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A change of direction for the climate

The cost of global decarbonization is well within the budgets allocated by governments to recover from the pandemic. Our ability to prevent climate change will depend on how the stimuli are used.

by Marina Andrijevic
13 July 2021
11 min read
by Marina Andrijevic
13 July 2021
11 min read

This article is taken from World Energy (WE) number 48 – The New Order

Scientists, pundits and policy makers draw many parallels between climate change and the Covid-19 pandemic. Among them, an overwhelmingly large pool of voices demands that the economic recovery in the aftermath of the pandemic be green. The rationale for the coupled view of these two crises is compelling. To avert future pandemics, we need better stewardship of the planet. The much-needed creation of job opportunities and boosting innovation can be done through investments in clean energy technologies and climate-friendly recovery. But it boils down to one proposition: the nature of the recovery from the pandemic could be a dealbreaker for our ability to prevent dangerous climate change. When governments started coming up with bold pledges for dealing with the economic effects of the pandemic, my colleagues and I unpacked one aspect of the recovery planning. We found ourselves awestruck by the outcome of what was essentially a comparison between two numbers. We put side-by-side the fiscal stimulus packages in response to Covid-19 and the yearly investments into low-carbon energy necessary to keep global warming in line with the goals of the Paris Agreement. In a paper titled “Covid-19 recovery funds dwarf clean energy investment needs” published in Science last October, we show that decarbonizing global economies is well within the budget of what governments are putting forward for the recovery. 

Energy decarbonization is crucial

To keep their economies and livelihoods afloat, governments have to prioritize supporting the healthcare systems, managing schools, and ensuring employment opportunities. Yet, spurring the economic activity to meaningfully recover will require investments beyond the most acute needs. Our analysis focuses on decarbonizing the energy sector, which is currently responsible for about two-thirds of economy-wide greenhouse gas emissions. The energy sector is therefore the dealbreaker for meeting the goals of the Paris Agreement. Keeping the global mean temperature increase below 1.5 or 2 °C hinges on steep reductions in the use of fossil fuels and a rapid shift to renewable low-carbon sources, such as solar and wind power, as well as improvements in energy efficiency. In our analysis we make a concrete case for how the Covid-19 recovery funds injected into the backbone of every economy can be aligned with ambitious efforts to reduce emissions. Governments can play the key role to mobilize private investment by channeling stimulus into dedicated public financing mechanisms. Liquidity measures for development banks can help them to proactively support low-carbon investments, particularly in developing countries, and through that reduce perceived risks faced by private investors. They can support policies, incentives, rebates and guarantees and tilt the playing field in favor of economic activity powered on clean energy.

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An unprecedented economic stimulus

When the paper was published, governments had committed more than USD 12 trillion to support the struggling economies. Since then, fiscal measures surpassed USD 14 and will likely increase further, not least because of the expected large fiscal package from the new US administration. The current global stimulus adds up to 16 percent to the world’s GDP in 2019 (2019 was the reference year in our paper) and is multiple times larger than what was put forward in the aftermath of the global financial crisis in 2008-09. We contrasted this unprecedented sum of money with the investments needed to decarbonize the global energy sector in a Paris Agreement-compatible pathway to a 1.5°C world. Our model estimate is that total energy sector investments amount to around USD 1.4 trillion globally between 2020 and 2024, or about 10 percent of the stimulus packages. But this is the aggregate global energy sector investment. Compared with a pre-Covid business-as-usual scenario, the additional investments into a green transformation to align with the Paris Agreement are about 300 billion per year. This is equivalent to a mere two percent of the total pledged stimulus to date, or 10 percent cumulatively over the next five years. Putting the world on a pathway to meet the Paris goals requires not just additional investments, but also massive divestments from fossil fuels. In the context of the recovery, avoiding the lock-in into polluting energy sources is just as important as ramping up investments into renewables. Together with the 300 billion dollars annual increase into low-carbon energy, investments into fossil fuels need to be reduced by 280 billion dollars per year for a Paris compliant pathway. The 20 billion annual difference between these two estimates—which is essentially the net shift in total energy system investments from current policy projections towards achieving the 1.5°C goal of the Paris Agreement—makes up less than 0.2 percent of current global stimulus. That is just 1 percent in total over the next five years.

