Reset your economy: the power of green stimulus packages

By on 17/07/2020 | Updated on 27/01/2022
Photo courtesy: Pixabay

Around the world, governments are using stimulus packages to jump-start business growth. Catherine Early explores the potential of ‘green recovery’ investments, designed to reshape as well as rebuild national economies

The economic damage inflicted by Covid-19 has been rapid and massive: in June, the International Labour Organization (ILO) estimated a decline in global working hours equivalent to 400 million full-time jobs in the space of six months. And governments have responded with economic stimulus packages worth US$10 trillion in the first couple of months alone, using a variety of measures to stem job losses and economic meltdown.

Much of this money is being spent to support employees who can’t work or have lost their jobs. But as governments consider how best to restore economic growth, many are focusing on creating a ‘green recovery’ – targeting funds at industries that will not only provide mass employment, but also shift the global economy decisively away from fossil fuels. A wide range of advocates – ranging from the IMF and World Bank to the Pope – have argued that ploughing investments into public transport, renewable energy generation, energy efficiency and electric vehicles will not only enable governments to hit climate change targets, but also reshape their economies around the growth industries of tomorrow.

With green industries well established in many parts of the world, there’s good evidence that environmentally-friendly investments can boost growth and employment at least as well as harmful or neutral programmes. In April, responses to a survey of more than 200 finance ministry officials, central bank officials and other economists by Oxford University’s Smith School of Enterprise (SSEE) and the Environment revealed that climate-positive policies performed as well as, or better than, others in terms of speed of implementation and long-term potential for economic benefits. A separate study by the University of Massachusetts quoted by SSEE found that every $1m in public investment generates 7.49 full-time jobs in renewables infrastructure, 7.72 in energy efficiency, and just 2.65 in fossil fuels.

Lessons from the 2008 global financial crash

Many supporters of the green recovery point to lessons learned from the government stimulus programmes following the global financial crisis in 2008-09. Joel Jaeger, research associate in the climate and economics team at US-based think tank the World Resources Institute (WRI), says that stimulus spending by US states on public transport generated 70% more jobs per dollar than spending on highways.

A $3.1 billion injection in the State Energy Programme, which provided grants for energy efficiency retrofits and renewable energy, was found to support 51,000 job-years from 2009 to 2013 and resulted in $7.7 billion in energy bill savings, he says. “By their nature, these types of projects are not self-sustaining, but they create an immediate stimulus, and the money that households save on electricity afterwards is injected back into other parts of the economy that are often bigger job creators than the energy sector,” Jaeger says.

Stimulus spending on public transport by US states generated 70% more jobs per dollar than spending on highways, according to Joel Jaeger. (Photo by Aleksejs Bergmanis via Pexels).

However, Jaeger urges governments to invest in existing programmes rather than launching new ones from scratch. In the Australians’ financial crisis stimulus package, officials set up a dedicated energy efficiency programme – but the roll-out was time-consuming, and some delivery teams lacked the right skills. “Inexperienced people installed the projects, there were fires. You can’t just send money into a green sector; any sort of stimulus needs to be really well thought out,” he says.

More jobs, better returns

The SSEE research also found that green stimulus packages produced greater economic benefits in the wake of the credit crunch. Renewable energy projects generate more jobs in the short term than fossil fuel schemes, it said; and because they require less labour and no fuel once established, they provide better returns in the long term.

However, though carbon emissions declined by 400 million tonnes in 2009 due to the financial crisis, they rebounded by 1.7 billion tonnes in 2010: the sharpest upswing in history. This was largely due to carbon-intensive stimulus investments in Asia, according to the International Energy Agency (IEA), which is now pressing for governments to use stimulus packages to reset their economies around sustainable businesses. Together with the International Monetary Fund, it has produced a roadmap for governments which it says will spur economic growth and create millions of jobs in electricity, transport, industry, buildings, fuels and emerging low-carbon technologies, while simultaneously putting global emissions into structural decline.

It estimates that this would require global investment of around $1 trillion a year – around 0.7% of global GDP – for the next three years, including both public and private sector capital. In return, it says, the plan has the potential to boost global economic growth by an average of 1.1 percentage points a year; save or create roughly nine million jobs a year; and reduce annual energy-related greenhouse gas emissions by a total of 4.5 billion tonnes, it says.

The IEA points out that the growth of green businesses and the falling cost of renewables technologies means that there are far more economic opportunities today than there were a decade ago, while some emerging technologies – such as batteries and hydrogen – are ready to scale up. It also points to numerous other economic benefits of clean investments, including reduced healthcare costs as air pollution falls; increasing access to electricity, which 860 million people worldwide still lack; and boosting energy security.

European Commission recovery fund

While the health crisis continues to unfold worldwide, draft stimulus plans are starting to emerge. In May, the European Commission announced its plan for a €750bn ($848bn) recovery fund, split into €500bn ($565bn) of grants for member states and €250bn ($283bn) of loans. All spending under the plan will be guided by the bloc’s “sustainable finance taxonomy”, which theoretically excludes investments in polluting infrastructure, and the plan is tied to the existing European Green Deal.

Jaeger says that the European Commission’s language tying the stimulus plan to broader climate goals is promising. “You can’t allocate a chunk of money to green stimulus without thinking about the rest of the plan and whether that’s incentivising high-carbon practices,” he says.

