HOW WILL THE PANDEMIC CHANGE THE GLOBAL ECONOMY?

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While countries try to face the spread of the pandemic, pollution and GHG emissions have fallen globally. Is this just a temporary change, or could it lead to longer-lasting emissions reductions?

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For most of the world, this year will be remembered mainly for Covid-19. The pandemic has infected millions of people and killed hundreds of thousands. Furthermore, it has devastated economies even more severely than the global 2008 financial crisis did. But the impact of Covid-19 has also given a sense of just how hard it will be to deal with climate change. Oil fuelled the 20th century: its cars, its wars, its economy and its geopolitics. Now the world is in the midst of an energy shock that is speeding up the shift to a new order. As covid-19 struck the global economy, demand for oil dropped by more than a fifth and prices collapsed. Since then there has been a small recovery, but a return to the old world is unlikely. Meanwhile, energy-related CO2 emissions have fallen sharply.

The black future of petrostates

Petrostates are being forced to confront their vulnerabilities. Europe lockdowns and rising Covid-19 cases in big consumers such as India worry fossil-fuel producers. For example, Saudi Arabia needs an oil price of $70-80 a barrel to balance its budgets, but today it does not reach $45. Petrostates should therefore accelerate their economic and energy diversification. Alternatively, they might wait to be saved by a higher oil price. But it is hard to think that it will go back to pre-crisis levels. The World Energy Outlook of the International Energy Agency (IEA), published in a pre-Covid context, indicated that oil would reach its peak demand in the mid-2020s. But the pandemic has accelerated this process and the world had already reached peak oil demand at the end of 2019. The Covid-19 revolution will therefore completely reshape the energy arena.

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Financial markets turn green

There have been collapses in oil prices before, but this one is different. Capital markets have shifted in favor of green energies: clean-power stocks are up by 45% this year. Securities and financial assets with the best performance are those that have a connection to sustainability. For example, according to data issued by top tier Italian economic news outlet Il Sole 24 Ore, starting from the beginning of the year the S&P 500 Esg (Environmental, Social and Governance) index outperformed the traditional S&P 500 index by almost 3 percentage points, recording a 12.63% gain in late August against 9.74% of the S&P 500.

Investments are the right path…

Costs related to natural disasters are high and rising. According to the Swiss Re Institute, economic losses from natural catastrophes amounted to $155tn. One of the driving factors behind this trend is climate change. Politicians are trying (again) to reverse this trend putting “green investments” on the top of their agenda. US Democratic presidential candidate, former VP Joe Biden, wants to spend $2tn for clean energy projects. The European Union, for its part, has allocated a huge amount of resources into climate measures. The President of the European Commission, Ursula von der Leyen, used her State of the Union Address to confirm that she wants the EU to reduce greenhouse-gas (GHG) emissions by at least 55% over 1990 levels in the next decade, increasing in this way the 2030 target for emissions reduction. The blueprint for this transformation will be the European Green Deal, whose objectives in terms of GHG emissions reduction are more and more ambitious, aiming to make EU climate neutral by 2050. This is the right path to turn the tide, but the entire international community must be involved in this process, especially countries with high level of GHG emissions. Unfortunately, the COP-26 UN climate change conference set to take place in Glasgow in November has been postponed due to the pandemic. It would be a good chance to discuss environmental issues and related economic possible changes. We have to wail until November 2021, when the conference will finally be held. 

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… But only the right ones

Since the beginning of the crisis, governments have issued more than $11,5tn in economic stimulus packages. They have rightly put people first and focused on the immediate implications of the crisis, with money channelled directly to households and firms. Specifically, they have sought to secure employment, provide unemployment and cash benefits to workers and households, and supply liquidity to businesses across the economy. At the same time, approximately $3.5tn in announced stimulus, 30% of the total, will flow into sectors with environmental impact on climate change, such as agriculture, industry, energy and transportation. Worldwide, industry gets the most support from governments, followed by transport and energy. Economic stimulus provided to these sectors may be directed towards clean energy and low carbon development, but this is not always the case. The most notable examples of measures that target environmentally intensive sectors include significant deregulation, subsidies or tax cuts to activities likely to worsen environmental outcomes, including large bailouts for the aviation sector. To date, much of this stimulus funding is set to flow into existing sectors with no attempt to look forward and support their medium and long-term sustainability. In countries with inadequate existing climate and biodiversity policies, these flows are likely to reinforce unsustainable trajectories of high emissions. As a result, current stimulus into those sectors risks reinforcing a status quo that is significantly tilted toward negative environmental outcomes, amplifying risks to citizens and the natural world in the short and long term.Relatively few efforts have been made to support some improvements in environmental sustainability.

 The Green Stimulus Index

Vivid Economics has created the Green Stimulus Index to assess the environmental orientation of the stimulus funding. It examines G20 economies (plus the European Commission and its “Next Generation EU” program) and it evaluates the effectiveness of the Covid-19 stimulus efforts by G20 countries in ensuring an economic recovery that takes advantage of sustainable growth opportunities.

Results are not encouraging. In particular, the US and China, the two largest world economies, are the two notable nations with a lack of focus on clean energy and sustainability. The US, in particular, have few targeted measures in place to encourage the shift towards sustainability. Their existing policy mix means that stimulus funds are more directed towards reinforcing traditional markets, environmental deregulation and support for the aviation industry. China, for its part, has invested heavily in clean energy and the expansion of their electric vehicle subsidy scheme is promising, but further subsidies for fossil fuel vehicles and a reduction in permit requirements for coal mining could be very damaging to other clean energy developments.

Russia, Mexico and South Africa are major fossil fuel energy producers, and their response to Covid-19 has reinforced their historical negative environmental performance. Other nations, such as Australia and Japan, are yet to take robust measures to ensure that their stimulus will boost the long-term sustainability and resilience of their economies. Elsewhere, Canada and South Korea have launched a range of mixed targeted plans. Results for Europe suggest a relatively neutral approach. Germany, France and the UK are the best improved environmental performers. Italy and Spain benefit from a better historical (pre-Covid-19) environmental performance than some G20 economies but are still channelling funds into polluting activities. The best result has been achieved by the European Commission, but its score is calculated assuming that the proposed “Next Generation EU” recovery package and related environmental measures are fully implemented.

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Conclusions

The pandemic offers the world a chance to change its habits. The energy shock is speeding up the shift to a new order, as shown by the decline in oil demand and changes in financial markets. But governments do not always go in the right direction. The Green Stimulus Index demonstrates how the largest economies of the world are not addressing economic stimulus packages to environmental policies, preferring other types of investments. The US and China are not properly involved in this process and this can severely compromise an effective change worldwide. Most governments have chosen not to use economic stimulus to enhance nature or tackle climate change. However, there is an opportunity to learn from countries that have taken the lead and act decisively now to prevent irreversible damage to nature and drastically reduce future costs of protecting the planet. COP26 might be a good opportunity for States and stakeholders to discuss the future of our planet and how the economic system should evolve. In solving one crisis, we cannot ignore another.

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