Blog Post

A green recovery

Government policy faces various challenges. Before the COVID-19 outbreak, the European Union set ambitious targets to reduce carbon emissions. Now in the midst of the pandemic, the EU has temporarily lifted state-aid rules allowing governments to steer companies through the crisis and to minimise job losses using public money. This column suggests combining these policies by attaching green conditions to state aid. In that way, we can aim for a green recovery.

By: Date: April 6, 2020 Topic: Energy & Climate

Governments have multiple goals including economic growth, social inclusion and environmental preservation (Schoenmaker, 2020). The COVID-19 pandemic has had a sharp negative impact on the economic and social fronts (deteriorating health, reduced income and job losses). By contrast, environmental performance is ironically improving, as carbon emissions and materials use decline because of reduced production and transport during the COVID-19 lockdowns. Nevertheless, the pre-crisis levels of environmental degradation are likely to return when the lockdowns are lifted and economic growth resumes.

But it doesn’t have to be this way. Governments, in particular in Europe with the Green Deal, have been working on the energy and circular transition in the medium term. By attaching green conditions when granting state aid and guarantees during the COVID-19 crisis, governments could push companies to accelerate the adoption of low-carbon and circular technologies after the crisis is over, and thus aim for a green recovery.

The European Commission (2020a) has temporarily lifted state-aid control rules to ensure that the disruptions caused by the COVID-19 pandemic do not undermine the economic viability of companies. State aid can take the form of wage subsidies, tax and social contributions relief, financial support, and loans and guarantees via banks. By limiting unnecessary company failures and job losses, the Commission aims rightly for a swift economic recovery after the COVID-19 pandemic is ended. Meanwhile, several countries have pledged large state-aid packages to steer companies through the COVID-19 crisis.

Green state aid

Both economic and environmental viability are important for companies’ survival in the long run. Green conditions for companies that receive state aid will change their business models. It will also affect market outcomes. To allow the smooth functioning of the internal market, we suggest therefore that the Commission designs and monitors green conditions as part of their temporary framework for state aid measures during the COVID-19 pandemic (European Commission, 2020a).

The green conditions can be based on the Green Deal targets to reduce carbon emissions in 2030 by at least 50% and in 2050 by 100% (ie carbon neutrality), compared with 1990 (European Commission, 2019). In addition, new targets are set for the design of sustainable products and circular production processes to reduce the use of virgin materials in the new Circular Economy Action Plan (European Commission, 2020b). When granting state aid, governments should require companies to implement these reduction targets for carbon emissions and materials usage in their business models after the crisis. In this way, state aid expenditures will not only promote the economic viability of companies, but also their environmental viability. This will accelerate the adoption of low-carbon and circular technologies.

Companies are struggling for survival and need to receive the state aid quickly. To reduce the upfront administrative burden, governments can choose to apply a light green test when granting the state aid, combined with a tougher green test ex post. If a company breaches the agreed green conditions, the state aid would have to be partly or fully repaid, depending on the severity of the breach. We also propose to target key sectors that are carbon- and material-intensive to keep bureaucracy to a minimum.

The following sectors have relatively high carbon and material footprints (Schoenmaker and Schramade, 2019):

  • Transportation: road, air and water transport are predominantly fossil-fuel driven;
  • Manufacturing: many manufacturers still employ energy- and material-intensive technologies;
  • Construction: many builders still use non-recyclable and energy-intensive materials, such as cement;
  • Energy: the shift from fossil-fuels to renewable energy is very gradual.

Examples

An earlier example of state aid with green conditions was the support for the American car industry during the Global Financial Crisis. President Obama (2009) granted large sums of state aid to General Motors on the condition that the company accelerated the development of an electric car. General Motors now has several electric cars in its range.

Current examples include state aid to the severely affected airline and travel industries. Airlines could be requested to speed up investment in carbon-efficient aircraft after the crisis, while airline manufacturers could be requested to speed up the development of such carbon-efficient and carbon-neutral aircraft. Travel companies, such as TUI, which received 1.8 billion in state aid from Germany, could be asked to reduce their carbon footprints by 50% by 2030. They can achieve such reductions by offering their clients more carbon-efficient air travel and greater usage of train travel.

Banks can set similar green conditions when extending loans to their borrowers in these sectors (with or without public guarantee) during the COVID-19 crisis. The underlying arguments are the same: economically and environmentally viable companies carry a lower credit risk. Leading banks already have experience with applying green lending criteria (Schoenmaker and Schramade, 2019).

