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How to design and finance a green recovery beyond Covid-19

Written by Anna Locke, Andrew Scott


A year ago, young people across the globe took to the streets to appeal for urgent action to address the climate emergency. This was meant to be the year of ambitious commitments to climate change, but the Covid-19 pandemic has slowed the momentum. The United Nations Framework Convention on Climate Change (UNFCC) negotiations have been postponed to 2021, and only 12 countries have submitted revised Nationally Determined Contributions to date.

As our attention pivots to what the world could look like after the pandemic, there are calls for recovery measures to be ‘green’ – compatible with climate goals and the Earth’s planetary boundaries. The UN Secretary-General, for example, has called several times for recovery efforts to be consistent with the low emissions transition agenda.

However, there is also pressure to focus on rapid economic recovery to address the desperate need to restore jobs and production, and there are concerns about the limited fiscal space to build in longer-term climate and environmental objectives.

The reality is that we can no longer treat a green recovery as simply an option. But how can we design an ambitious green stimulus package to rapidly create jobs, improve public health and tackle inequality? And how best can we create the economic and political space for that?

Frequently asked questions

Andrew Scott: designing a green recovery

Governments’ immediate responses to the economic impact of the Covid-19 pandemic have largely not sought to address climate issues. Instead they have been directed towards short-term recovery for businesses and livelihoods.

In several countries, response measures have included support for both low-carbon initiatives and carbon-intensive economic activity, although support (PDF) that potentially damages environmental sustainability has been greater than the commitment to promote it. In June, for example, Bloomberg estimated that less than 0.2% of the trillions of dollars committed to stimulus measures by the 50 largest economies targeted a low-carbon transition. According to the Energy Policy Tracker, which catalogues energy-related measures, G20 countries have pledged a total of $382 billion for the energy sector since the start of the Covid-19 pandemic. Of this, just 36% is for clean energy.

This is a missed opportunity. Regulatory and fiscal policy measures included in post-pandemic economic recovery programmes should be purposely designed to promote low-carbon options. Analysis by Hepburn and others (PDF) suggests clean infrastructure (energy), building energy retrofits, investment in education and training, natural capital investment and clean research and development would positively impact both the economy and the climate. In a ‘green’ recovery programme, corporate bailouts, subsidies and public investment should target low-carbon activities or be conditional on transitions towards them.

Although the economic case for investment in clean energy, energy efficiency and nature-based solutions has been made, it is not certain that programmes around these activities can be designed and implemented within policy-makers’ expected timetables. The speed of implementation may have a greater bearing on the design of governments’ economic recovery programmes than long-term sustainability. Short-term thinking often prevails; it is far easier to do what has been done before, and there is a strong corporate lobby for this.

The opportunity to use post-pandemic recovery measures to promote low-carbon investments, encourage less emission-intensive consumption and deliver economic growth is clear. But addressing the climate crisis and putting economies on a pathway towards net zero emissions will require a lot more than building back better. The global response to Covid-19 demonstrates the speed, scale and depth of change that can be achieved when there is political will. The climate crisis will also need this level of change.

Frequently asked questions

Anna Locke: financing a green recovery

With the pandemic projected to shrink global growth by nearly 5%, governments can use three main methods to finance the recovery: borrowing money, printing money or raising taxes (or its counterpart, reducing subsidies).

In the short-term, the first two are the most common approaches. The UK government has already borrowed £150 billion over the course of four months earlier this year, with the low interest rate making this a cheap option. Other governments have followed suit.

Whether governments will turn to the third option remains to be seen, particularly if interest rates remain low. However, even those who feel confident that higher taxation is not needed – and that heavier government borrowing will not push up inflation – acknowledge that tax rises might be needed for a green transition. Another option is to reallocate fossil fuel subsidies to low-carbon development measures: last year, G20 governments spent $64 billion on coal alone.

One thing has become clear: whatever the nature of the recovery packages, higher debt to GDP ratios are here to stay. This itself may help to create greater fiscal space for recovery packages.

However, fiscal space differs across countries, even among high-income countries (HICs). Ireland’s lower share of government spending as a proportion of its GDP (25%) compared to France’s (56%), for example, means that in principle, it will be easier for its government to engage in public sector investment. The difference is even starker between HICs and low-income countries (LICS), who already face large debt overhangs with less confidence from the market that they can service that debt.

The fiscal burden and the social contract

So, who will bear the fiscal burden? And how might this affect the social contract that exists between different groups in society, especially different generations?

A key concern is that the younger generation, particularly in HICs, will bear the brunt of increased government debt, adding to the youth burden that inaction on climate change will bring. This has sharpened the focus on the social contract between generations and different social groups. The economic lockdown has hit the young at the expense of the old, women harder than men, and the unskilled more than the skilled. Existing inequalities may increase as some of the government’s largest funding is going to the financial sector.

However, it is not inevitable that the younger generation – particularly Generation Z – must bear the brunt of financing the recovery, as much depends on what route the government takes. A recent EBRD podcast was optimistic about financing options that could address longstanding inequalities that undermine social cohesion. Keeping interest rates low and opting for wealth taxes or closing tax loopholes for multinational tech companies would impact those with greater incomes and assets, who also tend to be older.

That said, such measures will require broad political and social support within countries for successful implementation. This may require building more social trust between individuals and public institutions, and a wider shift towards thinking that our individual contributions are an investment in our collective well-being (£), both hallmarks of happier societies.

Strengthening the social contract needed to achieve this means capitalising on the feelings of common purpose around combatting the virus. Governments’ active role in designing, funding and implementing a green economic recovery must go hand in hand with greater trust from their citizens to exercise that role.

This blog is part of the ODI at 60 series which explores how to build a better world beyond Covid-19. Join the conversation with #GlobalReset #ODI60.