The economic response to COVID-19 is unprecedented and spending in the ongoing phase of reconstruction will have a major impact on the greenhouse gas emission trajectory of the next decade. Recovery plans need to be designed wisely.

Firstly, there will not be many other ‘boosts’ like this one in future (as countries will have to go back to keep public debt under control).

Secondly, the injection of huge amounts of cash may have negative effects (like inflation). Unfortunately, so far, much of the stimulus has gone to traditional, polluting sectors. As a result, a sharp emission rebound is already being recorded in the first half of 2021, just like there was an emission rebound after the 2008–9 global financial crisis.

Yet the time is indeed propitious for “building back better” and for decoupling economic growth from energy demand and carbon emissions. Decoupling is key if we want to cut emissions by 7% every year between now and 2030, which is what we need for a net-zero-by-mid-century trajectory. The good news is that “green growth” is achievable as there are some hopeful signs. In the year of the pandemic, for instance, renewable energy consumption continued to grow despite falling energy demand. Renewables have been experienced as a safe haven by the financial sector in the face of extreme volatility in the commodity market.

Fighting global warming

Also, fighting global warming has a solid economic rationale. First, because the costs of climate inaction are estimated to be extremely high. A report by Morgan Stanley has shown that the cost of natural disasters provoked by climate change amounted to 650 billion US dollars between 2016 and 2018. Moreover, an estimate by the UN Environmental Programme has found that the cost of adapting to the consequences of climate change will grow to 140–300 billion US dollars per year by 2030 and 280–500 billion per year by 2050 globally. Finally, a recent study on the costs of historical inaction on climate change estimates that there will be an increase in costs from climate damage if mitigation is postponed, with a median increase of 600 billion US dollars in discounted future damage per year of delayed mitigation (taking 2020 as point of departure).

It is important to stress that such negative economic consequences of climate change are not equally distributed across the world. Unsurprisingly, today’s most fragile economies already are and are going to be the most vulnerable to climate change. Climate change will reduce global GDP by 3 percent by mid-century. Africa will be most severely hit, as it is estimated to lose 4.7 per cent of its GDP by 2050 as a result of climate change. The lack of high-quality infrastructure and stronger economic dependence on ecosystems (as the share of subsistence farming in GDP is higher) aggravate the economic damage of climate change in less developed countries. Promoting green growth is therefore also a matter of fairness among nations.

Economic implications

Furthermore, many studies show the economic benefits of investing in low-carbon technologies and infrastructure. A huge caveat is that these studies rest on more or less bold assumptions and have partial geographical or sectoral coverage. For these reasons, a solid consensus has not been reached on whether spending on low-carbon technologies offer better returns, although institutions like the Organisation for Economic Cooperation and Development (OECD) and the International Monetary Fund seem increasingly supportive of green growth.

In light of this, the International Energy Agency has advised governments to favour shovel-ready projects in the wake of the pandemic to restart the economy while building future-proof infrastructure that would limit mitigation costs to be incurred later. Projects of this kind notably include building retrofitting but also the installation of new renewable energy capacity. These activities have the advantage of creating jobs during the most critical years. Green construction projects are also less susceptible to offshoring, which plays well with governments given the increasingly pervasive objective of gaining strategic autonomy.

An important task of policy-makers when implementing green growth strategies is to reduce uncertainty for investors. Public money alone is not enough and private players need to be brought on board. Ideally, the primary role of public support would be that of mobilising substantial private investment that would have not been mobilised otherwise. Reducing uncertainty for private investors is done for instance by avoiding undoing climate policies and regulations (the so-called “do-no-harm” principle, which is indeed embedded in Next Generation EU) and by providing long-term carbon price signals.

International cooperation and coordination are essential to sustain a shift to a green growth paradigm.

The G20 forum is in an ideal position to facilitate constructive dialogue among advanced and emerging economies about re-orienting investment and fiscal action along this pattern. In particular, to promote a green recovery, the Italian Presidency of the G20 should:

1. Advance the multilateral agenda in support of net-zero investments.

1. Promote a standardisation of green finance mechanisms and practices through shared reporting procedures and indicators for all asset classes.

1. Promote the standardisation of the socio-environmental metrics and evaluation processes that are being used by different financial institutions to create a unified environmental, social and governance (ESG) risk matrix for infrastructure projects.

1. Promote innovative financing mechanisms for sustainable infrastructure. For example, the development of Sustainable Development Bond (SDB) markets could help in providing new funds to finance sustainable projects.

1. Support a shared framework to establish Green Banks, defined by the OECD as public-private entities that promote investments in sustainable and climate resilient infrastructure.

1. Advance the standardisation and transparency of data associated to an infrastructure project.

This article is a summary of the "Opportunities for Green Growth: In Search of Multilateral Coordination" report of the Instituto Affari Internazionali, co-authored by Nicola Bilotta.

To read the full report, as well as the bibliography, please click here.

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