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BUILDING A GREENER RECOVERY: LESSONS FROM THE GREAT RECESSION Covid-19 Green Recovery Working Paper Series 2 ACKNOWLEDGEMENTS Lead Author Edward B. Barbier Department of Economics, Colorado State University Special thanks are extended for comments and suggestions provided by Aeree Kim, Asad Naqvi, Himanshu Sharma, Steven Stone, Miriam Liliana Hinostroza Suarez and Eric Usher, and the research assistance of Angela Mensah. UNEP (2020). Building a Greener Recovery: Lessons from the Great Recession. Barbier, E.B. United Nations Environment Programme, Geneva. _ Copyright United Nations Environment Programme, 2020 This publication may be reproduced in whole or in part and in any form for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgement of the source is made. The United Nations Environment Programme would appreciate receiving a copy of any publication that uses this publication as a source. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the United Nations Environment Programme. Disclaimer The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the United Nations Environment Programme concerning the legal status of any country, territory, city or area or of its authorities, or concerning delimitation of its frontiers or boundaries. Moreover, the views expressed do not necessarily represent the decision or the stated policy of the United Nations Environment Programme, nor does citing of trade names or commercial processes constitute endorsement. BUILDING A GREENER RECOVERY LESSONS FROM THE GREAT RECESSION Covid-19 Green Recovery Working Paper Series 4 Rebuilding a greener world economy after the COVID-19 pandemic requires learning from what worked and what did not from past efforts to adopt green stimulus during the 2008-9 Great Recession. These investments emphasized energy efficiency spending and “shovel-ready” clean energy projects. They impacted job creation and expansion of renewables for several years but provided little long-term support for de-carbonizing the world economy. The biggest obstacles have been major market disincentives, especially the underpricing of fossil fuels and market failures that inhibit green innovation. However, since the Great Recession, new trends have emerged that must also be considered. These include widening wealth and income inequality, the growth in private wealth while public debt rises, and the lack of progress in achieving key Sustainable Development Goals (SDGs). There are three key lessons: Policies for a sustained economic recovery amount to much more than just short-term fiscal stimulus. Green structural transformation will require long- term commitments (5 to 10 years) of public spending and pricing reforms. The package of reforms will be different for major economies, such as the Group of 20 (G20), and low and middle-income economies, reflecting their different structural conditions and needs. Any package of green and inclusive reforms must be fiscally sustainable. Countries with limited fiscal space and debt constraints must find new room for maneuver. Pricing and market-based incentives are essential, both to foster green investments and innovations and to provide revenues for the increase in public spending. EXECUTIVE SUMMARY BUILDING A GREENER RECOVERY: LESSONS FROM THE GREAT RECESSION 5 The global public health and economic crisis created by the pandemic is creating a growing financial burden on all governments. In addition, the lack of international support and coordination for ensuring progress towards the 17 Sustainable Development Goals (SDGs) has made developing countries more vulnerable to the pandemic than they should be. In G20 economies, the priorities for public spending include support for private sector green innovation and infrastructure, development of smart grids, transport systems, charging station networks, and sustainable cities. Pricing carbon and pollution and removing fossil-fuel subsidies, can accelerate the transition, raise revenues for the necessary public investments, and lower the overall cost of the green transition. Developing countries will need to find cost- effective and innovative policy mechanisms to achieve sustainability and development aims in the absence of significant infusions of additional financing from major economies and international organizations. This requires identifying affordable policies that can yield progress towards several SDGs together, rather than sacrificing some goals to achieve others. Three policies meet these criteria: a fossil fuel subsidy swap to fund clean energy investments and dissemination of renewable energy in rural areas; reallocating irrigation subsidies to improve water supply, sanitation and wastewater infrastructure; and a tropical carbon tax, which is a levy on fossil fuels that funds natural climate solutions. Keywords: carbon pricing; clean energy; COVID-19; G20 economies; green economy; Green New Deal; green recovery; natural climate solutions. 