From old to new sectors

Some high-carbon companies and sectors might find it difficult to adapt to the new low-carbon and circular environment. These companies or sectors (such as the fossil-fuel sector) are reminiscent of the European textile and shipping sectors in the 1990s. These sectors received state aid, which only delayed their disappearance. To avoid repeating these mistakes, governments should not provide state aid or guarantees to sectors that are economically or environmentally not viable in the medium term.

In these cases, governments must use their resources to retrain the workers. While the kneejerk reaction of governments is often to help the business that is in trouble and/or to protect the jobs involved, it is better to focus on helping the people – retraining and finding new employment – and changing the system. The Danish labour market, for example, is known for its high level of flexibility when hiring, social welfare system and active employment policies. Together, these three components constitute what is known as the ‘Flexicurity Model’ (Jespersen et al, 2008).

There is also a direct role for governments themselves in sectors that rely heavily on public investment and/or planning procedures, including the energy, transport and building sectors. Birol (2020) proposed to speed up the energy transition by putting clean energy jobs at the heart of stimulus packages. Other opportunities would be to expand public transit systems, including a European network of high-speed trains, and stimulating circular construction practices, which also require newly trained workers. Retraining efforts can also be (partly) directed to these areas.

To speed up recovery after the Global Financial Crisis, several countries shortened planning procedures to advance large building and infrastructure projects. Accordingly, governments can speed up the planning and execution of renewable energy projects (both power generation and distribution), public transport projects (replacing road and air travel) and circular building projects.

Governments are rightly compiling state aid packages to promote a swift recovery after the COVID-19 pandemic is ended. Our four recommendations to foster a green recovery are:

  • Apply green conditions to state aid for companies in sectors with high carbon and/or material footprints;
  • Apply similar green conditions to new and extended bank loans (with or without public guarantees) to these sectors;
  • Refuse state aid for companies and sectors that are not able or willing to adopt low-carbon and circular technologies, and retrain their workers for new employment;
  • Speed up planning procedures for renewable energy, public transit and circular building projects and infrastructures.

References

Birol, F. (2020), ‘How to make the economic recovery from coronavirus an environmentally sustainable one’, Prospect, 24 March.

European Commission (2019), ‘The European Green Deal’, Communication from the Commission to the European Parliament and the European Council, COM(2019) 640 final, Brussels.

European Commission (2020a), ‘Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak’, Communication from the Commission, COM(2020) 1863 final, Brussels.

European Commission (2020b), ‘A new Circular Economy Action Plan For a cleaner and more competitive Europe’, Communication from the Commission, COM(2020) 98 final, Brussels.

Jespersen, S., J. Munch, and L. Skipper (2008), ‘Costs and benefits of Danish active labour market programmes’, Labour Economics, 15(5): 859-884.

Obama, B. (2009), ‘Remarks by the President on the American Automotive Industry’, Transcript of Press Conference, 30 March, Washington DC. Available at: https://obamawhitehouse.archives.gov/the-press-office/remarks-president-american-automotive-industry-33009.

Schoenmaker, D. and W. Schramade (2019), Principles of Sustainable Finance, Oxford University Press, Oxford.

Schoenmaker, D. (2020), ‘The Caring Economy: Balancing Profit and Impact’, Working Paper. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3567026


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article More on this topic More by this author
 

Opinion

The Challenges of the Post-Pandemic Agenda

This opinion piece has previously been published in Project Syndicate. PARIS – There is a growing possibility that the COVID-19 crisis will mark the end of the growth model born four decades ago with the Reagan-Thatcher revolution, China’s embrace of capitalism, and the demise of the Soviet Union. The pandemic has highlighted the vulnerability of […]

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 28, 2020
Read article More on this topic
 

Opinion

Can households in the European Union make ends meet?

Half the households surveyed by Eurostat see themselves as unable to find the resources they would need to cope with an unexpected expense within a month, estimated by experts at €375 in the case of Greece.

By: Maria Demertzis, Marta Domínguez-Jiménez and Annamaria Lusardi Topic: Finance & Financial Regulation Date: July 24, 2020
Read article
 

Blog Post

Is the EU Council agreement aligned with the Green Deal ambitions?

On 21 July, EU leaders agreed on a €1.8 trillion package that should boost the recovery after the COVID-19 crisis, but also contribute to the advancement of key EU societal objectives, starting with the climate transition. In this blog post we assess the green ambitions of the package and evaluate its consistency with the European Green Deal.

