in order to design effective stimulus programmes for the current crisis.
Lessons from the 2008 global financial crisis
The 2008-09 financial crisis led to a global drop in lending and a downturn in financial markets, which resulted in a deep economic recession. At the same time, public concerns about climate change increased. With the 2009 United Nations Climate Change Conference in Copenhagen, several governments introduced some green measures into their economic plan for recovery.
The United States
The 2009 American Recovery and Reinvestment Act was the main stimulus policy undertaken by the United States in response to the 2008 financial crisis, with a total budget of around USD 800 billion, of which USD 92 billion went to clean energy sectors. For the support of renewable energy, the Recovery Act included production tax credits for wind energy, investment tax credits for solar energy, cash grants for renewable energy properties, and loan guarantees to ease the funding of renewable projects. The United States also supported energy efficiency improvements for households, invested in cleaner transportation, and created new research programmes.
Overall it has been found that the American Recovery and Reinvestment Act was successful in stimulating the renewable energy sector: renewable energy capacity was increased, and according to the Council of Economic Advisors, it created 26,600 jobs in the clean energy sector with higher salaries than the national average.
The European Union
Similarly, the European Commission proposed an economic recovery plan of 200 billion euros. The measures included investments in energy efficiency, in transport infrastructure and in clean technologies to stimulate construction and low-carbon vehicles, along with funding to support efficiency and innovation. The European programme for recovery was complemented by national efforts, where France and Germany made the most significant commitments towards green stimulus with a budget to clean energy sectors of about 3.5 billion and 10.6 billion euros respectively.
The overall impact of the European green stimulus packages was found to be relatively small due to the small share of green measures in the overall fiscal stimulus packages. We observed more evident results in countries that implemented important national programmes: France’s package was estimated to have a large economic impact, but its long-term environmental impacts are uncertain. In Germany, the transport policies boosted GDP by 0.6% in 2009, and we observed a reduction in energy consumption. Sweden, which focused mainly on R&D, is more likely to observe a positive effect of its stimulus in the long run. An important conclusion of the study of the European programme is that coordinated green stimulus measures are more likely to deliver greater economic impact than green measures implemented separately by individual countries.
Smaller stimulus programmes were implemented in other countries. China was the only major developing economy to introduce environmental policies in its recovery plan by supporting high-speed rail, electricity networks and water management. Japan focused on the replacement of household appliances. South Korea allocated 80% of its total stimulus programme to green stimulus, improving the energy efficiency of buildings. For South Korea, it appeared to have been successful in creating jobs and boosting economic growth, but we do not observe a significant improvement in environmental performances.
Environmental responses to the Covid-19 pandemic
There exist a number of fundamental differences between the 2008 global financial crisis and the current one. The pandemic has resulted in a significant loss of human lives which continues to increase, an enormous strain on public health and social infrastructure, and higher economic and social consequences that will be lasting. Governments must first contain and mitigate the spread and infection of the virus. These containment measures have resulted in some short-term environmental improvements, in particular a significant drop in carbon emissions and a reduction of air pollution. But without introducing environmental policies in the fiscal stimulus for recovery, these advances are unlikely to be long lasting.
Lessons from the global financial crisis have shown that governments can introduce green stimulus in the Covid-19 recovery, to generate economic growth, create jobs and bring environmental benefits at the same time. These green fiscal policies could take the form of investments in energy efficiency and in green infrastructure. Since 2010, the cost of renewable power generation technologies such as solar and wind have fallen compared to other energy sources, which make them more economically attractive. Governments can also support R&D programmes and older vehicle scrappage programmes. Air pollution could be a higher public policy priority compared to the previous crisis as several studies have linked bad air quality with Covid-19 infections. Financial measures, such as preferential loans, loan guarantees and tax abatements, can be used to support environmental commitments and performance in pollution-intensive sectors that may be particularly affected by the crisis.
It is difficult to properly measure the net impact of green stimulus as it requires to have a strong ex ante and ex post methodology to quantify the benefits on employment, the economy and the environment, compared to what we would have had without the stimulus. Therefore to get an actual measure of the effect of green stimulus packages, it is essential that policy evaluation be an integral part of stimulus programmes. This would allow governments to monitor their policies correctly over time.
The next step?
Several organisations, such as the OECD and the IEA, have called for actions to make the economic recovery from Covid-19 environmentally sustainable and to build on the lessons from the global financial crisis of 2008. The two crises are different in many ways, but the global financial crisis can teach us how to expand green stimulus efforts without repeating adverse experiences. Green stimulus policies are very relevant following countries’ commitments to cut emissions under the 2015 Paris Agreement. In the months ahead, governments should come up with green recovery packages, in particular to prepare the COP26, that has been postponed to late 2021 because of the health situation. It is the opportunity to build a sustainable recovery alliance between governments.
By Alice Crolard
Agrawala, Shardul, Damien Dussaux, and Norbert Monti. “What Policies for Greening the Crisis Response and Economic Recovery?” OECD ILibrary. Last modified May 28, 2020. https://www.oecd-ilibrary.org/environment/what-policies-for-greening-the-crisis-response-and-economic-recovery_c50f186f-en;jsessionid=-H8nJaaqKq2lpuKdsUILhtzM.ip-10-240-5-93.
IEA. “Green Stimulus After the 2008 Crisis.” IEA. Last modified June 29, 2020. https://www.iea.org/articles/green-stimulus-after-the-2008-crisis.
OECD. “From containment to recovery: environmental responses to the COVID-19 pandemic.” OECD ILibrary. 2020.
Pollitt, Hector. Assessing the Implementation and Impact of Green Elements of Member States’ National Recovery Plan. Final Report for the European Commission: Cambridge Econometrics, 2011.