Green stimulus: what it could look like in the various areas of the economy
The economic policy responses to the upcoming recession in Germany and many other countries due to the coronavirus pandemic will have a major impact on climate action. Governments have drawn up unprecedented aid packages to keep businesses and workers afloat. Now they are discussing stimulus packages worth hundreds of billions of euros that could lock in investments and technological developments in key areas for the energy transition for years after the corona crisis has passed at a time when many companies face future-defining decisions on their decarbonisation strategies.
Environmental think tanks, economists, climate researchers and others already weighed in on the debate about how mistakes made in the wake of the 2008 financial crisis that let fossil fuel intensity spike could be avoided this time. Many also say the corona crisis offers an opportunity to leapfrog transition steps that otherwise could take years, as the comprehensive economic lockdown caused by the outbreak allows policymakers as well as individual citizens to reflect on ingrained habits and procedures.
Think tank Green Budget Germany (FÖS), for example, published a snap report (in English) commissioned by Greenpeace that summarised its findings on possible measures in individual sectors. In a discussion paper, the Wuppertal Institute for Climate, Environment and Energy advocated a Three-Stage-Model to respond to the economic impact, divided into short-, medium- and long-term approaches.
While virus containment and financial survival of business clearly take precedence, longer lasting measures also had to be initiated now to ensure they take effect, the researchers argued. Energy policy think tank Agora Energiewende* has proposed a 100-billion-euro investment package to ensure the relaunch of the economy after the coronavirus pandemic in a way that supports the fulfilment of the country's energy and climate targets.
Economic cooperation body OECD cautioned that any stimulus response to the virus could only unfold its full potential if it is internationally coordinated and not pursued by each state individually. The European Commission has illustrated this approach in its call for a European "Marshall Plan" for economic recovery that is supposed to orchestrate responses across the bloc.
The World Bank commented making sure that these approaches do not run counter to climate policy aims could be achieved by using Nationally Determined Contribution plans in the context of the Paris Agreement as a starting point. In Europe and Germany, governments are able to draw on measures outlined in the Green Deal and the national Climate Action Programme, respectively.
The Clean Energy Wire will collect and update fresh proposals made for green stimulus measures in different economic areas in the list below.
The standstill of production lines at Volkswagen, Daimler and other carmakers has illustrated how the corona crisis struck to the core of Germany's industrial production sector. The car industry, which directly provides hundreds of thousands of well-paying jobs in the country, as well as many other businesses have had to introduce short-time work for their employees in order limit layoffs. The system allows companies to receive government support to keep employees on the payroll at fewer hours and lower pay. As the crisis hit the car industry at a crucial moment in its transformation away from the combustion engine, national industry association VDA quickly urged the government to back them in efforts to make the European Union drop a planned tightening of emission limits on cars.
But transport NGOs warned that hard-won action in the sector, which is Germany's most resilient carbon-emitter, should not be jeopardised by hasty reactions. Environmental transport association Verkehrsclub Deutschland (VCD) said stimulus packages should be directed at improving the integration of renewables and electric vehicles. Agora Energiewende gauges the necessary investment support in the automotive sector to combine growth and climate targets at about 15 billion euros.
While it favoured strengthening public transport over expanding car infrastructure, the FÖS said the expansion of railway systems or other large-scale projects is no viable short-term solution. Instead, maintenance work and strengthening of existing infrastructure could help absorb parts of the drop in construction activity, it argued. Also, the installation of charging infrastructure on public and private premises that is needed to pave the way for a mass roll-out of electric cars could create employment opportunities across the country.
Transport NGO Agora Verkehrswende proposed short-term measures like replacing emissions-intensive delivery vehicles in small companies and building an electric car fleet for commercial and public services. State aid could also lead to lasting positive effects by expanding charging infrastructure in rural areas and by modernising bus fleets in cities.
Public transport systems and road traffic registered steep drops in passenger volumes following the lockdown measures in Germany and other countries, as people switched from trains and buses to cars and bicycles or stayed at home altogether.
