Is this a good time to pursue environmental objectives?
Pre-crisis, the government committed to reaching ‘net zero’ emissions by 2050, safeguarding biodiversity and implementing a 25-year environment plan. These goals are no less important now: policy can be set both to boost the recovery and achieve longer-term environmental objectives.
There is strong public support for integrating environmental objectives into the recovery strategy after the pandemic: 60% of people report being as concerned about climate change now as they were before the crisis, while 21% say they are more concerned (ONS). In the same survey, 92% of adults say that they believe that lockdown has benefited the environment; and of those, 91% say that we should try to continue with these improvements.
In a separate poll conducted by Ipsos MORI, two-thirds of people in the UK say they believe climate change is as serious as Covid-19, and 58% say that they would make it a priority in the recovery.
Support for combining economic and environmental objectives is high, but there is no consensus on whether the government should support economic policies that are harmful to the environment. This raises the possibility that public willingness to pay for environmental improvements may decline during a recession. There may also be conflict in the short term between policies that can return to ‘business as usual’ and policies that ‘build back better’, as suggested in this YouGov blog.
How should the government think about sustainability goals as it plans for recovery?
One way to think about this is by using a concept called ‘natural capital’. Capital refers to things like machines, buildings and other types of assets in which businesses and governments invest.
The idea of natural capital recognises that elements of nature, such as the ecosystem or natural resources, are much like other types of capital assets. They generate valuable goods and services, including raw materials, pollination services, energy sources, clean air and spaces for outdoor recreation, which people value and which deliver health, wellbeing, and productivity.
Estimates for the UK suggest that natural capital adds around £78 billion to the value of homes within 500 meters of green space, provides £248 million of cooling shading services by trees, and saves 27,500 life years annually, due to air filtration services provided by vegetation (ONS).
But because many of the benefits of natural capital are not things that we trade in a market place – for example, everyone can breath the fresh air for free – this often means that there is too little invest in them, or they are over-used.
An important consideration for the government in deciding policy during the recovery will be how well ‘green’ investments perform relative to ‘brown’ investments in terms of their ability to satisfy:
- Short-term objectives, such as preventing a resurgent second wave of the disease and returning to full employment.
- Long-term objectives, such as growth, productivity and sustainability.
- Economic and financial criteria when the government budget is under pressure, including value for money, clear and efficient incentives, desirability under competing and uncertain scenarios, and effects on the distribution of income and wealth.
How will overall economic conditions affect policy design?
As the UK emerges from lockdown, there will be a lot of machinery and workers sitting idle. Households are saving more and spending less, creating concerns that pessimism and uncertainty will induce a spiralling ‘paradox of thrift’, in which cautious businesses and households deepen the slump by deferring investments, hiring and spending. In such conditions, if the government can spend money (called a fiscal injection), this can stimulate economic activity and support growth.
Related question: Why is uncertainty so damaging for the economy?
But not all forms of government spending to stimulate economic activity are equal. If the government stimulates people simply to buy things to consume now, or to make unproductive investments, then this will not generate long-term growth. It also means that it will be more difficult to pay back the borrowing that financed that spending in the future.
In contrast, if the government can stimulate economic activity that is productive (including enhancing natural capital), then this can expand the economy’s productive capacity, boost efficiency and productivity, and ultimately support growth that outpaces the costs of borrowing.
This is more likely with interest rates at historic lows. It is generally accepted that under current conditions the fiscal multiplier is positive – which means that additional government spending will lead to additional growth – and there are several reasons to suggest they may be larger for green than brown investments.
Related question: What is the size of the fiscal multiplier?
Compared with brown projects, green investments such as tree planting, low carbon transport infrastructure, and building retrofits (for example, solar panels and insulation) can be compatible with social distancing measures, create more jobs in the short run, and contribute to health and human wellbeing while advancing climate goals (for more, see here and here).
Public health advice indicates that densely populated public transport will remain undesirable for the foreseeable future, with 57% of commuters planning to reduce usage. A green response including increased support for teleworking and active transport (for example, cycling and walking) would reduce contact rates and the risk of a second wave, provide ‘shovel-ready’ investment opportunities in cycle and telecommunications infrastructure, improve health (physical and mental), and enhance wellbeing by reducing the harmful effects of commuting.
Cities across the UK and globally are already developing ‘pop-up’ cycle infrastructure and widening pavements to promote active travel during lockdown. Data show that UK vehicle use is down 60% from mid-February and that bicycle sales are up 200%. Transport is the UK’s most polluting sector and with over two-thirds of UK car journeys travelling fewer than five miles, active transport is a viable alternative for many.
Indeed, expanding e-bike use could cut vehicle carbon emissions by as much as 50% (about 30 million tonnes per year) with the strongest effects likely to be in rural and suburban areas. There is strong evidence for beneficial spillover effects onto human health, house prices and high-street retail sales (see this comparison across four European cities).
