Senior Director | Center for Energy Impact
World leaders are committing unprecedented funds to recovery packages. Their choices will shape our economies and societies for decades, and determine whether we breathe clean air, create a sustainable low-carbon future and possibly even survive as a species.
—Ban Ki-Moon, former UN Secretary General
The public sector’s response to the COVID-19 pandemic has been unparalleled. To date, governments have pumped more than $11 trillion in direct stimulus funding into their economies—and these programs are likely just the opening salvo. Such spending dwarfs the $600 billion per year that governments, multilateral agencies, and the private sector around the world allocate to climate investments, according to the Climate Policy Initiative’s estimate. Given the scale of current stimulus funding, governments have a critical opportunity to design their stimulus programs in a way that accelerates progress toward net zero carbon emissions by 2050.
Governments looking to seize this opportunity must manage seemingly difficult tradeoffs. As job losses mount in many countries, governments feel pressure to preserve established industries—many of which are fossil fuel intensive. At the same time, some governments and businesses are pushing for a rollback of environmental protections, including climate-related regulations, under the guise of stimulating economic recovery.
But climate progress and a strong rebound from the COVID-19 crisis are not mutually exclusive. A well-designed recovery program can not only bolster GDP, create jobs, and lower emissions in the near term, but also transform the country for leadership in the green economy over the long term. To ensure that they deliver on this opportunity, governments should tailor their plans to their country’s specific circumstances. Through our work, we have identified seven country archetypes that reflect a nation’s industrial mix, and the capabilities and skills of its workforce. The best approach for each archetype varies significantly.
Although approaches may vary, the urgency to act does not. According to the most recent UN Environment Programme Emissions Gap Report, global temperatures are on track to rise by 3.2°C by the end of the century. In order to limit global temperature increases to 1.5°C degrees, the target set five years ago at the UN Climate Change Conference (COP 21) in the Paris Agreement, the international community must slash global annual emissions by 35 gigatons (Gt) annually in this decade. Fortunately, the economic case for climate action is growing stronger: a 2019 International Monetary Fund analysis found that the domestic environmental benefits of a $50 carbon tax exceed the costs for just about every G20 country.
All governments should engineer their stimulus programs to advance a green, resilient recovery and to support their climate commitments ahead of next year’s COP 26 meeting in Glasgow. Such action will drive progress in addressing the planet’s greatest threat and ensure their countries will thrive in a low-carbon future.
The Potential of a Green Recovery
Given the magnitude of the challenge, government stimulus programs offer a critical opportunity to accelerate progress on mitigating climate change. New research published in Nature Climate Change indicates that channelling 1.2% more of global GDP into green energy while shifting investment away from fossil fuels could reduce emissions by up to half this decade.
Evidence is mounting that, if done well, green recovery programs can yield robust economic benefits. New research from the International Energy Agency (IEA) and the IMF outlines a sustainable recovery plan for the next three years. The plan would require an annual investment of about $1 trillion for three years—a relatively small share of stimulus spending to date—and could boost global GDP by 3.5%, creating the equivalent of about 9 million jobs per year over that period. At the same time, those investments would help position countries to compete in emerging green industries.
As countries consider how to design green recovery plans, they need to understand how various plan components differ in job creation potential and in duration of impact.
Assessing the Wide Range of Benefits. Payoffs from green recovery efforts fall into four main areas:
Aiming for Near-Term and Long-Term Impact. Governments have the opportunity to design policies that provide both a near-term boost for recovery and jobs and a long-term economic transformation.
Near-term responses typically involve interventions that offer a strong boost to jobs and GDP in the short run but vary in the duration of their impact. Tree-planting schemes, for example, deliver immediate direct job benefits, although these typically dissipate once the planting is complete. In capital-scarce countries with significant available labor, such schemes can create between 500 and 1,000 jobs per $1 million invested.
Governments can combine short-term policies with other initiatives—such as investments in electric vehicle (EV) charging infrastructure or grid capacity expansion—that provide a longer-lasting economic boost. Customers benefit from a lower cost of vehicle ownership and reduced power costs, and the nation wins by creating long-lasting jobs. The German government, among others, has already incorporated these approaches into its recovery plan, making a €2.5 billion investment in EV charging infrastructure and providing a €9,000 subsidy per vehicle to encourage adoption.
Solar photovoltaic (PV) energy and offshore and onshore wind energy technologies also offer opportunities for sustained job creation and GDP growth. These technologies are relatively mature and are more labor intensive per unit of power generated than is new gas or coal power technology. Research conducted by the Political Economy Research Institute at the University of Massachusetts indicates that every $1 million of government stimulus funding redirected from fossil fuel power to green power creates an additional five jobs.
Over the long term, governments can invest in transformative new technologies such as green hydrogen and carbon capture, utilization, and storage (CCUS). Although these burgeoning industries may take time to develop and scale, they can ultimately create significant numbers of jobs in research and development and infrastructure construction.
A combination of near-term and long-term initiatives can have a significant positive impact. The IEA/IMF plan mentioned above, for example, contains initiatives that create both short-term temporary jobs and long-term permanent employment gains. (See Exhibit 1.)
One Size Does Not Fit All
The opportunity to build a future economy that captures new value pools in low-carbon technologies is not uniform. The size of the opportunity depends on an array of factors, including a country’s existing manufacturing base and its workforce capabilities. At the same time, the feasibility of implementing a green recovery may be limited. In particular, countries that depend heavily on fossil fuels and have weak balance sheets will have less incentive to move aggressively.
Seven Archetypes. Seven clusters of countries have emerged in response to the opportunity presented by a green recovery program. (See Exhibit 2.)
