There are many calls to use recovery from the Covid-19 recession to assist with the ‘climate transition’ to an economy in which emissions are no longer causing global temperatures to rise. Should policy on climate change and the aspiration for ‘zero-carbon’ be modified?
International scientific advice is to keep average global temperatures from rising more than 2 degrees Celsius (C) above pre-industrial levels by reducing the emissions that cause climate change. The pandemic has led to a large, but probably temporary, fall in emissions. But what does economics tell us about what we should expect the impact of the pandemic to be on progress towards climate change targets? Should climate change policy be modified in light of the crisis?
What does the evidence tell us about the impact of the pandemic on climate change?
- The pandemic will lower the emissions that cause climate change in 2020. It is likely to create an economic downturn that will lead to lower emissions over the next several years than would otherwise have been the case (International Energy Agency, 2020).
- The emissions in any one year do not particularly matter for climate change: it is cumulative emissions that matter (Matthews et al, 2018). Therefore, what the pandemic does to the trajectory of future emissions reductions is crucial. Even if the emissions reductions in 2020 were permanent, any reduction in the rate of future emissions cuts could still lead to an increase in the cumulative total emissions.
- The ‘climate transition’ to a ‘zero-carbon’ economy is first and foremost an investment programme. Trillions of dollars’ worth of new infrastructure needs to be created over the coming years and decades to ‘decarbonise’ the energy, heat and transport sectors, with additional contributions from industrial processes and agriculture (The Economist, 2020).
- There will be a large-scale economic policy response to the Covid-19 pandemic, consisting of high levels of public expenditure backed by sales of government debt into a market that is backstopped by central bank purchases. Should this spending support, and perhaps accelerate, climate policy goals? Or should climate policy objectives be put on hold, and this spending directed to wherever it has the largest impact on the economic recovery?
Related question: Is this a good time to pursue environmental objectives?
- Recessions and economic crises, of which the pandemic is now clearly one, are above all falls in investment spending by the private sector (see Figure 1). This indicates, all other things being equal, that we would expect a slower build-up in the infrastructure associated with a carbon-free economy than we would have had without the pandemic. For example, the fall in the oil price since the end of February when Covid-19 went global, reflects a fall in energy demand. Utilities and other investors in the energy supply, seeing forecasts of reduced future demand, will be likely to scale back their investment plans.
Related question: How will coronavirus affect the UK’s oil and gas industry?
Figure 1: Quarterly US private investment and consumption expenditure percentage changes
Source: US Bureau of Economic Analysis via FRED.
Notes: Grey shading indicates US recessions. As can be seen, consumption is relatively smooth, with investment showing large, pro-cyclical changes.
- As relatively new technology, zero-carbon infrastructure benefits strongly from ‘learning by doing’ to boost its productivity and lower its costs (Lecca et al, 2017). If the deployment of this technology is delayed or it is deployed at a lower scale than otherwise, then some of these productivity improvements will not be realised. Green technology will therefore remain apparently expensive, uncompetitive and reliant on policy support for longer than it would have been.
- Some green technologies are complementary (that is, they need to occur together) and only make commercial sense if other developments also occur. For example, an electricity system powered entirely by variable generation of renewable energy sources will need storage. If the overall level of investment is lowered, then it is likely that there will be more cases in which complementary developments do not occur, undermining the rationale for some projects.
So there are many mechanisms by which a crisis like the pandemic would naturally tend to impede an industrial transformation like the climate transition. What’s more, there are constraints on policy that still pertain, while perhaps not biting harder in times of crisis:
- A large-scale programme of government-funded industrial transformation creates the potential for governments across the world to ‘pick winners’ that might not be the most effective or efficient solutions (van der Ploeg and Rezai, 2017). This is an argument for governments perhaps to intervene in prices (via carbon taxes) rather than in the disbursement of grants, subsidies and direct investments. (This applies in normal times too and is not a specific crisis-related point.)
- The investment programmes needed to accelerate the climate transition may not be at the stage where they can simply be funded and started as part of the Covid-19 economic stimulus response. There is not the trained labour force needed to implement an acceleration of the climate transition. This is not, however, an argument for putting climate objectives on hold: rather, it is simply a constraint on the effectiveness of big increases in climate policy support.
- A point that is specifically applicable to crises and the current pandemic is that climate policy involves costs to business. It could be argued that now might not be the best time to increase short-term costs.
