Investment in the Future: How a Green Covid-19 Stimulus Package Can Advance the Energy Transition

The corona crisis is not only threatening our health; it’s also shaking our economic systems to the core. A fall of global stock markets by as much as 35 per cent in the first quarter of this year means that a recession is imminent. The energy sector is also affected, with the price of oil plummeting and renewable energies also facing difficulties. Coronavirus infections, prolonged curfews, short-time work, and border closures are all affecting the supply chains of wind and solar energy technologies. Investment has all but dried up. In this situation we can learn from the experience of tackling previous economic crises and should opt for a “green” stimulus package in a three-step government programme of relief, recovery and reform. To accelerate and bolster the energy transition, all of the measures implemented in these three steps need to be scrutinised for their long-term viability.

Same but different responses to crises

The discourse on fiscal policy responses to the economic crisis triggered by covid-19 has shifted significantly compared to the financial crisis of 2007/2008. Back then an old debate was one of the main bones of contention: the debate between the adherents of two schools of economic thought based on Keynes and Hayek. While Keynes wanted to use fiscal policy and investment to stimulate demand and get the economy back on track that way, Hayek and his supporters wanted to keep government interference to a minimum. For decades, this dividing line was also reflected in the political spectrum. While social democrats called for stimulus packages in times of crisis, the conservative response was often reduced spending and austerity measures.

Today, however, there is a new cross-party consensus – in Germany and at EU level – that state relief measures are a necessary and desirable response to covid-19. Now the million-dollar question is: What role should sustainability play in all this? Aren’t the huge investment sums an opportunity to kill two birds with the one stone, kick-starting the economy while also making the changes that will set us on course for sustainability? Here, Roosevelt provided a blueprint for the sequence that government crisis intervention should follow: relief, recovery, reform.

1. Relief: immediate assistance in the crisis

In the current crisis many firms face the threat of insolvency. Hence the need for loans, short-time working benefits, and government grants. But all of these instruments should be strategically deployed and justified over the longer term. Car manufacturers are seizing the opportunity to turn back the clock, questioning emissions regulations while also demanding state support and purchasing schemes for diesel and petrol cars. But to what extent should state support extend the life of a combustion engine whose days are already numbered? At worst, such investment will be wasted on stranded assets. In this context, the scientists for future have been debating whether industries with unsustainable business models, such as airlines, should be excluded from these measures. It might be wise to make immediate assistance conditional on firms setting their own emissions reduction targets for 2030 in line with the Paris Agreement climate goals. The Science Based Targets initiative has already established a platform with this in mind.

2. Recovery: stimulating the economy

The stimulus packages introduced after the last financial crisis were geared to restoring the status quo. As soon as the economy picked up, short-term emissions reductions during the crisis were reversed. Global emissions have continued to reach record levels over the last decade. This time around, a more sustainable investment approach is needed to speed up a transformation that is already long overdue.

But how would that work in practice? After the lockdown, state investment, such as further tenders for renewable energies, could breathe new life into the sector. Existing support programmes should be expanded (for example, by abolishing the ceiling for solar energy subsidies). At the same time, incentives for private investment could be created, for example, with a scrapping premium for oil heating systems. Many investments in climate protection measures that are already on the cards in the coming years – energetic refurbishments of buildings, public transport, railways and cycle lanes – could be brought forward.  New development programmes for green hydrogen could advance sector coupling, creating a new economic sector in the process. At European level, the European Green Deal is a unique opportunity to increase competitiveness and advance a broader energy transition.

3. Reform: increasing structural resilience

Over the longer term, the energy sector has to become more resilient. Its dependence on imports and vulnerability to strongly fluctuating carbon prices need to be addressed.

The expansion of renewables can lead to greater resilience by reducing our dependence on fossil-fuel imports. Yet even before the current crisis, the installation of wind turbines had practically come to a standstill in Germany. Legislative reforms, for example with regard to distance rules, are now required to ensure the industry’s continued existence. The covid-19 crisis is also exposing the vulnerability of renewable energy supply chains due to a strong dependence on imports, particularly in the solar energy sector. In her recent blog post, Silvia Weko argued that now is the time to invest in national clean-tech infrastructure and innovation as a strategically important area – European innovation clusters focused on storage technologies are an important development in this context.

The sharp drop in carbon prices during the crisis adds another element of uncertainty that is currently slowing down investment. For greater planning security, a carbon floor price could be introduced in the European emissions trading system (ETS). And more generally, less overall dependency on economic growth would also increase resilience. These kinds of structural reforms could help to make the energy sector both “future friendly” and crisis-resistant. 

Joined-up thinking on measures

It’s important that all of the measures foreseen in these three steps – relief, recovery and reform – make sense in the long run. Otherwise taxpayers’ money will be wasted on stranded assets. The three steps should be coordinated at national and European level, and each of them needs to be compatible with the Paris Agreement climate goals. The European Green Deal has to be the basis for all of the measures taken in this crisis. Extending its remit and speeding up implementation should be the order of the day. This will ensure that a green covid-19 stimulus package revitalises the energy transition and increases our society’s resilience.