AN ENVIRONMENTAL WAKE-UP CALL
Green investment can kick-start our economies
By Gilles Moëc, AXA Group Chief Economist
At first glance, the impact of the ongoing recession on the prospects for a swift green transition could have been deeply negative. As usual, the steep contraction in world demand triggered a significant drop in the price of fossil fuels, which could have impaired the global shift to less carbon-intensive energy output. Moreover, with policymakers focusing on emergency measures to restart our economies, green targets could easily have been sidelined. Fortunately, at least in Europe, the general commitment to the transition is not being lost. Quite the opposite in fact: greening the economy is increasingly seen as a key tool to kick-start the recovery. Private investment is probably one of the most obvious lasting victims of the current crisis. Indeed, the pandemic is generating an unusually high level of uncertainty on demand prospects, as attention is now focusing on the possibility of a “second wave” this winter, while the first wave is far from over in the US and in many emerging markets. In addition, businesses have been forced to take a significant amount of additional debt during the lockdown to offset the collapse in their cash flows and merely survive. Even if interest rates on those emergency loans are low, the new debt burden may result in more investment programs being temporarily shelved. This calls for public sector support. The new investment schemes being set up now offer a unique opportunity to accelerate the green transition. The best example of this is the European Commission’s Next Generation Pact, which is designed to channel EUR 750 billion to member States worst hit by the crisis and 30 percent of these funds will be directed toward green transition projects. The Green Pact – doubling down on the EU’s already ambitious CO2 emission target – is being complemented by a clear, earmarked spending capacity.
“In Europe, the general commitment to the transition is not being lost. Quite the opposite in fact: greening the economy is increasingly seen as a key tool to kick-start the recovery.”
The current negative-to-low interest rate environment is not just the product of the pandemic-related extraordinary support provided by central banks. Over the last few years, preference for saving was evident across the developed world, while appetite for investment has been dwindling. Greening our economies is an untapped opportunity to channel plentiful saving to much-needed capital expenditure. Investing in green projects is often problematic since returns can be slow to materialize. Private investors don’t necessarily have the capacity to engage in these long-term endeavors. That’s why long-term funding supported by a government entity is particularly appropriate. The EU budget would be ideally positioned to issue debt over a long-term horizon (thirty years), lending its credibility to ensure the interest rate would be negligible, and transfer the proceeds to member states and corporations to finance decarbonization. Since the distribution of the funds would be dependent on the establishment of multi-year national recovery and resilience programs, visibility on member states’ environmental commitments (e.g. on the type of energy mix they are targeting) would be enhanced.
“Such a green investment plan is a way to signal that there is no automatic divorce between pursuing an economic growth strategy and curbing climate change.”
Such a green investment plan is a way to signal that there is no automatic divorce between pursuing an economic growth strategy and curbing climate change. The ongoing recession will force proponents of “de-growth” as the best avenue to decarbonization to face the social consequences of slower economic activity. At the rate of decarbonization observed between 2000 and 2018 (which has unfortunately slowed relative to the 1990s), the maximum “authorized GDP growth” would be a contraction of 0.6% per annum for the entirety of the decade. We would question whether it would be politically and socially acceptable that we should collectively forfeit any rebound from the current recession and then accept a decade-long recession. We suspect that the associated social and geopolitical costs would be on par with those of global warming. There is nothing like an actual recession to make “de-growth” less appealing. De-growth per se cannot be a solution to climate change unless one accepts dramatic social consequences. We need to change the way we generate carbon at any given rate of economic growth. This cannot be achieved without technology change, which itself is dependent on healthy investment. Beyond kick-starting the post-COVID recovery, there is no point being complacent about the challenge the green transition will create for our economies in the coming decades. Climate change is a negative externality – in other words, its final cost is not considered in the current price structure. Revealing this negative externality incurs a cost: a rising price of carbon can be detrimental to households’ purchasing power and firms’ profit margins. But collectively our societies have decided that this cost is preferable to the alternative, i.e. allowing the environmental and, ultimately, the economic and political consequences of global warming to tear at our social fabric. However, a well-designed investment effort can offset some of the transition cost to family and business income. A common criticism of the EU’s commitment to curbing climate change is that it is already a marginal contributor to worldwide CO2 emissions. This is true, but what is encouraging is that the European position is becoming more consistent. The Commission now openly supports a border tax, i.e. considering our imports’ carbon footprint to establish customs duties. This would ultimately come as a cost to consumers, but would also provide incentives for other major economic regions to join in the green transition. At long last, it seems a comprehensive, coherent decarbonization strategy is on the table.
Readers also read
- The crises behind the health crisis, by Alban de Mailly Nesle
- Pandemic is exposing deeper flaws in our economy, by Professor Lily Fang