How to get out of the Covid-19 crisis by decarbonization

The COVID-19 crisis it won’t help the environment too much nor to alleviate climate change: emission reduction is negligible (partly because of its non-permanent nature) compared to what we really have to do to keep global warming to an acceptable level.

Also, we must be careful how we get out of the crisis. Some elements can contribute to us not getting it in the right direction.

Factors that incite to take the wrong path

Oil prices have gone down to ridiculous levels: no demand and there is no place to store it anymore. These conditions weaken the motivation to replace it with more sustainable fuels.

CO₂ prices also fell a lot due to the economic slowdown. As in the case of oil, it is a normal trend: as economic activity slows, emissions are reduced. Therefore, the need to have permits to issue also decreases.


However, in this case there is a storage system incorporated into the European emissions market: the banking. There is the possibility to save permits (or to buy them now) to use them later, when they are more expensive. This, which some might consider undesirable speculation, is very positive. It allows to stabilize the price of permits and reduce the cost of reaching a certain level of contamination.

By buying permits now, the price of CO₂ goes up. In the future, when (hopefully) economic activity recovers, the price of issuing will be lower than it would have been without banking. The amount issued will be the same, but the cost and, therefore, the economic impact, will be less. The banking it has already been launched, and therefore prices have recovered to levels close to those they were before the crisis.

Finally, there is the temptation to prioritize economic recovery and postpone or even temporarily suspend environmental measures due to their possible negative short-term consequences for the economy. Some of Trump’s proposals, for example, they seem to go in this direction. This risk is even greater given the threat that populisms and nationalisms will grow with the crisis.

Understand the crisis as an opportunity

Under these conditions, has arisen a debate very appropriate on how to turn this crisis into an opportunity. By correctly directing the money flows that are going to be mobilized to recover the activity, it is possible to create a more sustainable economy.

It is not a simple matter. Just as many try to defend the the status quo With the excuse of economic recovery (airlines, oil companies, etc.), there is a risk of misappropriating this opportunity. May become simply a revenue extraction benefiting some agents with green business at the expense of the consumer or taxpayer. In this way, a change in the economic model towards a less consumerist and more sustainable one would not be promoted. That is why it is important that this debate be serious and rigorous.

How to use relief and rebuilding funds

To correctly channel public aid, two phases could be distinguished: one focused on avoiding the collapse of the economy and another in which we begin to rebuild.

In the first phase there should not be many prior restrictions. The important thing is that the money reaches those who need it as soon as possible: families and companies. This does not mean that we should wash our hands about how that money is used: we have to try to prevent it from being used for the wrong purposes.

For example, counterparts could be requested from the companies that receive it: asking them in exchange for a future strategy aligned or compatible with decarbonisation.

Now, you have to be careful not to ask for the impossible. It would be unrealistic, for example, to think that we should save the airlines only if they commit to reducing their emissions from today to tomorrow. This is technically impossible. Nor does it seem to make much sense to invest public money in saving industries that are not long to live in its current configuration.

But there are sectors where aid conditionality can be very effective. An example is the Tourism sector in Spain, with great potential to decarbonize and become more resilient with the necessary investments. Or the automotive sector, which must evolve towards an electrical paradigm.

In this first phase we could also take advantage of the drop in fuel prices or CO₂ to, although it seems counterintuitive, introduce that environmental taxation that we have been waiting for so long. This would prevent us from consuming more oil or more coal.

On the one hand, the drop in prices creates room to introduce taxes without consumers or companies noticing the blow. On the other hand, it allows obtaining public income instead of sending the rents to the countries that produce fossil fuels.

Finally, in cases in which public money (such as that of the European Central Bank) is directed to buy public debt, it could be required that, when that debt is used for investment, it should be done with sustainable criteria. For example, Peter Sweatman and Brook Riley encourage the European Central Bank to use part of its funds to buy debt from the European Investment Bank. East, in line with el Green Deal, has established environmentally demanding criteria for its financing.

Second phase: in which sectors do we invest?

When the health crisis passes, the stimulus phase of the economy can begin. At this stage, if we really want to move towards a sustainable economy, we must make sure that we finance investments and not expenses. And that investments are directed not only to physical capital, but also to human capital.

By now, we have learned some lessons: we need to invest more in public health and communication technologies so no one is left behind. All this with criteria of environmental and social sustainability, not just economic.

We will also have to invest to reduce our greenhouse gas emissions and decarbonize the energy sector. In addition, when we invest in efficiency or renewables we not only help decarbonisation, but, by its very definition, we create added value and reduce expenses, something very desirable.

The question is whether we should prioritize all investments in the energy sector and the fight against climate change. Health and education are also very important, even if you don’t make money. Even the infrastructures, if they contribute to greater sustainability (for example, with a more friendly urbanism). Here a calm public discussion is needed. Only well informed and not contaminated by external economic interests is it possible to establish priorities.

In addition, if the objective is to raise the national economy again, it is not enough to support economically to invest in renewable or efficiency equipment. These may not occur in Spain and may not contribute as much as necessary to the creation of employment, income, competitiveness and knowledge. To really lift the national economy, it is necessary to invest wisely in those sectors in which we are competitive and which, therefore, generate national income. And also in which we can be.

For example, according to this recent study, Spain seems to have the potential to be competitive in green technologies, due to the type of products it already exports. But it can also be in other sectors such as biosanitary, or in education.

A smart industrial policy

Smart industrial policy must play a key role. As Rodrik reminds us, is essential to achieve green and sustainable growth (because the many associated externalities make it impossible for it to occur alone).

Furthermore, unlike other policies whose sole objective is protectionism, this one has global benefits. Its essential characteristics are:

  • That there are institutions that allow collaboration between the state and private agents.

  • That the aid is conditional on good performance and not subject to crony capitalism … and therefore be rigorously evaluated.

  • That there is transparency and accountability.

The need for public investment can also be an opportunity to integrate some of the Mazzucato’s ideas: for the state not only to provide funds, but to become a partner in investments to also benefit if things go well (and not only pay if they go bad).

Of course, as public funds are limited, the conditions should be created so that the private sector also helps the recovery in the desired direction. For this we need clear frameworks that give adequate and stable signals. In the energy-environmental case, the framework is already ready, in part: the European Green Deal and the national energy and climate plans (PNIEC). But the clear signals and that smart industrial policy are still lacking.

In any case, to advance in this direction, revolutionary changes are not necessary. In fact, arguing about these revolutions can waste a lot of time. When it comes to sustainable energy investment, we already have many of the necessary instruments. We only need the political will to implement them.

Pedro Linares placeholder image, Professor of Industrial Organization at the ICAI School of Engineering, Comillas Pontifical University

This article was originally published on The Conversation. read the original.

Leave a Comment