Smoke from a cement factory in Derbyshire, U.K.
Credit: John Finney Photography via Getty Images
Many of the world's largest countries are lagging in the effort to use COVID-19 stimulus spending to accelerate the shift toward a more sustainable global economy, whether it is to tackle climate change more aggressively, cut pollution or safeguard the world's rainforests and oceans, new research suggests.
The pandemic delivered a massive shock that prompted the richest countries to unleash trillions of dollars' worth of fiscal stimulus spending on an emergency basis to help seed a rapid economic recovery. The sheer size of the spending was also said to offer a golden opportunity to dramatically boost investment in climate change and biodiversity projects. However, an analysis of the G20 countries and a further 10 national economies published last week shows that of the total $14.9 trillion in stimulus announced so far, $4.6 trillion is being spent on "environmentally intensive" sectors that tend to have a negative impact on climate, biodiversity or local air quality, such as agriculture, energy and transport. Meanwhile, less than $1.8 trillion of the stimulus spending has been "green."
Listen to the latest episode of S&P Global's ESG Insider podcast to hear more about how "green" global stimulus spending has been. Listen on SoundCloud, Spotify or Apple podcasts.
In the early summer months of 2020 "the 'build back better' mantra got started," said Jason Eis, executive director of U.K. think tank Vivid Economics that performed the analysis along with the Finance for Biodiversity Initiative. "The idea was that if we're going to build back the economy, let's make it look as we'd like it to look in the long term" when it comes to sustainable production and consumption.
Even with the promise of stimulus dollars, it will be a challenge because key areas of the "green economy" have also been hit hard by the pandemic. In December 2020, the number of clean energy jobs was 12% lower than a year earlier, translating to about 450,000 jobs lost, according to a Feb. 4 report by New York-based research firm Rhodium Group. Most of the lost jobs were in the energy efficiency sector, such as solar and wind power.
And there have been other setbacks in the fight against climate change. For example, while CO2 emissions dropped sharply in the early days of the pandemic, they have bounced back since the second half of 2020 as a global economic recovery took hold.
"In our tracking of stimulus spending in 2020 for the EU, U.S., China and India, we found that each major economy has taken a different approach to handling the economic fallout of the COVID-19 crisis," said Kate Larsen, director of the energy and climate practice at Rhodium, in emailed responses to questions. "However only the EU committed a meaningful amount of its spending to green measures. Across the EU and its member states, green stimulus spending made up about 15% of the total share, compared to around 1% or less for the U.S., China and India. In some member states, like France, the green share was even higher."
In absolute terms, the EU and its member states have together committed $238 billion to green measures, compared to $40 billion for the U.S., $1.4 billion for China and $900 million for India.
One reason that the EU's share is so high is that most of its stimulus spending came from "automatic stabilizers" that covered direct income support to households and direct financial assistance to private companies affected by the lockdowns. This freed up the EU to direct more funds toward the green economy. In the U.S., by contrast, congressional debates in the spring and fall of 2020 tried to limit the price tag of emergency spending. It meant that "green measures were pushed off the table as they were unable to compete with more immediate needs like unemployment insurance and cash for households and small businesses," Larsen added.
In summer 2020, EU leaders agreed to a package of €1.82 trillion as part of its COVID-19 recovery plan and its budget for the next seven years. It targeted 30% of that money at climate-related projects. "It is the first time...in European history, that our budget will be clearly linked to our climate objectives," European Council President Charles Michel said July 21, 2020, when announcing details of the deal.
While pandemic-related stimulus measures are continuing to have a net negative environmental impact, there are reasons for optimism. Between December 2020 and February 2021, 17 countries improved their score in Vivid's "greenness of stimulus index," or GSI. The U.S. saw the largest increase of all, with a score that rose 36 points.
The U.S. improvement partly reflects the $900 billion stimulus bill President Donald Trump signed in December 2020, which included money for clean energy and public transit. The U.S. score got an even bigger boost after President Joe Biden signed an executive order in January that significantly amped up action on climate change across a broad swath of industries. However, the Biden administration's current $1.9 trillion stimulus plan making its way through Congress is expected to have only a modest positive impact on the U.S. score, as most of the funds are aimed at traditional "brown" industries.
Biden has a far more ambitious proposal in the works — the $1.7 trillion "Climate Plan for Clean Energy and Environmental Justice." Strictly speaking, that plan isn't short-term "stimulus spending" but a more specialized multiyear project. Nonetheless, if implemented, it would propel the U.S. ahead of every other major economy on the GSI and place it on par with Europe.
A complicating factor in the U.S. is the role of the Federal Reserve's asset buying program to help businesses recover. According to Vivid Economics, the Fed purchased about $587 billion in corporate bonds, or one-tenth of all such transactions, from companies identified as big CO2 emitters, large plastic polluters and those contributing to the deforestation of tropical forests.
"When the Fed buys corporate bonds they are reinforcing the credit-worthiness of companies by helping to keep their cost of capital low," said Eis of Vivid Economics. "By buying this corporate debt without fully understanding and incorporating these environmental risks, the Federal Reserve is essentially mispricing those assets and encouraging the market to misprice those assets as well."