Economic recovery, the environment and climate in Covid-19 times

Dr Jan-Justus Andreas, Policy Manager Industry, Bellona Europa

The Covid-19 pandemic and subsequent slow-down of the global economy brought to the forefront the vulnerabilities of our society and economy. It showed that global supply chains are ill-suited to dealing with shocks, such as a global crisis with local effects. It also showed that, although different continents, countries and regions had differentiated death tolls, the highest ones were concentrated in highly industrialised regions. While it is not possible to prevent or control the development of a new virus, it is certainly possible to act towards reducing a core amplifying factor of its impacts: climate change.

Across the globe, economies are reeling from the multi-fold effects of the Covid-19 pandemic. The UK is experiencing its worst recession since comparable records began in 1955[1] and unemployment rates are rising across Europe and beyond.[2] As governments began to create safety nets and economic stimuli to prevent a runaway worsening of the situation, many of them embraced a green recovery; a stimulus to redirect public and private money to climate-friendly solutions and technologies in an effort to bring about the fundamental changes necessary to deliver on the Paris Agreement climate targets.

Europe’s commitment to climate neutrality by 2050, announced under the Green Deal and waiting to be enshrined under the European Union’s Climate Law, its new climate target of 55% GHG emissions reduction by 2030 and the supporting legislative work to achieve these commitments show that Europe is ready to lead the transformation towards a carbon-neutral economy. Priority areas set out under the Green Deal have been picked up in Covid-19-related recovery funds at national and EU level. As well as reducing VAT and energy costs – to provide a general stimulus to the economy – green-focused recovery funds have been allocated to encourage the uptake of, for example, electric cars and provide financial support for efficiency improvements in housing and climate technologies in industry.

During the first half of 2020, several hydrogen strategies were published, including from the Netherlands,[3]Germany[4] and the EU[5]. These strategies jointly allocated several billion Euros with the aim of placing Europe at the forefront of the transition towards a hydrogen economy.

Indeed, the need and willingness to align and direct economic policy with climate targets has become a visible priority. During the current debates around the revision of the Trans European Network for Energy (TEN-E) regulation, the European Parliament urged that the “criteria for granting PCI status laid down in the TEN-E guidelines must be in line with the Union’s climate and energy objectives, including the 2050 climate-neutrality objective”. A move seen to reinforce the redirection of energy investments from, for example, traditional fossil gas towards clean hydrogen and CO2 networks. Furthermore, the European energy systems integration strategy sets out a vision for the future, climate-neutral energy system.

Climate action will undeniably be costly. However, the Covid-19 pandemic showed us that, in a public health emergency, the cost paradigm itself began to shift. The times when governments are more willing than usual to take up debt and make vast investments are key chances to direct that willingness to projects most beneficial to the future sustainability of the environment, the climate, but also the economy.

Crucially for governments, the question remains whether the macroeconomic returns of deep structural transformation can be generated quickly enough to act as an immediate stimulus. Or put differently, whether stimulus packages can simultaneously drive economic recovery and the deep structural transformation necessary to achieve carbon neutrality by mid-century.

The Centre for Energy Policy (CEP) at the University of Strathclyde recently published a first answer to this question.[6] Professor Karen Turner’s team evaluated three key climate technologies that will be crucial to achieve net-zero emissions: residential energy efficiency, electric vehicles roll-out and CO2 infrastructures for carbon capture and storage (CCS). The findings made clear that investments in these technologies had vast macroeconomic benefits and a plethora of co-benefits; such as immediate stimulus to the construction business and associated sectors, reduced air pollution, and reducing fuel poverty and real income and spending impacts in private households. There also remains a vast potential for additional job and value creation, particularly in the case of CO2 infrastructure, which could result in a large-scale CO2 management industry that would generate hundreds of thousands of jobs in the UK alone.

Boosting immediate jobs and GDP growth while driving climate action and future emission reductions is therefore fundamentally possible. However, it requires the right set of policies. While current programmes allocate significant financial support, it remains uncertain whether framework parameters are sufficient to de-risk and thereby incentivise action and utilisation of available money. Changing predominant systems of operation, be it electricity generation or industrial production, is a risky business at the best of times and particularly for established players. This is especially true in the face of growing global price competition and a non-existent market for decarbonised materials.

Notably, raw material producers and European industry have experienced the severe pressures of globalised competition for some time. Yet they also have the expertise and technologies ready to deeply cut emissions from their processes. From switching to hydrogen as a fuel to CCS development and the climate-beneficial utilisation of CO2 in select applications, the variety of projects represented in the CCUS Projects Network shows the opportunities we have to begin the deep transformation of our economy.

Existing government strategies need to be complemented by targeted policies and frameworks, which create public-private partnerships that de-risk investments, establish necessary infrastructures around H2 and CO2 and provide long-term opportunities. First-mover projects and associated companies need to benefit from their endeavours. Furthermore, the importance of knowledge exchange cannot be underestimated. To this end, the EU Strategy for Energy System Integration proposes the establishment of an annual European CCUS Forum to allow for knowledge exchange, the advancement of public support for the technologies and an overall support for European CCUS projects.

Herein lies the key opportunity of today: regaining an advantage by engineering the product chain of the future in order to reinvent business and allow companies to reassert global commercial power on a market, which, rather than being “likely to emerge”, needs to be created. As with the previous industrial revolution, getting there first can be a hugely beneficial starting point for decades to come. As the Covid-19 crisis also highlighted the volatility and vulnerability of global supply chains, there needs to be a strategic interest beyond the threat of carbon leakage in preserving fundamental production chains at home.

Indeed, Europe’s fading position as a haven for innovation and prosperity stands to be rekindled through a concerted effort to establish the world’s first green economy in the world’s largest single market. Through the Green Deal, supporting strategies and recovery bills, the EU and national governments have provided a vision and basic framework for action. These need to be linked with strategies and constructive policies for European industry, new markets and climate infrastructures. It is crucial that industry and climate strategies are aligned, follow a systemic and holistic approach and are implemented with a view of the wider European economy.

Last but not least, “building back better” will certainly have an implication for the globalised trade regime, which has not only been a direct contributor to climate change but has also generated a race to the bottom as far as reducing costs of production to an absolute minimum at the expense of climate and social considerations.

As the EU re-starts its engines, it will be of utmost importance to establish a new international trade paradigm, which does not endanger our climate and public health or weaken our resilience to shocks. At the United Nations, the discussions are in full swing. The Security Council has been asked to identify climate change as a threat to global security. There are ongoing discussions, dating back decades, which seek to recognise the climate as a common global heritage. In this wider context, protecting the climate should become the core underlying assumption for trade as we advance towards a carbon neutral second half of the century.

The European Union, through its announced process of establishing a carbon border adjustment already by 2023, is claiming a leadership role in setting environmental standards as the new terrain for competitiveness. Building back better is possible but it will, indeed, require that some of the older frameworks, exposed as short-sighted by the Covid-19 crisis, are left behind. The current global situation seems to have reset our old modus operandi so by default it is the right moment for a better, healthier industry-environment paradigm to grow roots.

Photo by Ruben Mishchuk on Unsplash