Leading Indicators: Have we already given up on the green recovery?

If the endless rhetoric about a green recovery were any guide to what was happening on the ground, the battle against climate change would already be won. Various analyses of actions, rather than words, are painting a different picture. It is becoming clear that policy responses to the crisis are falling some way short of this laudable goal.

Only last week, it was the turn of the IMF. In a semi-annual update on the global economy, the fund restated the message that any pandemic-related environmental dividend will be temporary. As things stand, emissions “will continue to rise relentlessly, and global temperatures could increase by an additional 2–5°C by the end of this century.”

As I have discussed previously, there is little question that policymakers have generally been both quick and imaginative in their responses to the economic crisis caused by lockdown. However, there is much more debate about the extent to which many of these policies could rightly be described as “green”.

An exercise undertaken by OECD in August found that 30 member and “key partner” countries had included measures to support the green economic transition in their recovery programmes. They also found evidence that roughly the same number had put in place measures “likely to have a direct or indirect negative impact on environmental outcomes.”

Many analysts have reached a similar, somewhat depressing, conclusion. Rhodium Group is, for example, tracking green stimulus spending across the world’s largest economies. The United States, European Union, China, and India together make up two-thirds of global GDP and over 50% of global greenhouse gas emissions. Their judgement is that only the EU has committed a significant share – in truth, a modest 20% – of spending to measures that might fall into the green stimulus category. By way of contrast, the US, India, and China have each allocated a paltry 1-3% of COVID-19-specific spending for green stimulus measures.

A broadly similar set of conclusions are evident in the Green Stimulus Index produced by Vivid Economics. Strikingly, they note that governments to date have largely failed to adequately support those sectors of the economy that would have a lasting impact on carbon emissions. In their own words, “announced stimulus to date will have a net negative environmental impact in 16 of the G20 countries.” Once again, the EU comes out top of the tree, with the €750bn ‘Next Generation’ package viewed as the greenest to date.

If we are to accept the IMF’s judgement that what has happened so far is “grossly insufficient”, there are two pressing questions for which answers must be found. What measures should be promoted to build a green recovery? And does the political will genuinely exist to drive these measures through?

In answer to the first question, the IMF’s latest World Economic Outlook puts great store on carbon pricing as a tool for addressing climate change. In addition, it makes a series of “green supply” policy recommendations, including an 80% subsidy rate on renewables production, and a 10-year green public investment program. Finally, it stresses the importance of “compensatory transfers” to protect the “purchasing power of poor households” who lose out from any such policy action.

The challenge around political appetites may prove more intractable and will, to some extent, be influenced by the outcome of next month’s US Presidential Election. Critically, the ability to demonstrate that green policies are not job-sapping but job-creating is an important part of winning hearts and minds. The evidence around the assertion is, in truth, mixed: in the aggregate, jobs will probably be created, but not without significant regional and occupational disruption. This only highlights the need to ensure that inclusivity and reskilling are part of any green policy discussion.

I have concentrated in this note largely on the role of governments in charting a route out of recession. But, for this strategy to be effective, it is also clear that the private sector has an important role to play. As the OECD has pointed out, “leveraging private investment for infrastructure is a critical pillar of the low-carbon transition.” The challenge of attracting private investment is an issue that seems to have been playing out for quite some time. As yet, it has not been delivered on the scale hoped for. If ever there was a time for finance to step up to the plate, this is undoubtedly it. Whether clearer definitions of “green” and “sustainable” are part of the answer, I don’t know. The need to simplify due-diligence processes is certainty something that has been highlighted by the OECD. Interestingly, the EU taxonomy for sustainable finance could have a role to play in this regard.

We may have, at one level, moved into a phase of ‘deglobalisation’ as far as trade relationships are concerned. Nonetheless, COVID-19 and climate change are global problems, requiring global solutions. Greater multilateral co-operation will be essential if we are to successfully transform the global economy. The pressing environmental need to do so is self-evident; short-term fiscal fixes will only defer the problem. If the rebound in economic activity is not sufficiently durable, we will quickly run up against another man-made crisis.