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Covid-19 gives us a unique gap to combat the climate crisis

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Richard Freund holds a Bachelor of Business Science degree from the University of Cape Town and has recently completed a master’s degree in Economics for Development at the University of Oxford. He is starting employment as a research assistant at Young Lives, an international study of childhood poverty coordinated out of the Department of International Development at the University of Oxford. The opinions in this article are his own.

The Covid-19 crisis is a (hopefully) once-in-a-century shock to the global economy that can make a critical impact on the climate crisis. Any fiscal response needs to place the largest emphasis on putting money into the hands of the poorest, and green policies can do that.

South Africa is the 14th-largest emitter of greenhouse gases globally, largely due to the economy’s high reliance on coal-based power. In fact, Mpumalanga is the global number one hotspot for nitrogen dioxide emissions – a consequence of a large cluster of coal-fired power stations in the region. This has to change. We cannot afford to continue as we have in the past. Not only will it result in calamitous consequences for the climate, but it is also economically myopic; as countries seek to uphold their Paris Agreement climate change commitments, the demand for renewable energy is likely to continue to rise, and fossil fuel prices will fall with demand.

The Covid-19 crisis has the potential to mark a turning point in South Africa’s progress on climate change. In response to the pandemic, we have already seen young activists demanding that we cannot return to the old system; they are calling for a “new normal” in which the country improves economically, socially and ecologically. Globally, it is estimated that carbon dioxide emissions may fall by 8% in 2020 as a result of the pandemic; to give some perspective, they only fell by around 1% during the Global Financial Crisis. However, this alone is not enough. The United Nations Environment Programme estimates that greenhouse gas emissions need to fall by just over 7.5% every year from 2020 to 2030 to keep temperature rises to less than 1.5°C.

According to a recent paper by economists Cameron Hepburn, Brian O’Callaghan, Nicholas Stern, Joseph Stiglitz and Dimitri Zenghelis, the biggest factor of the long-term influence of the pandemic on climate change will be through fiscal recovery packages. Unless governments intervene, greenhouse gas emissions are likely to rebound once national lockdowns are lifted and economies begin to recover. According to the authors, several factors are relevant to the optimal design of economic recovery packages, including the long-run economic multiplier (the long-run impact on GDP growth), the speed of implementation, affordability, simplicity and the impact on inequality.

The authors highlight that a key objective of any recovery package is to restore confidence in the local economy, and to direct savings into productive investments. Without sufficient confidence in the economy’s ability to recover, businesses may continue to lay off workers, banks may rein in credit, and consumers may limit spending – all of which act as self-fulfilling in delivering a weaker economy.

Studies of fiscal responses after the Global Financial Crisis suggest that the success of fiscal stimulus packages are strongly affected by two features: the speed at which they deliver real-world impact (such as jobs created), and their return on investment. Importantly, “green” policies that have a positive impact on the climate are often attractive with regards to both these features. In the paper discussed above, the authors undertook an assessment of 196 stimulatory fiscal recovery policies implemented in response to the Global Financial Crisis, and found that green policies frequently trump traditional fiscal responses.

For example, renewable energy investment has been found to generate more jobs than fossil fuels in the short-run, with one model suggesting that every $1-million in spending generates 7.49 full-time jobs in renewables infrastructure but only 2.65 in fossil fuels. In the longer run, these green public investments could then offer high returns by driving down costs of the clean-energy transition.

Yet, some of these larger construction projects may take time to organise; as highlighted above, speed of implementation is also critical for the pandemic recovery packages. Rapid-response climate-friendly stimulus policies include residential energy efficiency retrofits (such as home insulation, heating, and energy storage systems), increased expenditure on education and training to address immediate unemployment, and nature-based solutions, including sustainable agriculture.

When considering South Africa’s fiscal response in the aftermath of the pandemic, I want to stress again that economic growth and decarbonisation are not mutually exclusive. In April, Hepburn et al (2020) surveyed 231 finance ministry officials, central bank officials, and economists to establish their views on coronavirus recovery packages. Respondents were asked to assess different policy responses with regards to their potential climate impact and long-run multiplier. Several policies were identified as having both a strongly positive impact on the climate, and a large long-run multiplier. These included connectivity infrastructure (for example, public transport infrastructure), education investment, and clean energy spending. Thus, there appeared to be widespread agreement that recovery policies can deliver both economic and climate goals.

The coronavirus pandemic represents (hopefully) a once-in-a-century shock to the global economy that has the potential to affect progress on climate change in important ways. As argued cogently by Hepburn et al (2020), the biggest factor of the long-term impact of the pandemic on climate change will be through fiscal recovery packages that manage to decouple economic growth from greenhouse gas emissions, and reduce inequalities that will be exacerbated by the pandemic in the short run and climate change in the long run.

Interestingly, and particularly relevant for South Africa, some of the worst-ranking policy options, with low long-run GDP impact and high adverse climate impacts, included unconditional airline bailouts, traditional transport infrastructure, and income tax cuts. In an innovative idea, O’Callaghan and Hepburn (2020) argue that, if airlines are to be bailed out, any bailout should include conditions that the airline reach net-zero carbon emissions by 2050; if airlines fail to meet these conditions, the bailout capital would be converted into equity so that the taxpayer owns a stake of the airline.

When considering South Africa’s response to the pandemic, there is another layer that cannot be forgotten. Any fiscal response needs to consider the distributional consequences on the population and should have the largest positive impact on the poorest families. South Africa’s national lockdown has had, and will continue to have, devastating economic effects on the poorest families. Furthermore, the implementation of the government’s promised Covid-19 relief grant has been grossly mishandled, with millions of qualifying individuals denied access to the grant. Therefore, to avoid further exacerbating inequities in the world’s most unequal country, any fiscal response needs to place the largest emphasis on putting money into the hands of the poorest.

Again, there is reason to believe that green recovery policies can be pro-poor. Firstly, as highlighted by Hepburn et al (2020), energy retrofits could be directed towards lower-income households, helping keep homes warm in winter and shrinking real electricity costs. Furthermore, new renewable energy infrastructure, such as improved solar panels, can be used to increase rural electrification, and large clean energy projects rely on largely unskilled labour for construction. Thus, green policies certainly have the potential to be pro-poor.

However, I acknowledge that this alone will not be enough – for starters, these measures often cannot provide relief to many in the informal sector. Increased government support through the Child Support Grant needs to be continued and increased as the lockdown eases. If the government decides to reduce the Child Support Grant back to its pre-coronavirus level as the lockdown eases, this would not only harm the livelihoods of many poor families, but also could lead to a self-fulfilling downturn in the economy as families lack spending power to stimulate demand.

The coronavirus pandemic represents (hopefully) a once-in-a-century shock to the global economy that has the potential to affect progress on climate change in important ways. As argued cogently by Hepburn et al (2020), the biggest factor of the long-term impact of the pandemic on climate change will be through fiscal recovery packages that manage to decouple economic growth from greenhouse gas emissions, and reduce inequalities that will be exacerbated by the pandemic in the short run and climate change in the long run.

South Africa needs to ensure that its recovery is focused on improving its contribution to climate change through policies such as clean infrastructure investment, energy retrofits, investment in education and training, and nature-based solutions. And it needs to do so in an equitable manner. We cannot afford to miss this opportunity – too much is at stake. DM

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