Green or brown: The COVID-19 crisis and the road to recovery

The world economy is emerging gradually and unevenly from the collapse triggered by the COVID-19 pandemic. This year may see the fastest worldwide expansion in nearly five decades, although the recovery will remain subdued in many emerging markets and developing economies (EMDEs). Reductions in fossil fuel use contributed to substantial declines in pollution, brighter skies, and cleaner air in 2020, but carbon emissions are back and are accelerating with the recovery, a fact often referred to as “revenge pollution”.

In a recent working paper, The COVID-19 Crisis, and the Road to Recovery: Green or Brown? we argue that the size of the fiscal stimulus launched in response to COVID-19 has been unprecedented and extraordinary but inconsistent with the world’s low-carbon transition. The paper uses data from the Oxford-based Global Recovery Observatory and extends the analytical framework developed by the Oxford team. The analysis suggests that from March 2020 to May 2021, total global spending by 24 high-income economies and 61 EMDEs reached the astonishing amount of $19.8 trillion. The high-income countries included in the sample collectively accounted for more than three-quarters of this spending, while the EMDEs shared the rest.

The massive fiscal stimulus was aimed at ‘rescuing’ the economy.

Rescue spending - cash transfers, temporary liquidity support, tax relief measures and testing and vaccination programs - represented 85 percent of total stimulus and essentially helped families and businesses forced to remain in lockdown. Some 90 percent of this amount can be classified as “legacy” or “light brown” spending, aimed at keeping up activities that would have otherwise been terminated in the absence of these policies. Since most economies rely largely on fossil fuels, this spending has increased GHG emissions, despite not being intentionally aimed at doing so. Spending is classified as green or brown if it is likely to decrease or increase carbon emissions respectively, compared to a situation in which it is not implemented. Both green and brown spending represented a small percentage of rescue spending (0.27 percent and 1.68 percent respectively).

Green and brown spending have roughly the same shares in recovery spending.

Recovery spending – either on direct public investment or fiscal incentives for private investment - accounted for only 15 percent of total spending. It included a relatively high share of green spending (19.4 percent) but an even larger share of brown activities (20.4 percent). Almost half of recovery spending can be classified as having a neutral effect on carbon emissions and the rest as “light brown.” The United States, India, and China allocated only a small share of their recovery spending (8 percent, 5 percent, and 12 percent respectively) to green activities, and a much larger proportion to brown activities: 20 percent, 65 percent, and 26 percent respectively. Some 70 percent of the recovery spending for Indonesia is classified as brown. Brazil’s total spending is mostly “light brown’” and its large share of green recovery spending (51 percent) supporting renewable energy must be put into perspective: Brazil's recovery spending only makes up 0.3 percent of its total spending.

Russia, Mexico, and South Africa — three major fossil fuel energy producers — have provided unconditional support to oil, gas, and coal, refining industries, and carbon-intensive transport infrastructure projects. Similarly, Argentina, Saudi Arabia, and Turkey have directed a significant proportion of their stimulus packages toward polluting industries. Overall, recovery spending in most countries has been brown or light brown, reinforcing and exacerbating existing patterns of carbon-intensive development. Even the countries with a relatively high percentage of green spending — mostly in Europe — have invested the same or more in brown activities, thus “neutralizing” the positive impact on emissions. Overall, we find that countries that were already “green” before the pandemic also tended to spend more on green and less on brown activities during the fiscal recovery , which could potentially lead to a widening gap between countries’ environmental performance.

Another interesting result of the analysis is that many countries — irrespective of their status as advanced or EMDES — have adopted similar green or brown spending strategies. What can explain the similarity of countries’ spending patterns? Greater equity in health system have been associated to more egalitarian rather than individualistic values, and the latter have similarly been associated with greater concern for environmental and climate issues. Likewise, higher levels of political corruption have been found to be strongly associated with lower stringency of climate policies. In line with this literature, our findings indicate that countries with relatively good health outcomes, equitable distribution of resources and less corruption are the least likely to belong to the “brown” recovery spending group, and more likely to belong to the clusters with a mix of other types of spending.

COVID-19’s impact on the energy transition is mixed, ambiguous, and still to be determined.

In 2020, despite the decline in energy demand, renewable energy generation increased substantially — while fossil fuel capacity declined — mostly in countries that are already leading the low-carbon energy transition. At the same time, laggards (particularly among EMDEs) face mounting challenges to renewable energy deployment, and risk becoming locked into high carbon energy dependency. Countries have continued to invest in fossil fuels, even when under pressure from a destabilizing global health and economic crisis. For example, in 2020 China added 38.4 GW of coal-fired power capacity, exceeding the coal capacity decommissioned in all other countries in the world.

A missed opportunity

Why was the climate crisis largely ignored in the fiscal stimulus? A possible interpretation is that the climate crisis is slow-moving, and it is not perceived as the immediate threat brought about by a pandemic. And while the measures to combat the health crisis are expected to be temporary, thereby limiting political repercussions, addressing the climate crisis requires political consensus on how to decarbonize the economy, a process that involves future benefits and sacrifices that the current generation may not be willing to accept. Notwithstanding the differences between the two crises, the opportunity to “bend two curves with one recovery” — that is, to reduce emissions at the same time as preventing the spread of the virus — was missed. But the present situation is not insurmountable. As can be ascertained from this paper’s analysis, the opportunities to “build back better” are numerous, while the consequences of business as usual may be a perpetuation of poor and sub-optimal health, financial, and environmental outcomes.

This paper and two others on related subjects will be discussed at an online seminar on “Securing a Sustainable Recovery,” Tuesday, Nov. 16 at 11:30 a.m. ET. Click here to join the seminar.