For the medium term, converting ‘pop-up’ cycle lanes into permanent infrastructure, expanding grid capacity for a renewables-based energy system, and making the transition to electric vehicles will require additional construction, engineering and manufacturing jobs and expertise. While this requires a longer planning horizon, projects could be ready to break ground within the recovery period.
In the long run, such green investments require less labour and entail lower operating costs, freeing up resources as the economy returns to capacity. Perhaps more importantly, they avoid sinking stimulus funds into fossil-fuel based infrastructure that have a high likelihood of becoming stranded as environmental policy becomes more stringent and low carbon alternatives become more competitive.
Before the pandemic, growth in the demand for fossil fuels had already fallen to just 1% at an annual rate, with total demand falling in two-fifths of the world. In the UK, the value of fossil fuel production has fallen 60% since 2003, while the asset value of the UK’s fossil fuel reserves has fallen 53% between 2009 and 2016. In contrast, the value of renewables production has risen 1,000% since 2003, while their asset value has risen 133% between 2009 and 2016.
Despite this, early analyses of the initial Covid-19 stimulus packages show that most are providing unrestricted support to environmentally harmful sectors (similar to those following the 2008 financial crisis). Combined with historically low oil prices, such an approach risks crowding out future-proof low-carbon investments, locking-in fossil fuels, paying for short-term gains with long-term sacrifices in health, productivity and competitiveness.
But research by Morgan Stanley based on interviews with investors concludes that ‘decarbonisation remains an attractive investment theme for the decade ahead’ and that lower profits from fossil fuels ‘could free up cash for renewables‘.
A cost-effective strategy could be to incorporate environmental objectives into conditional bailout packages. For example, an authoritative review concludes that reverse auctions – in which those seeking funds compete by demonstrating the environmental, economic, and social returns they will deliver can be highly cost-effective (see here for a UK example).
Carbon reduction targets in line with the Paris Agreement and the government’s ‘net zero’ commitment could be integrated into support for airlines and vehicle manufacturers by requiring emissions reductions targets and linking the terms of loans to actual measured performance.
How reliable is the evidence?
The majority of research in environmental economics (reviewed here for the UK Natural Capital Committee) demonstrates the potential for highly attractive cost-benefit ratios for environmental investments in terms of catchment management, forestry and outdoor recreation, fisheries management, and wetland management.
But much of this research focuses on evaluating the benefits of individual interventions within a local context, meaning they cannot be assumed to apply equally to all cases in all places. More research is needed to assess properly how these benefits would aggregate to the macro scale.
Additional challenges arise due to the diversity of the UK’s natural environment and the ways people rely on it. Peatlands, coastal areas, salt marshes, forests, mountains, flatlands, and urban versus rural areas all generate different types of environmental value, meaning that there is no ‘one-size-fits-all’ green investment opportunity (for a UK assessment, see here).
For example, the same investment in additional tree cover can yield substantial value in urban settings due to the health benefits of improved air quality, but may have very limited impact in more remote locations. A leading UK study shows that spatial targeting that matches investments to local environmental and demographic conditions can greatly enhance value for money, particularly around tree planting and agricultural subsidies.
Measurement is a further challenge to assessing the relative merits of green stimulus. Many of the returns to natural capital investments exhibit public good characteristics, meaning they accrue outside of formal markets and are often poorly reflected or even omitted entirely from economic statistics. Assessing the economic benefits of green investment, including macroeconomic effects and net contributions to the public balance sheet, may require additional investment in the associated statistical and measurement infrastructure.
Despite these caveats, the evidence suggests that the pursuit of environmental objectives should not be delayed due to Covid-19, but rather should be integrated into the economic recovery strategy. There is strong public support for this, and robust economic rationale for pursuing a coherent strategy that encompasses growth, health and environmental objectives.
Where can I find out more?
For more on measuring and valuing natural capital and wealth.
For more on a net zero emissions recovery in the UK.
Who are UK experts on this question?
- Matthew Agarwala (Bennett Institute for Public Policy, University of Cambridge)
- Ian Bateman (Director, Land, Environment, Economics and Policy Institute, University of Exeter)
- Cameron Hepburn (Director, Smith School of Enterprise and the Environment, University of Oxford)
- Ece Ozdemiroglu (Founding Director, Eftec)
- Silvia Ferrini (Centre for Social and Economic Research on the Global Environment, CSERGE, UEA)
- Dieter Helm (Chair, UK Natural Capital Committee)
- Susana Mourato (Department of Geography and Environment, London School of Economics)
Author: Matthew Agarwala, Bennett Institute for Public Policy, University of Cambridge
Published on: 28th May 2020
Last updated on: 21st Oct 2020