Low traffic volumes amid the lockdown are revealing how much cars otherwise dominate the public space and bring noise and air pollution as well as congestion with them. The momentum could therefore be used to further establish the prevalence of bicycles for individual and cargo transport in inner cities, Green Budget Germany (FÖS) said.
While cars also allow relatively safe individual mobility, their large-scale use as replacement for public transport is impractical and often not an option for those with a low income. Reinforcement of inner-city bicycle infrastructure and transformation of administrative planning preferences towards pedestrians and bikes should be pursued alongside the expansion of tram lines, bus services and other public transport means, according to the FÖS.
Service sector trade union Verdi called for an emergency programme for public transport providers in the wake of the crisis. At least 50 percent of the transport companies' earnings are generated through customer fares, but the lockdown measures mean these have plummeted by up to 90 percent, meaning the services are "at a concrete risk" of going under. Verdi called on the government to compensate companies for the lost earnings by immediately releasing funds earmarked for public transport this year from the states and the federal government to save jobs and guarantee the services keep running.
The aviation sector has been hit particularly hard and early on by the coronavirus outbreak. Germany's flagship carrier Lufthansa, for example, reduced the volume of passenger flights by 80 to 90 percent in mid-March for at least one month. The airline said it will take months until restrictions are lifted to allow a return to regular operation and possibly years before demand for flights reaches pre-crisis levels.
But the impact on aviation should not be countered with a relaxation of environmental regulation or encouragement to book more flights at a later point in time, as the current nosedive is not at all related to these measures, the FÖS argued.
"Necessary restructuring should not be postponed artificially" as far as sustainability improvements are concerned, the FÖS said, advocating instead for short-term relief for employees. In a longer-term response, a relaunch of the aviation sector should be designed in a way that links support payments to investments in low-emissions propulsion systems or alternative fuels.
NGO Transport & Environment said possible bailouts for aviation companies should be made conditional on paying a fuel tax as well as more VAT once conditions improve, which currently save the companies 27 billion euros per year in expenses. Airlines should also oblige themselves to push decarbonisation technologies in their business, such as synthetic kerosene or waste-based fuels.
Already before the coronavirus outbreak, Germany's most important renewable power sources, solar PV and onshore wind, were grappling with regulatory hurdles to expansion. Even though the country concluded its first quarter with more than half of all electricity produced by renewables, expansion in Germany is far off of required levels to meet the energy demand of a growing e-car fleet and increasing electrification across all sectors, a prerequisite of most decarbonisation efforts.
An energy transition summit in mid-March that was supposed to provide a remedy for the current expansion slump was one of the first major political events that fell prey to the virus outbreak, when the government and federal states reshuffled the agenda to prepare their pandemic response. Initial investor reactions to the lockdown measures suggested that renewables are seen as a sort of 'safe haven,' as their value is relatively constant and unrelated to other asset classes. But like most other sectors, the renewables industry rather faces severe difficulties due to the crisis, as supply chains become disrupted and construction or maintenance activities are obstructed by containment constraints.
Germany's Association of Energy and Water Industries (BDEW) said continued investments in renewable energies were made even more pressing by the corona crisis and an important contribution to supply security in the future. Likewise, the Renewable Energy Federation (BEE) said a roadmap for the steady expansion of renewable energy sources could be an important contribution to the requisite economic stimulus measures that come with the added benefit of distributing funds across many regions in the country. It called for repurposing the over four billion euros the government set aside for decommissioning premium payments for coal plant operators to investment premiums for renewables to ensure that support money becomes effective locally rather than going to shareholders.
Michael Liebreich, founder of Bloomberg New Energy Finance, argued that boosting renewables expansion through direct support measures would be misplaced this time. Given the structural importance of renewables in a low-carbon energy system and considering the fact that costs for wind and solar power installations have plummeted in recent years, he instead called for addressing the need to better integrate them with storage devices, electric cars and heating systems to enable a "deep penetration into grids."
The Energy Watch Group, a Berlin-based network of scientists and parliamentarians, proposed that operators of innovative renewables systems that guarantee continuous energy supply day and night, for example by combining generation, storage, digital management and sector coupling, should receive a special feed-in tariff of eight cents per kilowatt-hour. They aruged this would allow for a faster exit from coal, an end to gas-fired power-generation. "Real climate action could be taken fast and a quick recovery after the end of the corona pandemic would become possible together with the necessary switch to a sustainable energy supply," they said.