Impacts that could go either way
- The pandemic may lead to a reduction in the level of integration of the global economy. On the one hand, this could be associated with lower international trade with associated lower transport emissions. On the other hand, a reduction in the interconnectivity and complexity of the global economy may be associated with a reduction in economic efficiency. This may cause emissions per unit GDP to be higher than they would have been. As we strive for a given level of living standards, this may increase the costs associated with the climate transition.
Related question: What happens to trade in a global downturn?
- There may be behavioural changes as a result of the pandemic that could either raise or lower the cost of the climate transition. Increased home and remote working, an increase in walking and cycling, reduced traffic and massively reduced air travel could all see the costs of the climate transition fall. Conversely, public transport could be negatively affected, we could see an increase in private car traffic when people return to work, and there may be a pandemic-induced bias against density in future residential planning/demand.
Related question: What has coronavirus taught us about working from home?
Other than the immediate fall in emissions due to reduced economic activity while the pandemic runs its course, there are few mechanisms by which the economy would ‘naturally’ respond positively to the pandemic in terms of implementing the climate transition. It does, however, provide some potential benefits due to the scope it allows for policy:
- Without speeding up current climate policy, progress will be slow. For example, Jan Rosenow has calculated that it will take 1,500 years to meet the UK government’s heating target for 2050 given current policy support levels. Likewise, the sum of ‘nationally determined contributions’ (NDCs) offered at the Paris Conference in 2015 are estimated to amount to stabilisation at between 3 and 4C above pre-industrial temperatures, well in excess of the targeted 2C. The pandemic therefore provides a natural opportunity to realign policy with the targets.
- Investment in green technologies can be part of an effective stimulus package by government not just to help the transition to a low-carbon economy, but to offer immediate support to the post-crisis rebuilding of the economy.
- This is especially effective post-pandemic relative to ‘normal times’ since implementing the climate transition in normal times requires crowding-out of other spending and other investment priorities as economic activity is reallocated (Nersisyan and Wray, 2020). In the current environment, such crowding-out is less likely, and instead ‘economic activity’ is reallocated from unemployment to the climate transition and helps to create jobs. A programme of accelerated climate policy support and investment, with the additional effect of being a programme of economic stimulus in a depressed economic environment, has been labelled the ‘Green New Deal’.
Related question: What is the likely future role of the state in the UK economy?
Finally, public opinion will ultimately play a key role. On the one hand, public opinion may currently be less favourable to long-term projects such as the climate transition. Public opinion may be further biased against (perceived expensive) policy to make a priority of the climate transition because of the large government debt figures that will be reported.
Against this of course, there is an argument that the public understanding of risks may be heightened in the current climate: recognising the risks posed by climate change might allow for greater acceptance of the need for a response.
What’s more, in normal times, status quo bias may limit the ‘Overton window’ of acceptable policy against transformative change such as the climate transition. But the current climate is clearly well beyond the bounds of normality, and so status quo bias may be less pertinent.
Related question: Risk in the time of Covid-19: what do we know and not know?
Summarising the discussion above, the balance of the evidence suggests that in the absence of a policy response, the pandemic will be bad for climate change in that it will impair progress towards a zero-carbon economy.
The answer to the question of whether net-zero climate change policy should be altered in light of the pandemic is ultimately a political question, with trade-offs and arguments on both sides.
Where can I find out more?
The energy transition, NDCs, and the post-COP21: Rick van der Ploeg talks about the climate transition and the nationally determined contributions that underpinned the Paris Agreement in 2015
The case for a Global Apollo Programme to limit climate change: Richard Layard, Gus O’Donnell, Nicholas Stern and Adair Turner discuss a large-scale programme to make clean energy cheaper than dirty energy.
How to pay for the Green New Deal: Simon Wren-Lewis makes the case for large-scale, debt-funded, public investment in tackling climate change.
The age of green money: Thomas Piketty discusses a monetary and fiscally expansionist response to the pandemic, featuring a strong focus on a green economy.
The economics of climate change: The managing editors of Economic Policy call for economics and economists to help deal with climate change.
Who are UK experts on these issues?
- Nicholas Stern, LSE
- Rick van der Ploeg, University of Oxford
- Richard Tol, University of Sussex
- Barbara Annicchiarico, University of Rome ‘Tor Vergata’