6 TABLE OF CONTENTS EXECUTIVE SUMMARY PAG. 4 PAG. 7 KEY TRENDS SINCE THE GREAT RECESSION PAG. 9 PAG. 14 BUILDING A GREENER RECOVERY FOR THE G20 PAG. 20 BUILDING A GREENER RECOVERY FOR LOW AND MIDDLE-INCOME COUNTRIES PAG. 26 TOWARDS MORE INCLUSIVE GREEN GROWTH PAG. 29 CONCLUSIONS PAG. 31 REFERENCES PAG. 32 ACKNOWLEDGEMENTS PAG. 2 TABLE OF CONTENTS PAG. 6 INTRODUCTION GREEN STIMULUS AND THE GREAT RECESSION BUILDING A GREENER RECOVERY: LESSONS FROM THE GREAT RECESSION 7 PAG. 4 PAG. 7 PAG. 9 1 BUILDING A GREENER RECOVERY: LESSONS FROM THE GREAT RECESSION INTRODUCTION All indications suggest that the global economic recovery from the COVID-19 pandemic will be long and arduous. Already, the fiscal bill for tackling the health emergency and the economic crisis is large and mounting. Governments worldwide are likely to face a $10 trillion deficit in 2020 and a cumulative shortfall of up to $30 trillion by 2023 (Assi et al. 2020). The immediate economic priorities should be to relieve the human suffering caused by the disease, protect livelihoods and incomes, and shore up businesses and industries hardest hit by the recession. But managing the long recovery is also critically important. As the OECD (2020, p. 3) has emphasized, “a more resilient economy depends on a shift to sustainable practices”. The alternative course of simply reviving the existing “brown” economy will exacerbate irreversible climate change and other environmental risks. Consequently, “building back better” means also addressing “an even bigger future threat to the global economy: environmental degradation driven by our current economic system” (OECD 2020, p. 3). Devising green strategies for the economic recovery is becoming essential. Although global carbon dioxide (CO2) emissions have fallen sharply during the pandemic, they have risen by 1% annually over the past decade as growth in energy use from fossil fuels outpaced the rise of low-carbon sources and activities (Jackson et al. 2019; Peters et al. 2020). The 2020 fall in global CO2 emissions of around 2-7% over 2019 levels is likely to be temporary, as the world economy recovers (Le Qur et al. 2020). There is also concern that the pandemic will further undermine the commitment to global action on climate, biodiversity and other environmental issues (UN 2020). Of the $12 trillion committed by the 50 largest economies to the pandemic recovery so far, only about 10% has gone to sectors and activities that could potentially contribute to a green future (Green Fiscal Policy Network and Oxford Smith School, 2020 (forthcoming). Evidence is also emerging that the crisis has led to a weakening of environmental regulations and their enforcement worldwide, with consequences for environmental quality, pollution and land use change (Helm 2020; Trong et al. 2020). It has also slowed innovation and investments in clean energy, thus seriously damaging the prospects for transition to a low-carbon economy (Gillingham et al. 2020) Given these concerns, the post-pandemic recovery offers a unique opportunity to develop affordable and workable policies to usher in a more sustainable and low-carbon world economy. To assist such a strategy, the following report focuses on: what worked and what did not from previous efforts by the G20 to green the economic recovery from the 2008-9 Great Recession, and more recent economic conditions and trends that must also be considered in devising a post-coronavirus green recovery. Several lessons emerge from this review. PAG. 14 PAG. 20 PAG. 26 PAG. 29 PAG. 31 PAG. 32 PAG. 2 PAG. 6 8 First, policies for a sustained economic recovery amount to much more than just short-term fiscal stimulus of 1-2 years. Instead, transitioning from fossil fuels to a low-carbon, greener economy will require long-term commitments (5 to 10 years) of public spending and pricing reforms. As a consequence, the policies chosen for short-term (1-2 years) fiscal measures differ from the policies for a medium to long-term (5-10 years) green economic recovery and transition. Second, public spending alone cannot create a greener economy. Pricing reforms, such as phasing out fossil fuel subsidies and taxing carbon and environmental damages, are also necessary to provide the incentives for green investments and innovation, reduce fossil fuel dependency and create a more sustainable economy. Third, the package of public investments and pricing reforms will be different for major economies, such as the Group of 20 (G20), and low and middle-income economies, reflecting their different structural conditions and needs. Finally, any package of green and inclusive reforms must be fiscally sustainable. Countries with limited fiscal space and debt constraints must find new room