Towards a ‘green’ relaunch of the economy after the coronavirus?

Thinking about the post-Covid-19 scenario, the Government wants to resurrect the Moncloa Pacts and the south of the EU demands the mutualization of the debt to the north with the launch of coronabonds, in both cases without much success. In the EU, everyone agrees that the recovery of the economy after the pandemic should boost the fight against global warming – the leaders called at their last meeting for “an unprecedented investment” in green transition – but it seems difficult, if there is no agreement in the short term. At the moment, Spain has advanced the processing of the Climate Plan, linked to 241,000 million of investment, and Brussels has launched a public consultation to increase the EU’s climate objectives for 2030. Will it be enough? What is needed?

Macroeconomic analyses indicate that the pandemic will cause a reduction in global GDP of 4% in 2020, which in Spain can amount to 10% due to the productive structure, which is very dependent on tourism. To emerge from the economic debacle, states will apply a strategy in several phases, according to the experience accumulated on previous occasions, such as the crisis of 2008.

In a first phase, it will try to stabilize the situation, with urgent economic stimuli and liquidity that minimize the destruction of the productive fabric. This includes the package of 200,000 announced by the Executive of Pedro Sánchez -117,000 million will be public-, which sees the light with droppers, as well as other measures adopted by the EU institutions, such as the 25,000 million in guarantees of the EIB, the 750,000 million to buy public and private debt of the ECB, or the fund against unemployment of 100,000 million that the Commission has launched.

Once the lockdown is over, the economy will have to return to normal, and most likely fiscal stimulus and rescue packages will have to be applied for specific sectors – think aviation – and even entire countries, depending on how economies evolve. Virtually certain, states will have to launch massive investment plans – that’s why the Marshall Plan is now remembered – to generate jobs and revive the economy.

It is in this second phase where the mutualization of European debt – the so-called coronabonds – becomes important, because they would allow the southern states to borrow at less cost when it comes to financing their massive investment plans. However, Germany and the Netherlands have already said they do not agree to take that step, which is being discussed today at the Eurogroup meeting.

“Unprecedented investment”

Despite these disagreements, at the last meeting of the European Council – the meeting of the HEADS OF STATE AND GOVERNMENT OF THE EU – the dignitaries demanded, in the face of the coronavirus, “a coordinated exit strategy, a comprehensive recovery plan and an unprecedented investment”, where the green transition and digital transformation are the two key elements. And they called on the Commission and other EU institutions, such as the ECB, to work on a Roadmap to make it a reality.

The commitment to green to get out of the Covid-19 crisis is one of the current mantras of high politics; the problem of global warming has not disappeared and the UN to the IMF have influenced it recently, although it has been necessary to delay the next Climate Summit (COP 26) in the United Kingdom by one year, and this will slow down the materialization of the climate plans of the different countries.

However, the challenge is enormous. Continuing with the comparison with the crisis of 2008, at that time, according to data from the European Climate Foundation, investments considered green were around 16% of the total, with large differences between states: 80% in South Korea, about 60% in an EU -which allocated rather little-, a third in China and 12% in the US; most served to trigger the implementation of renewables and support employment-intensive energy efficiency formulas, such as the rehabilitation of buildings. This time, it should be far superior. Are we ready?

Spain advances the Climate Plan

Spain should have sent in January to Brussels the Integrated National Energy and Climate Plan (PINEC), the document with the country’s path to reduce its current CO2 emissions by a third in 2030, linked to an investment of 241,000 million, 20% of a public nature. The obligation to submit it to a strategic environmental assessment prevented it and it was not until last week when the Government sent it to the Commission, without waiting for the conclusion of the public information phase.

Greenpeace and other environmental associations were not amused by the advance, because they consider that the obligation to guarantee public participation has been evaded. Ignacio Sánchez Galán, the president of Iberdrola, on the other hand, considered that it was “a wise decision of the vice president for the Ecological Transition, so as not to delay its processing due to the administrative break”.

Galán thought of having the green light as soon as possible to mobilize the resources linked to the PNIEC, and materialize as soon as possible its impact on the economy: an increase in GDP of 1.8% and the creation of 250,000 to 350,000 net jobs, among other positive effects, such as a reduction in mortality caused by pollution of 27%.

The EU wants to increase its environmental ambition

In parallel, also last week, Brussels launched a public consultation to increase the ambition of the EU’s 2030 climate targets, from a 40% reduction in its CO2 emissions to a range of 50% to 55%. It was scheduled to be included in the brand new European Climate Law, now in process, but in the end it was not so.

The consultation, open until June 23, is part of the battery of arguments and social support that the EU Executive of Ursula Von del Layen wants to provide to increase the EU’s climate ambition; not in vain did he promise a greener Europe -a European Green Deal-, with an investment of one trillion euros until 2030, to get the support of the European Parliament to his appointment, but he has collided with the skepticism of several community partners when it comes to transforming the promise into legislation and seeks formulas to overcome their reluctance.

However, the european Green Deal requires resources. And they do not seem to abound in the EU at the moment.

The first option, because of its volume, is the MULTIANNUAL EU Budget. For the next period, between 2021 and 2027, the Commission wants to increase the proportion allocated to the climate from the current 20% to 25% and at the moment its economic endowment is being discussed, with a new distribution of the contributions for the departure of the United Kingdom; the initial proposal is for it to represent 1.07% of the EU-27’s gross national income, some €1.087 trillion between 2021 and 2027. After the corresponding battle between those who want it to be reduced and what they want to increase it, the logical thing is that there ends up being about 250,000 million for green policies.

Part of these funds will have to go into a Just Transition Fund, intended for the regions most affected by the greening of the economy, such as the mining basins. At the moment it has been proposed that 7,500 million will fall here, of which Spain would receive 376 million net.

Another option is the collection of the CO2 Emission Allowances Market (ETS) during the period between 2021 and 2030. According to the calculations of the European Roundtable on Climate Change and Sustainable Transition (ERCST), with the prices before the collapse, of about 25 euros per ton – with the successive states of alarm in the EU is at 18 euros – would raise about 27,000 million for the modernization funds (16,500 million) and innovation (11,250 million).

The European Investment Bank (EIB) will also do its bit. It has announced a change in its policies, aligning all its loans with the principles and goals of the Paris Agreement as of January 1, 2021 and has announced that it will allocate one trillion euros in guarantees until 2030 for the decarbonization of the economy.

Extraordinary plan for the ‘European Green Deal’

Von del Layen, however, has already outlined how he wants to get the trillion euros with which to materialize his European Green Deal, starting from the three tools mentioned, Community Budget, ETS and EIB, which would have to be increased to reach the desired amount: the Budget would contribute 503,000 million -double the presumable between 2021 and 2027-, the ETS about 25,000 million and the EIB guarantees for 279,000 million; in addition, the states would convert 114,000 million from the cohesion funds – included in the Budget – into guarantees to channel more private investment.

All these amounts, being huge, seem small if with them even if it is only intended to achieve the current climate objective of the EU, to reduce its CO2 emissions by 40%, not 50% or 55% of the new target set. With rough calculations, it takes 500 billion a year, or about five trillion over the decade, about five times more than promised.

One of the reasons for the EU’s refusal to include the increase of the current 40% target with the Climate Law was precisely to better understand the costs and benefits of the measure.

We will see what everything is left of when the lockdowns are lifted and we have to get down to work; what is undeniable is that a lot of employment is generated with the rehabilitation of buildings and with the installation of solar panels.

Source: The Economist