The archetypes for these clusters are as follows:
In pushing to position their economies in emerging green sectors, however, governments must move quickly. Delaying could enable other nations to establish an advantage that countries slower off the mark cannot overcome. (See the sidebar.)
The fast-growing market for EVs illustrates the potential of the green economy.
Jobs in the ICE industry are under threat in several traditional major markets. Pre-COVID-19 competition from low-labor-cost economies strained margins and led to offshored production. The pandemic has compounded the problem by lowering demand for vehicles. Meanwhile, the ongoing growth of automation continues to reduce the number of workers required.
Several studies have shown that companies can maintain or even expand the number of jobs during the transition from ICE production lines to EV manufacturing. Europe alone could see the creation of 200,000 jobs across the full EV value chain by 2030, according to a study by the European Association of Electrical Contractors, creating net new employment even as the ICE industry declines. However, such projections assume that countries will move quickly to capture a high share of exports and retain production across the value chain.
Doing so will not be easy. China has already taken an early lead in EV parts manufacturing. Other governments should therefore direct green stimulus support to help traditional OEMs accelerate development of their in-house EV skills. For governments in mature industrial nations that may be wavering, the risk could be sizable. Volkswagen is poised to start producing some EV models in Slovakia, a country with high skill levels and low wages, where recent state investment in gigafactories could help the nation double down on its competitive advantage.
Understanding Feasibility. Although every country has an opportunity to drive a green recovery, the incentive to move aggressively is hardly equal from one nation to another. Two factors help shape the degree to which an ambitious green recovery program is feasible:
A Deep Dive in Two Countries. To understand how nations’ green recovery plans may vary, consider the cases of Denmark and Vietnam. These countries align with different archetypes, and both the opportunities for and the feasibility of a green recovery differ. Nevertheless, both countries can chart their own successful paths toward a green recovery.
A renewable-resource-rich nation situated between the North Sea and the Baltic Sea, Denmark has emerged as a global leader in the offshore wind industry, with major domestic players such as Vestas and Ørsted carving out strong positions in equipment manufacturing and power production, respectively.
A green recovery for Denmark could double down on this technical advantage, expanding the export markets for its domestically manufactured wind-turbine technologies. Denmark might also take advantage of its natural ability to produce zero emissions power to lead the way in producing low-carbon products in energy-intensive sectors. With a large European market on its doorstep, Denmark could play a prominent role in the manufacture of green hydrogen and green steel. And because making green steel and green hydrogen often entails constructing new manufacturing sites that are near renewable power sources, government-aided investment in building these sites in Denmark could be extremely effective.
Vietnam, meanwhile, has a very different opportunity. A nation with a low-cost, high-skill economy, it has mounted a strong response to COVID-19, and its economy is likely to be one of quickest in Asia to rebound from the pandemic. Despite the country’s historically weak fiscal position, this rapid rebound should strengthen it considerably; indeed, some analysts think that it may avoid recession entirely.
Leveraging this economic strength could enable Vietnam to position itself as a leader in Southeast Asia, capable of exporting to other regional leaders and beyond. Currently dependent for much of its energy on large amounts of imported coal, the country could take this opportunity to focus on previous investments in the solar sector to create domestic jobs and bolster growth. This strategy could help Vietnam improve its national security and its balance of trade. At the same time, the growth of domestic EV player VinFast has developed capabilities in parts manufacture and assembly. Using this advantage to export low-cost parts to major global OEMs as they switch to EVs could secure Vietnam’s position as a global sector leader.
Policymakers in Denmark and Vietnam, as in all countries, face unique pressures and have their own particular preferences. The key for each country will be to tailor the plan to its own context, focusing on areas where it has a competitive advantage.
Implementing a Green Recovery
All nations must contend with certain implementation hurdles if they are to deliver a successful green recovery. Previous attempts at green stimulus have revealed several pitfalls. The response to the Great Financial Crisis in 2008 in many cases included support for a green recovery. The ten largest programs directed a combined total of $263 billion toward green initiatives, roughly 16% of the total spent. Together with domestic green growth initiatives, such as the UK’s Green Deal, these efforts have helped define best practices that nations should adopt to improve their odds of success:
A Unique Opportunity
The climate challenge today is urgent and demands global, collective action. The massive stimulus programs being adopted offer a unique opportunity to drive real progress.
A few countries—notably France, Germany, and South Korea—are leading the way, with ambitious recovery packages that aim to drive rapid decarbonization while supporting the development of new domestic industries and long-term competitive advantage. Such initiatives will likely expand in some cases and be replicated elsewhere in coming months. After all, sizable investments are essential to post-pandemic recovery. In 2008, the IMF recommended that countries spend about 2% of their GDP to revive their economies in the face of the financial crisis, and the scale of today’s crisis exceeds the difficulties of that period. It’s hardly surprising that the German recovery package, for example, represents 3% of the nation’s GDP.
Spending on this scale can move the needle on climate change in ways that have eluded society to date. It can help countries meet the climate goals set in the Paris Agreement and position them to seize new opportunities in green technologies. In a best-case scenario, governments will respond to the pandemic-driven postponement of COP 26 by coordinating and aligning their green recovery plans to fuel their own transition to a low-carbon economy while increasing the support they provide to countries that have limited financial resources to make a similar shift.
The potential reward of such action is enormous. Well-designed, well-executed green recovery plans can bend the curve downward on emissions and push the economic growth curve upward, helping secure a more prosperous, secure, and resilient future.
The authors thank Sam Sherburn for his research and analysis assistance in the development of this article.
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