The COVID-19 pandemic has plunged the world in one of its most severe crises in living memory. The economic, social, and human costs of the pandemic have been dramatic, but the recovery that is under way offers an opportunity to make headway in areas where structural change has been slow. This is the case of the necessary transition to a low-carbon economy to meet agreed climate change targets. Even though countries differ in their ambition, circumstances, and policy settings, they have both the opportunity and tools to pursue this transition in earnest.
In particular, to be successful, post-crisis recovery packages will need to closely align public policies with climate objectives. The quarantine measures imposed worldwide to contain the spread of the virus — and the associated contraction in economic activity — caused large reductions in greenhouse gas emissions in 2020. However, experience from previous recessions shows these reductions in emissions are transitory and need to be followed up with strong climate policy action if durable transformation is to be achieved.
Many countries have indeed committed to a sustainable recovery out of the crisis and have included “green” initiatives in their stimulus packages. The problem is that these measures are often followed by action that can be viewed as having a negative impact on the environment. Countries also face the challenge of facilitating the reallocation of labour and capital that will be required to accommodate a rapid shift from fossil fuels to renewables.
Effective decarbonisation is a multi-faceted goal that will require action across a range of policy areas. Investment and support for innovation are a case in point. Appropriate regulations and standards as well as carbon pricing also have an important role to play. Education and skills, active labour market policies and social protection programmes are all needed to ensure a just transition, too.
Because governments’ finances will be stretched as economies recover from the crisis, public investment programmes will need to be cost-effective and based on the “no harm principle”, which requires excluding investment in areas that are harmful to the climate. Opportunities of particular interest in this regard include investments in power system flexibility such as energy storage, smart grids, long-distance, and cross-border power transmission, as well as in public transport infrastructure, including charging stations for electric or hybrid vehicles. Energy-efficient retrofitting of buildings, carbon capture facilities, and renewable energy deployment are additional investments that can support decarbonisation. In any case, these investments will need to be assessed, taking into account individual countries’ circumstances and decarbonisation pathways, as well as their distributional implications.
Support for research and development (R&D) is another area that will require government intervention. This is because technological progress will be needed to support decarbonisation, given market failures hampering investment in green technologies. Governments can support green R&D directly through “technology-push” measures, such as direct subsidies, tax credits, grants, and loans. Support will be all the more effective if it is directed to those technologies with the largest potential for emissions reduction that are furthest from the market, such as carbon capture and storage, batteries for intermittent energy sources, hydrogen and smart grids. Governments would also do well to include “market-pull” measures in their support packages, such as tariff incentives, renewable portfolio standards, and public procurement, because they can address environmental externalities andincrease demand for green goods, which can then encourage green innovation.
To be effective, support will need to be complemented by longer-term price signals that make low-carbon investments viable. The problem is that carbon is currently under-priced. OECD data indeed shows that about one-half of emissions are priced below EUR 30/tCO2, which is a conservative estimate for the social cost of carbon. This shows there is a lot of room for action in this area. Improved disclosure of carbon emissions through better climate-related taxonomies and standards for consistent and comparable reporting will also be needed to align private investments with climate goals.
Appropriate policies will also be needed to support those facing job losses during the transition to a low-carbon economy. This is because workers in declining “brown” sectors may be confronted with persistent joblessness and earnings losses, while firms in expanding “green” activities may face shortages of labour with the necessary skills. It is therefore essential to invest in education and training/retraining programmes as well as to facilitate — or at least remove regulatory and other impediments to — labour mobility and market competition. The same is true for active labour market policies and appropriate social safety nets for the most vulnerable. These interventions have the additional merit of helping muster public support for climate policies by emphasising protection for workers, rather than jobs.
Let us not forget the importance of phasing out fossil fuel subsidies and tax expenditures. Action in this area can align public finances with emission-reduction targets by creating much needed space in governments’ budget to finance spending in meritorious programmes while complementing efforts to broaden tax bases. Compensatory measures and other complementary policies would be needed to offset the distributional impacts of the removal of harmful subsidies, which may be particularly burdensome for disadvantaged social groups.
The T20 Task Force on Climate Change, Sustainable Energy and Environment has looked at these issues, and many others, like sustainable cities, circular economy issues, green investments, and climate resilience. All this work is to provide actionable advice to G20 members so that they can make the most of the recovery to facilitate a cost-effective and inclusive transition to a low-carbon economy.