OECD – How sustainable will our recovery be?

According to new OECD data, OECD countries and key partner economies have so far allocated USD 336 billion to environmentally positive measures within their COVID-19 recovery packages.

But is this enough to have the transformational effects needed to address environmental crises while building back the economy?

Not really. In fact, it amounts to only 17 % of the total sums so far allocated to COVID-19 economic recovery. This means that 83 % of this funding either does not consider environmental dimensions or, worse, reverses progress on some of them.

Yet there is still scope for aligning green recovery rhetoric with the reality of expenditure plans.

If we are serious about transitioning towards a low-carbon economy, we are going to have to do better than this.

To green or not to green?

The OECD Green Recovery Database also shows that the USD 336 billion allocated to environmentally positive recovery measures is close to evenly matched by non-green measures (those with negative or “mixed” environmental impacts), for those measures that have a monetary value.

But this proportion does not imply that the green measures therein are sufficient to enable transformation towards long-term climate and environmental objectives.

Especially given that the billions allocated to green investment may be counteracted by ongoing support to environmentally harmful activities.

What’s more, the remaining two thirds of recovery spending that has not yet been categorised as environmentally impactful cannot be considered environmentally benign.

Tracking progress

The database focuses on measures related to COVID-19 economic recovery efforts with clear positive, negative or “mixed” environmental impacts across one or several environmental categories.

The OECD Green Recovery Database also shows that the USD 336 billion allocated to environmentally positive recovery measures is close to evenly matched by non-green measures (those with negative or “mixed” environmental impacts), for those measures that have a monetary value.

But this proportion does not imply that the green measures therein are sufficient to enable transformation towards long-term climate and environmental objectives.

Especially given that the billions allocated to green investment may be counteracted by ongoing support to environmentally harmful activities.

What’s more, the remaining two thirds of recovery spending that has not yet been categorised as environmentally impactful cannot be considered environmentally benign.

Environmental impact of COVID-19 recovery measures by country

The impact of policies on the environment is illustrated by the following colours: positive, negative, or mixed impact.

Where the money is going

The bulk of green measures represents grants or loans (making up around 37 % of the 680 measures in the database), tax reductions or other subsidies (17 % of the total), and regulatory changes at around 11 %.

More than 60 % of green measures are sector-specific (slide 2) and, in terms of number of measures and funding, they target, by far, energy and surface transport (comprising around 20 % and 16 % of the total respectively).

This is good news since these sectors account for a high proportion of GHG emissions in many countries, and are often good candidates for quick roll-outs (e.g. renewable electricity projects and electric vehicle infrastructure).

On the other hand, measures for key sectors like aviation and industry show overwhelming balance towards mixed and negative categories.

Climate change mitigation is by far the most common environmental dimension impacted by the recovery measures tracked (nearly 90% of funding), both positively and negatively, and about equally split (slide 3). In synergy with climate measures, the next most common dimension impacted is air pollution (with around a third of total funding, again evenly split).

In contrast, other environmental dimensions feature much less strongly. Biodiversity accounts for less than 10% of the allocated funding. Water is also poorly represented, accounting for around 8% of positive measures in both funding and measures. And waste and recycling are hardly represented at all.

What can governments do?

For one thing, we need to walk the talk. Green recovery measures are still a small component of total COVID-19 spending (only 2% of the USD 14 billion rescue and recovery spending combined) and significant funds are still allocated to measures with likely environmentally negative impacts.

For another, we need to align across policies and sectors, and over time. The uneven spread of measures across sectors points to missed opportunities in this respect, which could help drive sustainability and transformation in key sectors, such as agriculture, waste management and forestry.

Finally, we need to invest in skills and innovation. The relatively few measures focused on skills training and on innovation point to an opportunity to direct more attention to measures that can drive sustainable job creation, notably in industries likely to be negatively affected, to ensure a “just transition”.

How can we speed the transition to a low-emissions economy?

Through a green recovery, governments have the opportunity to unleash innovation, undertake wider reaching and fundamental restructuring of critical sectors, accelerate existing environmental plans, and make use of environmentally sustainable project pipelines. The current outlook for a period of relatively low oil prices also offers an ideal opportunity to scale up carbon pricing and reform fossil fuel subsidies. Delivering a green recovery is vital for tackling the urgent and interconnected challenges of climate change and biodiversity loss.

Initial analysis suggests that governments have so far concentrated their green measures in the energy and surface-transport sectors. But other sectors – such as industry, agriculture, forestry and waste management – are equally important for a green and resilient recovery.

Which countries are committing to carbon pricing?

Decarbonisation keeps climate change in check and contributes to cleaner air and water. Countries can price CO2-emissions to decarbonise their economies and steer them along a carbon-neutral growth path. But are countries using this tool to its full potential?

This map indicates the carbon pricing of CO2 emissions from energy use in 42 OECD and G20 countries, covering 80% of world emissions. It shows that only 10 of the countries were pricing carbon at even half the EUR 60 per tonne benchmark (bright green on the map), which is a mid-range estimate of the real cost of CO2 emissions for 2020 and a low-end estimate for 2030. If a country does not price any carbon emissions from energy use, it is shown in dark brown in the map.

It is estimated that an increase in the effective carbon rate of EUR 1 per tonne of CO2 leads on average to a 0.73% reduction in emissions over time. Increasing the price of fuels that are high in carbon can encourage energy users to go for low or zero-carbon options. A commitment to carbon prices also creates certainty for investors that it pays to invest in low-carbon technologies.

How can we invest in green infrastructure?

Leveraging investment for infrastructure is a critical pillar of the low-carbon transition. Around USD 6.3 trillion of annual investment is needed until 2030 in energy, transport, water and telecommunications infrastructure, to sustain growth and increase well-being.

In recent years, trillions of dollars in capital have flowed into investments that are assessed using environmental, social and governance (ESG) criteria.

ESG criteria have helped raise awareness and strengthen corporate and investor commitments, but more work is urgently needed to ensure that ESG ratings are fit for purpose. Today’s ESG markets contain a huge variety – and at times divergence – in methodologies, performance metrics and product structures. There is still much to be done to make ESG investing fairer, more transparent and more efficient.

The COVID-19 pandemic highlights the urgent need to consider resilience in finance – not just in the financial system itself, but the role of capital and investors in making economic and social systems more dynamic and able to withstand external shocks. These include risks associated with climate change, which, beyond the pandemic, are perhaps the most pressing challenges to financial stability and resilience.

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