An important step towards achieving the goal

This would not mean that energy systems will be fully decarbonized within five years, but that with these annual investments, the global economy would have made an important and positive step towards limiting climate change. A recent study published in Nature issues another stark warning of stranded assets if the economies bounce back on fossil fuels, particularly coal, whose prices have been decreasing with falling emissions. The low prices of fossil fuels are an opportunity to remove subsidies and enact measures that would support expansion of renewable energies. To be clear: climate change does not end with cleaning up energy systems. And not all low-carbon energy investments are expected to be made by governments. However, the comparison we make is an indication of the difference in orders of magnitude. It also illustrates what is possible when a crisis is taken seriously. Fast forward six months since our analysis was published, many parts of the world are still in lockdowns and often on the brink of human and infrastructural limits to deal with the pandemic. There are also risks that governments will unconditionally support fossil fuel industries. But the world has changed in two important ways since then. The first is the development of effective vaccines, which offer a ray of hope that the pandemic might be coming to an end. The second is that Americans elected Joe Biden as president. He started the term by signing executive orders to get a grip on the raging pandemic and to begin damage control after Trump. Markets are responding positively to the prospects of normality from the inoculation underway in many countries. Meanwhile, the crisis that has been there before and will outlive the pandemic is only getting more pronounced. Year 2020 tied with 2016 as the warmest year on record. Extreme weather events battered different parts of the world with typhoons, floods, hurricanes, wildfires and most recently polar temperatures in much of Europe and North America. The drop in emissions caused by the disruptions from the pandemic was likely temporary and will not have an impact in the long term unless the economic recovery is powered by clean fuels.

All eyes on the USA and China

President Biden resuscitated the global climate policy arena by re-joining the Paris Agreement and by setting up a powerful delegation of both climate veterans and freshly minted experts to join the global leadership in the fight against climate change. These developments are reasons for cautious optimism, and the world will be closely watching the White House climate summit on April 22, 2021 with the hope that the US will announce a net-zero target by 2050. All eyes are on the US in the context of the green recovery too. While the US stimulus package was the largest in the world from a single country during Trump’s term, it was devoid of provisions for a green recovery. Signaling a change of course, President Biden promised generous fiscal support for green investments during his campaign and is now bracing for a congressional scramble to pass a more than two trillion dollars plan targeted at infrastructure, transport and the power sector that will also “address the climate crisis head-on.” Some of the largest economies such as China, the EU, South Korea, Japan have already announced their long-term targets to reach carbon neutrality. Together with a large number of smaller countries and with the expectation that the US will soon join the club, about 60 percent of the world’s emissions will be covered with net zero targets. Even the climate wonks were somewhat taken by surprise by China’s commitment to reach carbon neutrality by 2060. But the most recent CO2 monitoring indicated that China’s emissions bounced back to levels higher than in the pre-pandemic era. While long-term ambitions are welcome, this a stark reminder that governments’ near-term actions are critical. Lack of ambitious action and further lock-in to fossil fuels will render the Paris Agreement goals unattainable. The recent UNFCCC synthesis report is a stark reminder of the inadequacy of the 2030 targets currently on the table. Sound diplomatic relations between the US and China can be partly credited for the success of the Paris Agreement. Ahead of the COP26, the peer pressure between the world’s two biggest emitters will be instrumental in putting the Paris goals into practice. They should now work together on consolidating the pandemic recovery plans with climate action to double down on reducing emissions in the near-term.

International cooperation is essential

Cooperation must also be extended beyond the largest emitters. In our paper we indicated large regional disparities between countries, both in their capacity to address the Covid-19 crisis and in investment needs for clean energy systems—especially when considered as relative shares of economies. The US and the EU have pledged the most funds for their post-pandemic recovery but have proportionally the lowest low-carbon energy investments needed for switching onto a Paris-compatible track. Meanwhile, emerging economies such as India have committed less funding for pandemic recovery but require proportionally more investments to decarbonize their energy system while providing their populations with reliable, clean and affordable energy. Just as the pandemic cannot be curtailed without an equitable global distribution of the anti-Covid jabs, climate change cannot be stopped without international cooperation either. New and old mechanisms of cooperation need to be mobilized to support developing economies in shifting to low carbon energies, not least because many countries will have even more people to lift out of poverty in the aftermath of Covid. Our paper ultimately makes a point that money is not a problem. Myopic thinking, however, might be.

The author: Marina Andrijevic

Is a research analyst within the science team of Climate Analytics, Andrijevic supports the economic core of the team with research and application of quantitative economic methods to climate change issues.