Measures to contain the spread of the SARS-CoV-2 virus have resulted in an unprecedented contraction in global economic activity, with greater repercussions on international production, employment, and trade than in the wake of the 2008-2009 global financial crisis. Estimates of the impact of the pandemic on the global economy predict negative growth in gross domestic product (GDP) of -4.9 percent in 2020, while the first half of the year saw a significant decrease in hours worked (equivalent to 155 million full-time jobs) and in international trade (-3.5 percent yearon-year).
A new kind of recession
The COVID-19 pandemic differs from the triggers of previous recessions. The measures necessary to contain the new coronavirus—such as quarantine, lockdowns with various degrees of restrictions and social distancing—drastically limit the mobility of the populations involved, with extremely severe direct effects for the sectors of the economy most reliant on social interaction, including tourism, transport, entertainment and catering. The usual channels for amplifying the initial effects of the crisis on international markets, such as the financial sector and foreign demand, have also led to a substantial weakening in the prices of major commodities, especially oil and gas, with markedly negative consequences for countries whose exports are concentrated in their extractive industries. While the ongoing pandemic crisis can be seen as symmetrical at a global level, the effects on individual countries are likely to be of a different nature, magnitude and timing, with economic recovery influenced by a number of factors, including developments in numbers of infections and the effectiveness of containment strategies, the differentiated dependence of individual economies on the worst affected sectors, as well as by external cash flows and economic progress prior to the crisis. Although the projections for change in 2020 GDP are negative for all regions of the world, more pronounced effects are expected for advanced economies (-8 percent) compared to the expectations for emerging and developing economies (-3 percent). This article aims to look further into both common traits and divergent dynamics during the health and socio-economic crisis. We also consider the policy responses adopted by the world’s two main economies, the United States and China, especially in terms of the substantial consequences for global energy demand and the transition to a low-carbon economy. In China, following the sharp contraction in the first quarter of this year (-6.8 percent), GDP is expected to return to moderately positive growth in the second half of 2020 (+3.2 percent). In fact, compared to other major global economies, the Chinese government had to face an earlier closure of non-essential production that took place in midFebruary and start its gradual reopening in April, following the adoption of effective containment measures. In the United States, the persistence of the epidemic resulted in a severe impact on economic activity in the first half of the year (-36.4. percent year-on-year in H2). The spread of infection has differed across the 50 states and the adoption of fragmented containment measures has resulted in a differentiated reopening of production activities, with significant restrictions still in place in 20 states, where personal care services, indoor entertainment and catering remain closed or have only partially resumed. This scenario suggests a more gradual recovery in the second half of the year with negative GDP growth forecasts in 2020 of -4.3 percent (although these forecasts are better than those in the Eurozone and the United Kingdom, which stand at -8.3 and 9.8 percent respectively).
Standing on the shoulders of giants
Significant fiscal measures, worth a total of USD 12 trillion around the world, and expansionary interventions by central banks and financial regulators have limited the shortterm effects of the pandemic on global public health, employment, and manufacturing. However, the dimensions and make-up of the measures to stimulate the economic recovery taken by the United States and China have diverged to date. Although an international comparison between the volume of fiscal policies in response to COVID-19 must take into account the differentiated impact of the pandemic and other shared shocks to the system, as well as the differing scope of the preexisting social buffers, it is noteworthy that the United States has increased spending and waived or deferred tax revenue equal to 12.3 percent of GDP – without taking into account the recent stimulus package worth nearly $900 billion -, compared to a rate in China of 5.6 percent. Even when other categories of government fiscal measures are considered, the United States reports a percentage of liquidity support (through loans, equity capital or guarantees) for GDP significantly higher than in China (2.6 percent and 0.5 percent respectively).
Fiscal policy comes into play…
The post-COVID-19 economic recovery measures taken by the Trump administration include a wide variety of fiscal policy interventions. Consistent with the guidelines adopted by the main Member States of the European Union and the United Kingdom, they fall into three macro-categories: 1. increases in public spending and the waiver of tax revenues (equivalent to 9.2 percent of GDP, mainly made up of direct income support measures, loans and incentives for companies that maintain their workforce, with an emphasis on small and mediumsized enterprises and increases in health spending); 2. deferral of tax and social security payments (equivalent to 2.6 percent of GDP); 3. other guarantees and liquidity injection measures (equivalent to 2.6 percent of GDP). As part of these measures, specific sectoral interventions worth USD 32 billion are planned for the air transport industry, the largest share of which (USD 25 billion) has been allocated to passenger transport companies, with the remainder to cargo and auxiliary contractors. On December 21th, the US Congress approved a large package stimulus after months of negotations, allocating a new direct payment – up to $600 – to American adults and $300 billion to support small businesses.
