Macro-economic impacts of the COVID-19 pandemic and green recovery packages
Authors: K. Fragkiadakis, P. Fragkos, J.-F. Mercure and Y. Simsek
Key research insights
The COVID-19 pandemic has led to the worst economic downturn of the last decades with profound implications on employment, trade, investment and sectoral demand. The economic downturn is mostly caused by precautionary measures to contain the spread of the virus, which reduce aggregate demand for goods and services and – to a smaller degree – limit production possibilities, due to reduced working times, child-care and supply chain interruptions. To curb the economic slowdown and address environmental concerns, politicians and economists are advocating climate friendly policy initiatives as an integrated governmental response to recover from the pandemic. Governments worldwide adopt large stimulus packages as a response to the COVID-19 crisis, with $3.5 trillion dedicated to climate protections in the agriculture, industry, energy and transport sectors (Vivid Economics, 2020).
This analysis uses two well-established macro-economic models (GEM-E3-FIT and E3ME-FTT), which are based on two different schools of economic thought, i.e. Neo-classical vs post-Keynesian, and assesses the macro-economic, employment and emission impacts of green recovery options, in particular supporting the increased deployment of renewable energy and electric vehicles by comparing three alternative scenarios: Reference, COVID and Green Recovery Scenarios.
According to the model results, the implementation of green recovery packages boosts growth worldwide triggered by increased low-carbon investment, offering strong economic development with global GDP increasing by 2.2% in 2025 and 1.7% in 2030 with long lasting impacts mostly due to the accelerated learning-by-doing of low-carbon technologies. The global economy benefits from improved productivity of workers and capital enabled by investment in new infrastructure, like electricity grids and energy‐efficient buildings. Green recovery packages would create about 20 million new jobs over 2025-2050 mostly in the construction sector (triggered by the increased installation of renewable technologies and retrofitting of buildings) and in the manufacturing of electric vehicles and batteries, while other economic sectors would indirectly benefit from the cascade effects through inter-industrial relations captured by the models. Emissions in all economies are likely to be lower in 2030 compared to the pre-COVID scenarios, but this is not enough to ensure the transition to net zero emissions by mid-century as this is not the result of structural changes or stronger decarbonisation policy efforts.
The assessment of economic impacts of COVID-19 and the green recovery packages is subject to deep uncertainty. It is clear though that the pandemic and the general lockdowns have negative impacts on jobs, incomes, businesses and economic activity. However, green recovery packages can stimulate economic growth through increased investment and productivity and may also lead to structural changes in the economy through increased participation of clean energy industries and reduced production of fossil fuel supply sectors, which are more vulnerable to crises. The model-based analysis shows that the Green Recovery packages would increase EU GDP by about 2% by 2030 in both models (Figure 1- right), as investment in new infrastructure, like electricity grids and buildings, improve the overall productivity of the European economy. The increased GDP growth may lead to a “rebound” in emissions, if not combined with ambitious climate policies at the European and national level. Green recovery packages can effectively close the emission gap in 2030 between current national policies with the cost-optimal mitigation pathways to well-below 2oC targets and to the ambitious EU Climate Plan target for 2030. The analysis shows that with Green Recovery measures, EU CO2 emissions would decline by 7-8% below Reference scenario, further reducing the gap with the 2030 European targets (Figure 1- right). However, they cannot deliver the long-term emission reductions compatible with the Paris goals, so a significant upscale of climate policy ambition is required after 2030 towards net-zero emissions by mid-century.
In conclusion, governments worldwide have a unique opportunity today to create new jobs, boost economic growth and reduce GHG emissions by investing in Green Recovery packages, but should also ensure that public spending and support is directed towards competitive firms, sectors and production factors. Ignoring this moment to scale up climate action would continue to lock many into high-carbon economies, and thus governments should seize this occasion by integrating climate change and clean energy transition at the core of their policy decisions. If governments fail on this challenge they steer into a situation with high emissions, low economic growth and excessive debt.
- NAVIGATE policy brief: Impacts-of-COVID-19-and-recovery-packages-on-climate-change-mitigation
- Vivid Economics. (2020). Greenness of stimulus Index—An assessment of COVID-19 stimulus by G20 countries in relation to climate action and biodiversity goals.