Reaping a Double Dividend on Growth and Climate From COVID-19 Recovery Spending
Economic recovery from COVID-19 can reap a double dividend from climate-smart stimulus packages that maximise jobs and growth, while advancing the climate action the world so urgently needs. In dealing with the health crisis, we cannot lose a generation to the accompanying economic crisis.
In many parts of the world, focus is sharpening on how to rebuild from the economic wreckage of COVID-19. It is the biggest shock to the global economic system since the Great Depression, perhaps even worse than that. The virus is nowhere yet beaten and may play havoc with communities and economies for some time to come. Time will tell.
Economic recovery will be protracted; demand, employment and output having fallen off a cliff. World trade is at record lows, supply chains are in chaos, and many may need to be re-born closer to home to avoid the derailments we have seen around the world. The Organisation for Economic Cooperation and Development (OECD) is estimating rich nations will incur US$17 trillion in extra public debt as they grapple with the virus. At some stage that will have to be unwound, and many emerging markets will be even more battered. Ongoing uncertainty and a profound loss of confidence will hinder recovery.
This is not a time for governments to retreat. Even voices usually clamouring for government to get out of the way now expect governments to lead, because recovery will require massive and sustained support from governments around the world.
Government focus on recovery must be on maximising economic growth and jobs, and ensuring this includes everyone. This was the guiding star that steered the international response to the Global Financial Crisis. I was advising Prime Minister Kevin Rudd at that time and saw first-hand just how much foresight, coordination and effort was required for success.
Critically, this focus needs to be the right kind of growth and jobs. And here, economic recovery must reckon with climate change. Pre-occupied with COVID-19 as we are, there is no hiding that climate change remains the biggest threat to our future welfare and prosperity.
It has not gone away, and in fact is getting worse. The damaging impacts of climate change are increasingly evident for everyone to see, everywhere in the world. Australia’s summer of fire, of hell, has branded this into our consciousness.
Indeed, the current pandemic is a harbinger of climate disasters to come and the resilience we need to build into our systems – including health systems as climate change foreshadows more pandemics – to deal with what we know will be the adverse impacts of a changing climate.
Recovery stimulus must not fuel acceleration toward potentially catastrophic climate change. It must do the opposite if it is not to become counterproductive – delivering economic damage rather than rescue. Yet there is a real risk, as during times of crisis people cling to what they know and seek comfort in the familiar.
Writing recently, International Energy Agency Executive Director Fatih Birol and European Commission Vice-President Frans Timmermans put it bluntly: “We need to make sure that we don’t come out of the lockdown and sleepwalk into a harmful ‘lock-in’ of the obsolete, polluting technologies and outdated business models of the past century.”
There are plenty examples of status quo spending by governments in recent weeks. They include a massive package for the US fossil fuel sector, China approving five major new coal-fired power plants, India accelerating coal production, South Korea bailing out a coal power plant builder and Germany bailing out Lufthansa without carbon emissions reduction commitments. In Australia, our Recovery Commission is drawing fire for emphasising a gas-led recovery even as the need for gas as a back-up capability shrinks with each accelerating cycle of new renewable and energy storage technologies.
These sorts of decisions will significantly influence whether the world successfully addresses the threats of climate change, or not. They will be our legacy to our kids and grandkids, in a cruel twist paid for by them given the extraordinary debt we must incur to spur recovery. It would be a crime to leave them a catastrophe from high emissions, climate vulnerable investments.
Consistent with the obligations of 195 parties to the Paris Agreement on climate change, there should be clear principles that recovery stimulus options do not lock-in higher emissions and greater climate risk; that pathways to jobs and growth also need to be pathways to a cleaner future; that regulatory, taxation or subsidy measures support the goals of the Agreement not undermine them; and, that industry support is accompanied by conditions for transitioning to lower emissions and greater climate resilience.
Fortunately, there are growing signs of this thinking spreading around the world, abetted by one of the rare beneficial side-effects of the COVID-19 shutdowns being greater environmental awareness.
Whether marvelling at returning marine life in the canals of Venice, clear blue skies in New Delhi and Beijing, or wildlife wandering down city streets, people can literally see a better future. That is one where seven million people don’t die every year from air pollution largely emanating from the same sources causing climate change.
A growing number of governments are committing to the double-dividend recovery. For every example of status quo spending there are others aimed at ensuring investments support both jobs and growth and transition to lower-emission, more climate resilient economies. The European Union has led the way with a €750 billion stimulus package aimed at a double-dividend, with emphasis on advancing its Green Deal toward net-zero emissions. It will invest heavily in areas like energy efficiency, turbocharging renewable energy, accelerating hydrogen technologies, rolling out clean transport and promoting the circular economy. Inexorably, it will move toward penalising trade and investment partners not aligned with this direction of travel.