China has instead instituted measures to support households and businesses more cautiously. While the central government had introduced expansionary measures equivalent to 13 percent of GDP to mitigate the effects of the 2008 financial crisis, the public interventions to pull the country out of the COVID-19 crisis amounted to around 5.6 percent (RMB 4.6 trillion). Overall, China's fiscal and lending policies in 2020 in response to the coronavirus shock constitute only 40 percent of those in 2009 in the wake of the global financial crisis. During the Third Session of the 13th National People’s Congress of the People's Republic of China on May 22, the Chinese government identified six priority areas for maintaining national security: job security, basic vital needs, the operation of market entities, energy and food security, industrial stability and value chains and the functioning of local governments. Their emphasis on the resilience of production networks confirms China's strategic focus on infrastructure investment. The promotion of investment in the construction of IT and communications infrastructure was relaunched at the State Council executive meeting on April 28, to foster two-way cooperation between communication platforms and production sectors, to support industrial integration and to create an environment conducive to the development of the platform economy. Discretionary fiscal policy interventions also covered spending on epidemic prevention and control, the production of medical equipment and other public investments in healthcare, suggesting further expansion of the public sector, including support for state-controlled enterprises. Economic recovery measures aimed at cutting emissions were taken in April, extending subsidies and tax incentives on electric cars to 2022 and implementing a plan to extend the battery charging network by 50 percent within the year, to broaden the scope of electric vehicles in the country (USD 1.43 billion). Compared to the U.S. and Europe, China has introduced less direct subsidy to workers and consumers, favoring measures to support infrastructure investment. This approach not only risks widening inequalities within the country, but weakens the evolutionary process in China’s industrial policy, which is now less export-oriented and more focused on meeting domestic demand (domestic consumption contributed 57.8 percent of annual GDP growth in 2019). This has implications for the sustainability of the recovery in China and for its trading partners. Overall, however, the complex recovery plans of the two rival powers share a predominance of sector-neutral measures with few exceptions as highlighted above, suggesting a trend of returning to pre-crisis production specialization, especially in the United States.
In support of oil
It is still too early to measure the impact of the U.S. and China’s recovery strategies on energy and the climate, because the substantive effects of these plans—often not yet fully defined— will only become visible over the next few years and because, in the case of the U.S., the new Biden administration will make radically different decisions relative to those made by the Trump adminsitration. However, it is possible to observe certain points of contact and divergence between the moves made so far by the U.S. and China. Although they are both net importers of oil, the U.S. and China also produce the commodity themselves. Companies operating in the sector in both countries have experienced increasing difficulties in recent months. U.S. oil producers have suffered particularly heavy losses due to the decrease in prices triggered by COVID-19. Compared to the first quarter of 2019, Chevron lost USD 8 billion in revenue in the first quarter of 2020, with losses at ExxonMobil of USD 1 billion. Among the non-majors (mid-cap companies, mostly shale producers), Diamondback lost USD 2.5 billion, Cimarex USD 1 billion, and Pioneer and Concho around USD 500 million each. U.S. crude oil production fell by 2 million barrels per day due to low prices and market dynamics (unlike production in the OPEC Plus bloc, which has decreased because of coordinated production cuts). The Trump administration has ordered sizable loans to oil companies to safeguard a sector whose importance to the American economy has increased in recent years, especially in certain states such as Pennsylvania and Texas. The Biden administration will reduce its support, potentially making U.S. producers relatively more vulnerable to a prolonged situation of low prices. In China, Sinopec production fell by only 0.4 percent year-on-year in the first half of 2020 and Petrochina saw an increase of 7 percent. Unlike most of the rest of the world, domestic oil and gas production in China has remained surprisingly high, partly due to government pressure to continue investing. In China, where the pandemic broke out, demand for fuel began to recover relatively early, in April. Domestic oil production is considered strategic in both the U.S. and China, especially in the context of rising geopolitical tensions and volatility in production areas such as the Middle East. This will not change radically under Biden, who is not expected to ban fracking even if he is expected to introduce stricter environmental regulation on pipelines and methane leakage.
Emissions will return
Looking beyond support for the oil and gas sector, other U.S. economic recovery measures taken by the Trump administration have prompted vehement criticism for their lack of consideration of climate and environmental factors. The criticisms were not only motivated by ethical considerations, but also by growing concern that whereas the rest of the world, including China, is using the crisis to innovate in its models of economic development, Trump’s U.S. has been stuck in an antiquated development model and therefore risks losing global competitiveness and economic leadership. While the criticisms of the Trump administration are well-founded, these arguments are rooted in over-optimism in assessing the “green” elements of China's recovery plans. A more in-depth analysis shows that the carbon intensity of the recovery plans in China and the United States are not that different (unless a full assessment cannot be carried out until after the fact). Some agencies have tried to measure the possible carbon intensity of stimulus packages. Vivid Economics, for example, has developed the “Green Stimulus Index.” This indicator fully captures the green component of the European recovery plans and confirms that the Chinese and U.S. measures are mostly “brown” (i.e., they support polluting activities, inconsistent with the target to reduce greenhouse gas emissions). Interestingly, in net terms, the American and Chinese stimulus measures so far have been almost equally climate negative. The difference lies in China having introduced stimulus measures with a positive impact on reducing emissions, which are more than offset negatively by highly brown stimulus measures. Conversely, the carbon intensity of the U.S. economic stimulus is slightly lower, although—at least at government level—the U.S. has so far not implemented any green stimulus measures. One factor that helps differentiate the prospects for greenhouse gas emissions by China and the U.S. is that China started the road to recovery ahead of the U.S. and emissions and GDP growth are correlated. Greenhouse gas emissions are expected to resume growth in China sooner than in the US.
