A Covid recovery for the climate

25 Sep 20

The pandemic presents an opportunity for governments to engender a “green reboot” of the global economy, argues CIPFA’s chief economist Jeffrey Matsu.

 

Mobilisation of younger generations saw climate change dominate public consciousness in 2019. Environmental activists from groups like extinction rebellion sparked a renewed interest in sustainability and social value. These became buzzwords across ministries and boardrooms as consumers prioritised eco-friendly, local outcomes.

Many expected 2020 to be the year for climate action before Covid-19 put such ambitions on the back burner. But world economies now have a unique opportunity. The past six months have reshaped expectations on the role of government and public spending. As a result, the process of recovery presents public policy with a chance to do things differently – a green reboot.

While addressing the myriad challenges posed by climate change remains daunting, in many parts of the world large pots of funding that are now available can help if channelled appropriately. Take the European Green Deal with its €1trn commitment to transforming the 27-country bloc to climate neutrality by 2050.

Although decarbonising the energy sector, cleaner transport, more energy efficient buildings and a circular economy are a few of the stated intentions, vigilance will be needed to ensure new schemes aren’t masking regressive steps elsewhere. For example, the recently agreed €750bn EU recovery package reduced the Just Transition Fund, initially designed to assist coal-producing regions in their transition to a low carbon economy, from €40bn to €10bn. There is also a role for national audit offices to provide more robust independent scrutiny of plans.

In the UK, the upcoming comprehensive spending review will be an opportunity for the government to move beyond traditional fiscal targets and focus on its performance in delivering the UK’s Clean Growth Strategy, 25 Year Environment Plan and Industrial Strategy. A post-Covid recovery cannot rely on spending vast sums of taxpayers’ money without heed to the quality or durability of those investments. Community resilience to climate risk will require further delegation of decision-making to local authorities who are better placed to design a framework to achieve local priorities. In practice, the Community Value Charter Model proposed by think-tank Localis could complement the Cabinet Office’s Outsourcing Playbook which provides the rules and principles that guide more effective collaboration between the public, private and third sectors.


“The silver lining to an acute crisis is that it creates a sense of urgency”


Changing behaviour through local engagement can support broader shifts in markets that embed long-term value creation. In 2005, a joint initiative between the UN Global Compact, International Finance Corporation and a group of the world’s largest financial institutions gave rise to the Principles for Responsible Investment, which today has the support of over 3,000 signatories. Shifts in consumer tastes and investor demand have since propelled responsible investing that applies nonfinancial factors such as environmental, social and governance. According to the Global Sustainable Investment Alliance, sustainable investing assets grew by 34% between 2016 and 2018 to exceed $30trn.

Ultimately, the environment is a global responsibility with a diversity of local consequences. Stimulus packages to support a post-Covid recovery should embrace our newfound ways of working and living through tax reforms that advance a transition away from fossil fuels at pace. Regulatory changes such as the UK’s Future Homes Standard that take steps to decarbonise new-build homes can lead to a holistic policy framework incentivising action to develop a low carbon supply chain.

Meanwhile, energy efficiency retrofit programmes such as the £2bn green homes grant are seemingly at odds with other policies that offer tax relief on new dwellings insofar as any part of an existing structure is not used. Innovate UK estimates that the construction and demolition of buildings accounts for a third of landfill waste.

Agreement on definitions and priorities can require compromise across a swathe of disparate stakeholders. The silver lining to an acute crisis is that it creates a sense of urgency and collective action that can accelerate decision-making. This may serve as an advantage in the next round of UN climate talks in Glasgow that will aim to set a rule book for a new global carbon market after two successive failures. A unified standard for carbon offsets would allow countries, companies and individuals to pay each other for their emissions through a pricing mechanism aligned with the 1.5 degrees target of the Paris Agreement. The revenue from increased environmental taxation could be used to restore public balance sheets and create much needed fiscal headroom, or to support spending on other social objectives.

Mitigating financial risks from climate change is also on the Bank of England’s radar as it prepares banks and insurers to undergo stringent climate stress tests. Results were expected to be published in 2021 but due to Covid the exercise has been delayed by at least a year. Meanwhile, the Climate Financial Risk Forum, co-chaired by the Prudential Regulation Authority and Financial Conduct Authority, has recently published an industry-led guide to climate-related financial risk management covering the areas of disclosure, innovation, scenario analysis and risk management. Insurers such as Zurich are weighing in on the conversation, with their recent white paper outlining three crucial steps for organisations in developing a climate resilience adaptation strategy.

Perspective will be key to protecting and building resilient communities. According to the World Economic Forum’s Global Risks Report 2020 published in January, climate-related issues dominated the short- and long-term risk outlooks. Incidentally, infectious diseases did not feature in either of the top ten lists, and its perceived impact over the next 10 years was noticeably behind environmental, technological and geopolitical risks.

Policymakers should take heed that the next swan event may come in a colour other than black or green. Preparedness through sound public financial management will help steer today’s recovery toward a more sustainable future.

  • Jeffrey Matsu

    Jeffrey Matsu is chief economist at CIPFA. With extensive experience in connecting policy with practice through evidence-based research, he works with partner governments, accountancy bodies and the public sector around the world to advance public finance and support better public services.

    Previously, Jeff was responsible for market analysis and thought leadership at the Royal Institution of Chartered Surveyors and co-led the economy theme at the UK Collaborative Centre for Housing Evidence.

    He was also a senior economist at Morgan Stanley and served on the research staff at the Board of Governors of the Federal Reserve System in Washington DC.

    Jeff holds degrees in economics from the University of Washington and Johns Hopkins University.

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