By: Grégory Claeys and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 23, 2020
Read article More on this topic More by this author
 

Blog Post

Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?

The European Commission’s original allocation mechanism really favoured lower-income countries and to a large extent was based on pre-COVID economic data. The modification adopted by the European Council gives more consideration to the country size and the adverse economic impact of COVID-19. As a consequence, by using the Commission’s May 2020 economic forecasts, I estimate that only Germany and France will get more grants from the EU’s recovery fund compared to the Commission’s original proposal, while other countries will get less.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 23, 2020
Read article More on this topic
 

Blog Post

Government-guaranteed bank lending: beyond the headline numbers

Loan guarantees have been a major part of the COVID-19 support packages offered by European governments to companies. The actual take-up numbers so far follow very different patterns from the headline announcements, and might allay early concerns about single market distortions caused by the different sizes of packages in different countries.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Date: July 14, 2020
Read article Download PDF
 

Policy Brief

Greening the recovery by greening the fiscal consolidation

In the wake of COVID-19, some economic recovery policies will help green the economy – for example, energy renovation of buildings. But there are limits to the share of stimulus that can be explicitly green. The European Union should therefore also green the fiscal consolidation by setting out the path to much higher carbon prices than today. This would guide investment and provide revenues to help the fiscal consolidation.

By: Ben McWilliams, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate, Finance & Financial Regulation Date: July 8, 2020
Read about event More on this topic
 

Past Event

Past Event

An EU budget for Europe's future with Johannes Hahn

How do we make the EU fit for future?

Speakers: Zsolt Darvas, Johannes Hahn and Mehreen Khan Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 7, 2020
Read article More on this topic
 

Opinion

Credible emerging market central banks could embrace quantitative easing to fight COVID-19

Emerging economies are fighting COVID-19 and the economic sudden stop imposed by the containment and lockdown policies, in the same way as advanced economies. However, emerging markets also face large and rapid capital outflows as a result of the pandemic. This column argues that credible emerging market central banks could rely on purchases of local currency government bonds to support the needed health and welfare expenditures and fiscal stimulus. In countries with flexible exchange rate regimes and well-anchored inflation expectations, such quantitative easing would help ease financial conditions, while minimising the risks of large depreciations and spiralling inflation.

By: Gianluca Benigno, Jon Hartley, Alicia García-Herrero, Alessandro Rebucci and Elina Ribakova Topic: Global Economics & Governance Date: July 6, 2020
Read article More on this topic
 

Blog Post

EU recovery plans should fund the COVID-19 battles to come; not be used to nurse old wounds

In its proposed Recovery Fund, the European Commission uses allocation criteria mainly linked to infection rates and past economic performance. To foster an efficient economic rebound post COVID-19 crisis, we propose instead to allocate funds through a forward-looking approach based on specific industrial and economic structure of EU regions.

By: Carlo Altomonte, Andrea Coali and Gianmarco Ottaviano Topic: European Macroeconomics & Governance Date: July 6, 2020
Read article Download PDF More on this topic
 

Policy Contribution

The financial fragility of European households in the time of COVID-19

The concept of household financial fragility emerged in the United States after the 2007-2008 financial crisis. It grew out of the need to understand whether households’ lack of capacity to face shocks could itself become a source of financial instability.

By: Maria Demertzis, Marta Domínguez-Jiménez and Annamaria Lusardi Topic: European Macroeconomics & Governance Date: July 2, 2020
Read about event More on this topic
 

Past Event

Past Event

Impact and additionality assessment in the time of COVID-19

Understanding the impact and additionality of policy interventions.

Speakers: Ugo Albertazzi, Benoit Campagne, Andrea Conte, Zsolt Darvas, Maria Demertzis, Francesco Di Comite, John Earle, Matteo Falagiarda, Áron Gereben, Helmut Kraemer-Eis, Hans Peter Lankes, Iana Liadze, Andrew McDowell, Nicola Pochettino, Debora Revoltella, Mattia Romani, Simone Signore, Natacha Valla, Georg Weiers and Marcin Wolski Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 30, 2020
Read about event More on this topic
 

Past Event

Past Event

The need for market-based finance after COVID-19

How do COVID-19-caused financial dislocations inform policy responses?

Speakers: Maria Demertzis, Gabriel Makhlouf and Guntram B. Wolff Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 29, 2020
Load more posts