Lessons from the last recovery for this recovery

Building back to business-as-usual will reignite GHGs and represent a tragic missed opportunity.

Newspaper headline of 2008 financial crash

Governments looking to stimulate their economies to recover from the COVID-19 pandemic should heed a lesson from the financial crisis a decade ago: building back to business-as-usual will reignite greenhouse gas emissions growth and represent a tragic missed opportunity to align economies with clean growth trends.

GHG emissions are expected to decline by 8% in 2020, down to 2010 levels, the Organisation for Economic Co-operation and Development said in a September report. However, unless governments impose a strict climate lens on their recovery programs, the GHG reductions will likely be short-lived and growth will resume at an even-quicker pace, said the Paris-based organization that provides policy advice to developed nations.

Stimulus programs around the world have governments preparing to open the fiscal floodgates to support citizens and businesses hammered by the pandemic’s impacts, all while reviving their economies. The European Union and its member states are leading the way on green recovery plans as they announce initiatives worth hundreds of billions of euros to support clean energy; low- and zero-carbon transportation, buildings and infrastructure; and innovative technology companies that provide long-term economic and environmental benefits.

European governments are looking to leverage the pandemic recovery to drive widespread adoption of solutions to critical problems that existed before COVID-19 struck and will be with us long after it becomes a painful memory.

“We’re not going to get out of the current crisis just by giving people social benefits,” Sabine Sparwasser, Germany’s ambassador to Canada, said in an interview. “We need to invest in new technology in order to address the other crisis that is out there and is even bigger: climate change.”

The German government – which has announced a €130 billion green recovery plan – is partnering with Corporate Knights on a series of virtual roundtables this fall to address  how the international community can work together to build back an economy that is more efficient, more inclusive and greener.

In its speech from the throne on September 23, the minority Liberal government said that climate action will be the “cornerstone” of its recovery plan, with the aim of creating one million jobs. The Liberals have not put dollar figures on their proposed stimulus package but said in the throne speech that they will reveal those details in a financial statement this fall.

Parallels between the global financial crisis and the current economic slump are limited but can yield important lessons. The causes of the downturns differed greatly, as did the impacts and the sense of urgency around the climate crisis.

The 2009 recession hit heavy industry and construction particularly hard, prompting talk of a “he-cession,” while the current crisis has been particularly difficult for female-dominated sectors, such as hospitality, restaurants and traditional retail, while playing havoc with parents’ ability to keep children in school so that they can focus on work.

As well, in the intervening years, governments made commitments on emissions-reduction targets under the 2015 Paris climate accord and are due to strengthen those commitments this year.

“The fear is that because the economy has been so down, we will want recovery at any price,” said France’s ambassador to Canada, Kareen Rispal.

France has announced a €100 billion recovery plan focused on areas like clean transportation and energy efficiency. That comes on top of €130 billion the government had provided to support individuals and businesses hit by lockdowns and the economic fallout of the pandemic.

Rispal said the world cannot afford a repeat of the 2009/2010 scenario, when emissions rose dramatically as the global economy rebounded from the deep slump. “We shouldn’t sacrifice the environment because we want this economy recovery. But we think we can do both.”

The experience from 2009 and 2010 indicates the dangers of building back business-as-usual.

As the financial crisis precipitated the deepest – at that time – recession since the Great Depression, emissions declined in 2009, falling by 1.4% globally and 7.6% in the developed world. In 2010 – despite some green stimulus policies in Europe, the United States and South Korea – emissions growth roared back, with GHGs rising 5.9% per cent, the fastest rate in nearly a decade, according to a report from the University of Oxford’s Smith School of Enterprise and the Environment (SSEE).

Economist Don Drummond said there was a sense of panic in 2009, as the financial system teetered on the brink of collapse. While the current economic crisis is painful, the damage is more focused on specific sectors where short-term assistance can be provided. He said the evidence shows there’s a firm economic imperative to consider climate change – the physical costs, social implications and how it’s reshaping global markets – in the economic recovery equation.

Governments can then put in place stimulus policies that not only revive overall demand but target problems that existed prior to the pandemic, including poor productivity and income growth, inequality and the climate crisis, Drummond said.

In a recent analysis from SSEE, a group of prominent economists that includes Joseph Stiglitz and Nicholas Stern argued that evidence from the 2009 slump showed that the investments in a green recovery outperformed traditional stimulus programs, in both short- and long-term results. Support for renewable energy development and energy efficiency in buildings, in particular, quickly put people back to work while providing longer-term dividends related to productivity gains and environmental benefits, they said.

One of the most successful 2009/2010 programs was the U.S. Department of Energy’s loans to emerging clean-technology companies. Critics panned the program when one of its major beneficiaries, Solyndra LLP, a solar panel manufacturer in California, failed in 2011 after receiving a US$535 million loan.

However, that loan program is also credited with allowing Tesla to rapidly expand and challenge the traditional auto industry, whose members are all now developing electric vehicles. It also financed large-scale solar and wind projects, which allowed the industry to lower its costs. Wind and solar projects now often have lower costs than fossil-fuel electricity generation for new power facilities.

Decisive government intervention is required, the SSEE economists concluded, to address climate change “by tipping energy and industrial systems towards newer, cleaner, and ultimately cheaper modes of production that become impossible [for fossil-fuel-based producers] to outcompete.”

For an in-depth discussion with expert commentators, register for Wednesday’s roundtable.

Shawn McCarthy writes on sustainable finance and climate for Corporate Knights. He is also senior counsel for Sussex Strategy Group.

With the support of the Embassy of the Federal Republic of Germany in Canada.

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