U.S. green recovery under Trump and Biden
The economic recovery measures adopted by the Trump administration were at odds with those proposed by the International Energy Agency (IEA), of which the U.S. is a member. In conjunction with the International Monetary Fund, the IEA has developed a green recovery strategy that could reduce CO2 emissions by 4.3 billion tons and expand global GDP by 3.5 percent to 2023. The sectors listed by the IEA in which investment has the greatest potential for job creation and added value include energy efficiency in buildings, eco-friendly urban transport infrastructure and solar panels. While the EU (including Italy with the “ecobonus” scheme) are moving in this direction, the Trump administration has not. The U.S. response in 2020 looked very different from what it did after the 2008-2009 crisis. Back then, U.S. investments in electric cars and lithium-ion batteries contributed to cost-cutting and standardization of grid storage and electric vehicles. On the other hand, analysis of the U.S. recovery and its carbon footprint must also be tempered with the consideration that, despite the Trump administration’s lack of action, many U.S. companies have continued to invest in green technologies. For example, Amazon plans to purchase 100,000 electric vans for deliveries by 2024, and DHL expects that, by 2025, 70 percent of its “first and last mile” deliveries will be made using clean modes of transport. The crisis will not end any time soon, so there will be further rounds of public spending.
Biden will adopt a completely different approach from Trump, having announced a green recovery spending plan of $2 trillion as well as the commitment to reach net-zero emissions by 2050 and completely eliminate emissions from the power sector by 2035. There will be substantial investment in new renewable capacity, where the U.S. will also try to catch up with the EU on offshore wind and hydrogen. Biden has also promised to quickly deploy a plan to modernise 4 million buildings, increasing their energy efficiency. An ambitious infrastructure bill is also expected, with substantial emphasis on green infrastructure. Indeed, public investment in infrastructure will be key, particularly on electric grids, a hydrogen backbone and EV charging stations.
China is another kettle of fish altogether. As mentioned, China has introduced several green recovery measures unlike the U.S. under president Trump. In May 2020, the National People's Congress announced investments in electric vehicles and fuel cells, infrastructure to support digitization, electric vehicle charging stations and ultra-high-voltage electricity transmission networks. The Politburo Standing Committee has approved spending of USD 1.4 trillion over the next 5 years on the construction of new infrastructure to support the energy transition. In addition to the announcements, substantive measures have been taken for electric vehicles and charging stations, as have others to support the heavy-duty trucks market (renewal of fleets). More generally, the Chinese government also favors reorienting the economy toward hightech (5G data centers and technology), which should make the country’s GDP less dependent on manufacturing and pollution-producing industries. At the same time, however, doubts persist over the feasibility and political will of Chinese decision-makers to implement the most ambitious measures and it must be noted that the green measures are accompanied by continued support for pollution producing sectors. China plans to build many coal-fired power plants (180 GW of the world’s 500 GW of fossil fuel-based electricity production capacity under construction is in China) and the crisis triggered by COVID-19 can only further motivate the Chinese government to support the socio-economic stability of coal-producing regions. It is unclear how plans to expand coal capacity can be reconciled with Xi Jinping’s announcement to reach carbon neutrality by 2060.
The economic recovery measures taken by the Trump administration have been heading in the opposite direction to the green recovery strategies adopted by the EU and advocated by the IEA. The moves made by the Chinese government are more difficult to interpret. While China's recovery strategy includes certain green elements, it also confirms support for heavily polluting activities, and it is unclearto what extent their announcements will result in substantive measures. Changes in CO2 emissions over the coming years will depend partly on the recovery measures and their impact, partly on exogenous factors. Not only does uncertainty about the future spread of the virus affect the reliability of economic recovery projections, which forecast global growth of 5.4 percent (4.5 percent in the U.S. and 8.2 percent in China) by 2021, but other factors are likely to put the global economy at risk in the coming months, as does the eventual nature of the recovery itself. In particular, the rising tensions between the U.S. and China, especially in the commercial and technological fields, and the resulting threats to the strength of global production networks, the gradual strain of relations between the OPEC+ oil-producing countries, and the widespread political and social instability inherent in a recession, will impact the international context where the economic recovery policies of the United States and China will be played out. Joe Biden’s victory brings back the US in the Paris Agreement. Under a Biden adminsitration, the U.S. will join the net-zero-by-mid-century club. The country will also join the EU as a convinced supporter of green growth, as President Elect Biden will implement an ambitious green recovery plan worth $2 trillion. The ability of this plan to lead to a sharp reduction in CO2 emissions will however depend on its design. It will be important to avoid diluting stimulus measures and develop clear timelines and masterplans because most green investments are interdependent, meaning that an investment can only generate benefits (for economic growth and the climate) if other complementary investments are also made. For this, coordination is going to be key, both internally and with international partners like the EU.
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