for maneuver. Pricing and market-based incentives are essential both to foster green investments and innovations and to provide revenues for the increase in public spending. The rest of this report reviews efforts to introduce green stimulus and recovery efforts during the Great Recession, as well as key trends since then. It then discusses their implications for constructing a post- pandemic green recovery strategy for both G20 and low and middle-income countries today, and how such a strategy can lead to inclusive green growth. BUILDING A GREENER RECOVERY: LESSONS FROM THE GREAT RECESSION 9 2 GREEN STIMULUS AND THE GREAT RECESSION As the economic downturn caused by the COVID-19 pandemic has deepened, attention has shifted from addressing the immediate crisis to how to “build back better” (OECD 2020; UN 2020). There are increasing proposals for developing a “greener” fiscal response, in order to ensure that climate goals are not sacrificed (Agrawala et al. 2020; Hepburn et al. 2020; Kaufman 2020). 1 Many of these proposals suggest that the lessons learned from the green stimulus implemented during the 2008-9 Great Recession should be applied to green the current recovery from the pandemic. This section further reviews past efforts to stimulate a green recovery from the 2008-9 Great Recession, with the aim of highlighting possible lessons for a post- pandemic recovery. 2 1 An interesting hybrid proposal is three-year investment recovery plan based on fostering clean energy proposed by the IEA (2020), which would cost $1 trillion annually (0.7% of global GDP). The plan endorses many of the specific policies suggested here, including the phasing out of fossil fuel subsidies, but stops short of ending underpricing of fossil fuels through carbon taxes and other market mechanisms. 2 See also Agrawala et al. (2020), who conduct an in-depth review of many national green stimulus packages enacted during the 2008-9 Great Recession. IEA (2020) also reviews lessons from these packages for their sustainable recovery plan for the global energy sector. During the 2008-9 Great Recession, I assisted the United Nations Environment Programme (UNEP) in devising their “Global Green New Deal”, a plan to build on green stimulus efforts to construct a sustained green recovery (Barbier 2010a). Since then, I have also periodically reviewed progress in green policies worldwide, including recent Green New Deal proposals (Barbier 2010b, 2016a and 2019), as well as strategies for greening the post-pandemic recovery in G20 and low and middle-income countries (Barbier 2020a; Barbier and Burgess 2020). Of the $3.3 trillion in global fiscal stimulus during the Great Recession, around $522 billion (16%) can be classified as “green investments”, such as low- carbon energy, energy efficiency, pollution abatement and materials recycling (Barbier 2010a and 2016a). Almost all of this entire green stimulus was by the G20 economies (see Figure 1). In fact, just four economies China, the United States, South Korea and Japan - accounted for around 85% of the global green stimulus over 2008-9. 10 FIGURE 1. GREEN STIMULUS IN THE 2008-9 GREAT RECESSION Nearly two thirds of the global green stimulus ($335 billion) went to improving energy efficiency, with an aim to create much needed jobs in sectors hard-hit by the Great Recession, such as construction (see Figure 2). Among the four countries that enacted most of the green stimulus during the Great Recession, three allocated sizable shares to energy efficiency China (84%), United States (50%) and Japan (67%). The European Union directed 42% of its green stimulus to energy efficiency, and Germany all of it 3 . In comparison, only a quarter of South Koreas green stimulus went to energy efficiency. Instead, it promised 3 Similar to Germany, major European economies also allocated much of their green stimulus to energy efficiency. For example, the entire green stimulus of Italy was for energy efficiency, 84% of the UKs green stimulus and 83% of Frances (Barbier 2010a and 2016). to spend 5% of GDP ($60 billion) over 2009-2013 as part of a long-term strategy to develop key green industries, such as solar panels, electric cars, wind turbines and high-speed trains, as well as for projects on river restoration and flood control (Barbier 2010a). Green stimulus includes all support for: i) low-carbon power: renewable energy (geothermal, hydro, wind and solar), nuclear power, and carbon capture and sequestration; ii) energy efficiency: energy conservation in buildings, fuel efficient vehicles, public transport and rail, and improving electrical grid transmission; and iii) water, waste and pollution control, including water conservation, treatment and supply. G20 is the Group of 20 countries. The members of the G20 include 19 countries (Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the UK and the US)