Macroeconomic & Geopolitical

Brace Yourself for the Pivot from COVID to Climate

September 2021 – 3 min read
The pandemic forced governments to plow resources into consumption, but climate challenges will require lots (and lots) of investment.

The urgency to tackle the coronavirus crisis lies not just in the lives to be saved and the jobs to be restored, but also in the need to turn our efforts back to addressing the relentless effects of climate change. As long as we keep churning out highly effective vaccines, however, that shift is coming soon. Even the most gifted leaders struggle to advance more than one priority at a time. 

New climate policies were taking shape long before COVID, but the disruption and opportunity ahead look massive as the drivers of growth move from an intense focus on preserving current consumption to a Herculean effort to muster fresh and innovative investment. 

The central economic response to the pandemic shock, you will recall, has been to put money in people’s pockets. Governments that could afford to borrow offered emergency benefits to families and businesses whose incomes had collapsed. Central banks flooded markets with liquidity so that firms could roll their debt and keep the lights on. It didn’t save everyone, but the consumption rebound has been impressive.

The economics of the climate challenge require a very different playbook, essentially discouraging lots of current, carbon-intensive behavior and encouraging innovative new patterns of clean and green activity. 

Simply put, we face a considerable and unavoidable supply shock, points out Jean Pisani-Ferry, a European scholar who is as astute on economics as he is on policy. As governments raise the price of carbon with a loose combination of taxes, tariffs, subsidies, and regulations, they are accelerating the obsolescence of oil rigs, petrochemical refineries, and anyone involved in the production of an internal combustion engine.

At the same time, the relative adjustment in prices toward renewable alternatives will boost investment in clean energy research, electric vehicle infrastructure, and retrofitting buildings for better energy conservation. By some estimates, annual energy investment could more than double in the next decade.

“The speed of the adjustment now required to keep temperatures from rising two degrees Celsius will make it all the more difficult to cushion the transition. In addition to less consumption and more investment, this means a lot more government spending on cushions.”

Still, as Pisani-Ferry notes, even if it’s in everyone’s interest to live on a cleaner planet, the transition will inflict immediate costs on some and deliver slower benefits to others. Not every gas station attendant will find work installing solar panels. Moreover, the speed of the adjustment now required to keep temperatures from rising 2 degrees Celsius will make it all the more difficult to cushion the transition.

In addition to less consumption and more investment, this means a lot more government spending on cushions. It also means more public debt to finance the switch.

In theory this should not be necessary. The premise of carbon taxes is that governments can set a price that fully and accurately balances the cost of decarbonizing as well as the costs of future damage to the planet. On paper, this should drive change without any other government rules or action that would otherwise distort market mechanisms.

In practice, it doesn’t take long to see the problems with making anything close to reliable calculations for any of these costs. Nor is it hard to see that adding a price to carbon consumption can be a highly regressive tax in a moment when inequality fuels powerful political action. Emmanuel Macron discovered this the hard way when his plans to finance France’s green transition with a fuel tax foundered amid the angry protests of the gilets jaunes.

As long as interest rates stay low, pandemic-related spending and debt are only headed higher as governments subsidize both the effects of the supply shock and the acceleration of investment needs.

One reason climate policy looks so daunting is that it requires untangling an impossible cluster of inter-knotted challenges. There’s a scientific challenge to understand the scope and pace of changing weather patterns. There’s a technological challenge to mitigate the damage already done, develop renewable energy alternatives, and protect wetlands and forests. There’s a moral challenge to absorb the sins of past and current generations to leave a livable planet for generations unborn. There’s a political challenge—within countries and among countries—to overcome the classic “free rider” problem of all those who are waiting for others to change first. And there’s an old-fashioned economic challenge in creating incentives to encourage ecologically sustainable activity at a financially sustainable cost.

If the first four still look formidable, the economics are coming much more clearly into view. There will be a slow but relentless shock to supply as a combination of taxes and regulations constrict the profitability of carbon-intensive activity. There will be an even slower emergence of investment opportunities as relative prices shift and new activity patterns take shape. And there will be lots and lots of public spending that will attempt to speed—and ease—the transition.

Brace yourself for the pivot from COVID to climate.

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