Key emerging markets that once would have only prioritised traditional carbon-intensive recovery stimulus, per the examples above, are now looking at low-emissions solutions. This includes China which emphasised “new infrastructure” in its recent US$500 billion stimulus package, encompassing cleaner energy, transport and digital industries. India is supporting further roll-out of its world leading renewable energy commitments as part of recovery, Indonesia has announced a major investment in solar energy, and Japan and Korea are announcing climate transition spending.
International institutions are also now advocating climate transition investments, including the United Nations, International Energy Agency, the OECD, the World Economic Forum, the World Bank and the International Monetary Fund.
Significantly, there are growing calls from business for a double-dividend recovery. An accelerating trend over the past eighteen months has been recognition by business that climate change is core, not peripheral, to their business operations. Beyond the increasingly evident impacts of climate change itself, a key driver for this has been the insights business is gaining from the application of guidance led by the G20’s Taskforce on Climate Related Financial Disclosures (TCFD). Influential regulators such as the Bank of England and the Australian Prudential Regulatory Authority have been encouraging this application and signalling they will move to making it mandatory.
In a nutshell, the guidance asks firms to assess their exposure to climate risks – ideally to price these risks, to assess business opportunities from climate transition, to disclose the information to help investors make decisions on whether to invest in the company, and to integrate climate risk and opportunity into business strategy.
Climate risks can relate to the negative physical impacts of climate change on business such as flooding or fire for real estate or the risks associated with economies transitioning to lower emissions technologies. The classic example of this being the risk to fossil fuel companies from transition away from them as an energy source. Climate opportunities stem from the transition, for example an estimated US$1.6 to US$3.8 trillion opportunity every year to 2050 in transitioning to clean energy in order to meet the Paris Agreement goals.
More than 80 per cent of top corporates in the Group of 20 (G20) major economies are now implementing TCFD recommendations. The more business engages with this analysis and understands climate risks and opportunities, the stronger the recognition that climate change is material to the business. This is driving significant change through recognition, one way or another, that climate change will be a determinant of future business growth and success. As the outgoing Bank of England Governor Mark Carney starkly puts it, if companies and investors fail to adjust to this new world, they will fail to exist.
Ever more companies are adjusting, with an escalating number of climate-related announcements over the past eighteen months. At my firm Pollination, we are seeing a step change in companies seeking advice on this adjustment. The most significant example globally was Blackrock recently announcing a game-changing move to place sustainability at the centre of its investment approach, because it assesses the returns to investors will be greater. Blackrock manages over US$7 trillion of assets, meaning other large asset managers will follow, as happened days after the announcement when State Street Corp – with US$3 trillion under management – went the same way.
This is underpinning calls by business for a double-dividend recovery based on the powerful logic that as companies are now integrating climate change as core business strategy for growth, so should governments as core economic strategy for growth; not just for recovery. In two examples, the We Mean Business Coalition of around 1300 top corporates globally, with a combined market cap of US$25 trillion, is calling for a double-divided recovery. In Australia, the Australian Industry Group is doing likewise.
Governments need to heed these insights and calls, not least because climate related investments will offer the best prospects for economic growth and jobs in many cases. On that basis alone they should be prioritised. The OECD report ‘Investing in Climate, Investing in Growth’ demonstrated this in detail for the G20 in 2018.
They provide options for major infrastructure investments which should be a bedrock of government stimulus for recovery, such as: clean energy and new transport systems, more sustainable homes and buildings, and improved agricultural production, water and waste management.
They are often the best spur to jobs: for example, clean energy investments create twice as many jobs per dollar spent than fossil fuel investments. Many provide stronger growth trajectories through higher longer-term productivity from new ideas, technologies, services and efficiencies, with stellar examples being the extraordinary growth, falling costs and employment associated with renewable energy (11 million jobs around the world), battery storage and electric vehicles.
We already know well where such investments can be made. They are not hypothetical. In Australia’s case they have been outlined in CSIRO’s excellent technology roadmap for a low-emissions Australian economy published in 2018; Ross Garnaut’s latest book Superpower: Australia’s Low Carbon Opportunity; the recent inspiring report by Climate Works on de-carbonising Australia’s future; and in the Government’s just released low-emissions technology roadmap for Australia.
Remarkably, given all this, what is not yet clear is whether enough governments will fully seize this once-in-a-generation opportunity to realise its promise. While there are many positive signs, the scales are far from being tipped in favour. Too many governments are oscillating between supporting the status quo, with its diminishing returns, and fulfilling their own commitments to the Paris Agreement and optimum support for growth and jobs. In our region, investment decisions by China and India alone could make or break the Paris Agreement and significantly impact our welfare and prosperity.
As it always has with climate change, success will require sustained advocacy, making the case on the logic, evidence and the arguments. Measured in decades the world has come a long way on climate change since we began confronting this threat in earnest more than thirty years ago. But we really don’t have another thirty years. The world needs the best possible recovery from COVID-19 now and that needs to be climate smart because this presents the best prospects for recovery. The world needs to transition to net-zero emissions and greater climate resilience into the future, and as quickly as possible, as there genuinely is no other option. Encouragingly, the voices for a double dividend from recovery stimulus are growing. But they must become louder still.