The commission’s strategy is yet to be approved by the European Parliament, but other EU countries have already forged ahead with their own plans. Germany has pledged €130bn ($146bn), €50bn ($56bn) of which is targeted at the energy transition – particularly the production of hydrogen from renewable energy and sustainable mobility, which excludes petrol and diesel cars from support. In Denmark, the government is planning construction of 4GW of offshore wind power, alongside investments in carbon capture and storage and energy efficiency in homes.

Many economists and campaigners have suggested that, if stimulus or bail-out money is granted to polluting industries, policymakers should attach “green strings”. For example, large businesses in Canada which receive loans will be required to publish reports on how their operations will be in line with the country’s climate targets.

Mixed messages

China’s emissions from coal power, cement and other heavy industry bounced higher than pre-coronavirus levels in May, according to analysis by Carbon Brief. (Photo courtesy: Pixabay).

But Jaeger says that so far, such conditions are the exception rather than the rule. He points to South Korea, where the government has proposed spending ($10.6bn) by 2022 on green infrastructure and technology to create 133,000 jobs, but has also issued a 1tn won ($800m) emergency loan to coal plant manufacturer Doosan Heavy Industries and Construction Co, which critics point out was already struggling financially before the pandemic. “If a country is going to bail out these high-carbon industries it is a great opportunity to make sure they are set up for the future,” he says.

In China, whose carbon emissions are the highest in the world, the government has pledged 3.6tn yuan ($500bn), with a particular focus on “new” infrastructure, including wider rollout of electric vehicle charging stations. However, its emissions from coal power, cement and other heavy industry bounced higher than pre-coronavirus levels in May, according to analysis by Carbon Brief. Local governments approved large numbers of new coal plants in the first half of the year.

Cameron Hepburn, director of the economics of sustainability programme at the Institute for New Economic Thinking at the Oxford Martin School, says that green stimulus ideas are the subject of “a huge battle” in China. “If this debate is lost, it’s because provinces of China have a lot to lose; their livelihoods rest on coal. This politics is not specific to China, and we are increasingly recognising the necessity of properly thinking through the just transition – delivering a green recovery relies on assuaging the minority who don’t want to see this change.”

Trump rolls back on environmental policies

In the US, president Trump has used the pandemic as an excuse to roll back on environmental policies. His energy secretary, Dan Brouillette, told delegates at the IEA’s summit that the administration was “dedicated to an all-fuels, all-technologies energy strategy”. And in June, Trump directed departments to bypass environmental regulations as they pursued new infrastructure and development plans.

President Trump has used the pandemic as an excuse to roll back on environmental policies. (Photo by Gage Skidmore via flickr).

The US preferrs a bottom-up, free-market approach to a government-led approach excluding certain types of energy generation, said Brouilette, arguing that the latter would increase cost and regulation. But US policy on this area could change after November’s presidential election, since Democrat nominee Joe Biden has indicated support for investment in public transport and electric vehicle infrastructure.

So far, the arguments in favour of the green recovery have not led to widespread development of such plans, according to separate analyses by Vivid Economics, Bloomberg New Energy Finance, and the International Institute for Sustainable Development. Speaking at the IEA summit, António Guterres, secretary general of the United Nations, criticised the fact that many countries have used stimulus plans to prop up fossil fuel companies that were struggling financially before the pandemic.

“If we have any doubt about the direction the wind is blowing, the real economy is showing us. The business case for renewable energy is now better than for coal in virtually every market. Fossil fuels are increasingly risky business with fewer takers. Commercial investment houses are asking companies to change their business models,” he said.

Fossil fuel volatility

Analysis published in June by the Center for International Environmental Law (CIEL) revealed the scale of the volatility in fossil fuel markets. Oil, gas, and petrochemical companies have been selling off assets at massively discounted prices, slashing dividend payouts for shareholders, and racking up debt, it said. “Investors should stay away from fossil fuel companies, and policymakers must stop bailing them out,” says Steven Feit, senior attorney at CIEL.

Hepburn believes that countries can still incentivise a green economy, even if they do not have much wiggle room financially. “This is a confidence game, it’s about signalling to investors where the money should flow and where the jobs will be created. Spending government money will help, but so could a range of regulatory interventions that send a strong message that this is where the recovery is going – put your capital here and you’ll make a return,” he says.

Policy makers should take the opportunity to drive their economies towards problem-solving, says Dr George Dibb, head of industrial strategy and policy engagement at the Institute for Innovation and Public Purpose at University College London. Multiple countries have, or are developing, legislation to decarbonise their economies by 2050, he says, arguing that stimulus packages are a key tool for signalling to businesses where they expect to see future growth.

“Government is acting as a market creator, and making that market safer for investment,” says Dibb. “Then we don’t just get the benefits financially; we hopefully solve the problem as well.”

Global Government Forum is running a free webinar on this topic on Thursday 10 September. Reset your economy: building a green stimulus package will explore the potential value and risks around stimulating ‘green recoveries’, and the policies and capabilities required to successfully deliver them. Register here.

About Catherine Early

Catherine is a journalist and editor specialising in government policy and regulation. She writes predominantly about environmental issues and has held permanent roles at the Environmentalist (now known as Transform), the ENDS Report, Planning magazine and Windpower Monthly, and has also written for the Guardian, the Ecologist and China Dialogue. She was a finalist in the Guardian’s International Development Journalism competition 2009, and was part of the team that won PPA Business Magazine of the Year 2011 for Windpower Monthly. She also won an outstanding content award at Haymarket Media Group’s employee awards for data-led stories in Planning magazine. She holds a 2:1 honours degree in English language and literature from Birmingham University.

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