Brave green world? Using COVID-19 as a window of opportunity for a more sustainable global economy

The coronavirus crisis has led to considerable restrictions of economic and social life. Production and travel activities are at least partly on hold. Greenhouse gas emissions decrease because of lower energy consumption.

However, it is conceivable that the reduction in emissions during the pandemic will reverse when the global economy once again uses all production capacities. It is possible that the corona pandemic and its economic consequences may even result in a deterioration in climate protection in the medium- and long-term. To prevent this, economic policy flanking measures could be taken.

The bright side of Covid19: energy and resource savings

Covid-19 induced reductions in the production and consumption of goods and services has translated into significant energy and resource savings. Industrial production, which was responsible for almost a quarter of global CO2 emissions in 2017, slumped sharply. In the eurozone alone, it fell by almost 28 percent in April 2020 compared to April 2019 (see Figure 1).

Resource consumption in travel and transport activities also declined. In April 2020, the various restrictions on social and economic life led to a reduction in global CO2 emissions of around 17 percent compared with average values of the previous year (Le Quére et al. 2020).

Beware of the rebound effect

Once the pandemic has ended and the global economy recovers, a significant increase in economic activity is expected – including in resource consumption, including rising greenhouse gas emissions. This is particularly true in the production of physical goods. In this area, the consumption lost during the pandemic can be expected to catch up. If the 2008/2009 financial crisis is any guide, and could even lead to overcompensation.

However, consumption in the service sector will most likely not catch up – or only partially – make up for the coronavirus crisis. In addition, more  home office work could also lead to energy savings in the transportation sector… These two developments could ensure that the catch-up effect in resource consumption after the corona pandemic will be lower than after the Lehman bankruptcy. The emissions saved during the pandemic might not be fully made up for again.

Why the pandemic could make for MORE resource consumption

In the short term, the environmental impact of the corona pandemic will be determined by the extent of the lockdown and the catch-up effects. In the medium and long, however, the pandemic’s effects on incentives to save CO2 will be more critical. Additionally, the decrease in energy and resource consumption during the corona pandemic has resulted in falling resource prices.

This is also true for emission certificates. If companies used the lockdown phase to buy cheap certificates (the price for European ones had fallen to just under EUR 15 per tonne in March 2020, compared with almost EUR 25 at the beginning of the year), they will take advantage of the resulting potential greenhouse gas emissions at a later date. Meanwhile, at the end of June, prices are back on a pre-crisis level (see Figure 2).

The legal framework could also be changed to make this switch less attractive. It is plausible that states water down regulations. That would internalize the adverse external effects of resource consumption and increase the international competitiveness of domestic companies. In addition, experiences or the retention of changing behavioural patterns from the crisis based on new cost-benefit considerations or changed social norms could also have a negative impact. People might, for instance, have a lower preference for using public transportation.

Less room for financial manoeuvering is also an issue. Companies and states might simply lack the means for investing in environmentally and climate-friendly technologies. Without price incentives, there is a risk that these companies will continue to use existing production equipment. On the government side, the additional burden of debt resulting from economic stimulus programs could reduce the scope for investment in R&D, premiums, and tax benefits for the turnaround towards a sustainable economy.

Why the pandemic could make for LESS resource consumption

The experiences gained during the corona crisis also offer opportunities for a medium- and long-term reduction in resource consumption and greenhouse gas emissions. For instance, it is conceivable that the travel behavior of business, administration and politics will remain at a low level even after the pandemic because many companies, authorities and organisations have become accustomed to online meetings and video conferences and are keeping these forms of communication for cost reasons.

The desire for greater independence from imports is also prevalent. The trend of relocating production steps from low-wage countries back to industrialized countries will likely accelerate. Most importantly, reshoring shortens value chains and reduces emissions from goods transportation. It is also likely to result in energy savings from production as developed countries usually can afford and have the technical knowledge to set up more modern and climate-friendly production facilities.

Finally, the government stimulus packages could set powerful financial incentives for the ecological transformation of the economy and society. Germany, the European Union and South Korea have attached green strings to their stimulus packages. The German government, for example, has introduced higher premiums for buying new electric cars. Among South Korea’s measures is a program to make public buildings, such as government agencies or daycare canters, emission neutral.

Two economic policy options

Greenhouse gas emissions associated with the consumption of natural resources represent a negative external effect that is not included in market prices. The market economy will not by itself be able to achieve an optimal level of emissions. State intervention is necessary to achieve this goal. From an economic perspective, two options stand out:

First, increasing the price of greenhouse gas emissions: States must ensure that negative external effects of greenhouse gas emissions get internalized into market prices. They can use emission certificates or a quantity tax, both instruments related to one ton of CO2 or greenhouse gases. One proposed solution is for states to raise the price of resource consumption through a CO2 tax. In the long-term, such actions could lead to enormous competitive advantages as they would help economies become pioneers and standards setters of the green economy.

Second, increasing public funding for low-resource and low-emission technologies: Both the U.S. and China have been very effective in using government agencies to promote the development of cutting-edge technologies. Europe and Germany could turn to an innovation-centered industrial policy focused on promising technologies. A case in point is 3D printing. It holds the potential to save energy and resources and, at the same time reduces dependence on imports – a boon for both ecological and economic resilience.

This blog post a short version of a discussion paper we have recently published in German.

Reference

Le Quéré, Corinne, Robert B. Jackson, Matthew W. Jones et al. (2020). „Temporary reduction in daily global CO2 emissions during the COVID-19 forced confinement“. Nature Climate Change, 19. Mai 2020 (https://www.nature.com/articles/s41558-020-0797-x).