Putting renewable power expansion at the centre of stimulus measures in the energy sector proved to be a highly rewarding decision in the USA after the 2008 crisis, according to the US administration under President Barack Obama. It had led to a clear boost for the national wind and solar power industries, creating about 900,000 jobs by 2015, and helped make renewables competitive with fossil power sources.
Agora Energiewende says about 13 billion euros would be needed for a green stimulus in the energy sector, up to 10 billion of which could be mobilised through Germany's renewable energy surcharge.
Germany's onshore wind industry saw a massive drop in expansion levels in 2019 due to regulatory challenges and lawsuits against new projects and a swift 2020 recovery has been made unlikely by the economic lockdown.
But the German Wind Energy Association (BWE) warned that the virus must not overshadow sustained challenges to the technology's expansion, which had already been addressed for two years prior to the crisis. The BWE welcomed the removal of bureaucratic hurdles by the national grid agency BNetzA and urged the government to relax other regulations as well. "Our industry doesn't need money to get going again, but merely administrative support," BWE head Hermann Albers argued.
In order to maximise the contribution of offshore wind to a green stimulus, Germany's expansion targets at sea could be ramped up to 25 GW by 2030, Agora Energiewende proposed. Moreover, investments in joint European projects, for example a wind power island-hub in the North Sea or boosting hydrogen production projects, could increase offshore wind's contribution to economic recovery.
The solar power industry has lobbied the government since mid-2019 to remove a capacity cap on guaranteed support payments that it said would be reached in the first half of 2020 and choke off investment in a key industry of the energy transition that has just begun to regain some strength after years of decline due to much cheaper competitors from China soaking up business volumes.
Lobby group SolarPower Europe said that solar power is "the most job intensive, low-cost and easily deployed renewable technology" that could help jump-start productivity across Europe. The group said it will work out concrete proposals on how the entire value chain of solar power could be exploited to this end by targeted investments.
Even though the immediate impact on the buildings sector's emissions from the corona crisis is likely to be low compared to transport or industry, as heating demand from public or commercial buildings largely shifts to households, the sector still offers abundant potential for green stimulus. Environment agency UBA in a 2019 study found that energy efficiency investments regularly show a considerable impact on employment levels.
Applications for an energy-efficient refurbishment and construction programme of Germany's building stock already soared in the first quarter of 2020, following an increase in available grants in the Climate Action Programme. According to the economy ministry, especially small businesses benefit from the financial support for insulation, heating system renovation and other efficiency measures disbursed by the national development bank KfW.
Given that the rate of refurbishment of Germany's building stock needs to be doubled over the next years to come closer to the sector's emissions reduction targets, boosting public and private investments there would also be required in a non-corona scenario.
Think tank Agora Energiewende estimates that roughly 20 billion euros in stimulus funds should be directed at the sector to replace oil heating systems with heat pumps and initiate a steady renovation rate of private and public buildings.
Besides housing, infrastructure construction also offers ample potential for coupling economic stimulus and climate action targets. After the financial crisis of 2008, the rebound in emissions was to a large extent due to spiking cement and steel production for large construction projects, which was often powered with fossil fuels. Investments in lowering carbon emissions in basic material industries therefore would be part of avoiding mistakes made after 2008 from a climate perspective.
According to Agora Energiewende, investments to the tune of 15 billion euros are needed to get the industrial sector on a sustainable growth track after the pandemic. While a significant drop in business appears unavoidable due to collapsing demand at home and abroad, the German industry with its roughly 5.6 million employees could use the interruption to improve its long-term competitiveness by improving the energy efficiency of steel furnaces or chemical steam crackers. The think tank proposes to invest five billion euros out of industry support funds into ramping up Germany's hydrogen production capacity, which would suffice to reach a production capacity of 10 gigawatts by 2030. The currently still very high cost of necessary power-to-gas production could be reduced substantially by Europe-wide tenders, Agora added.
The World Bank noted that large infrastructure projects often take a long time to prepare, which would make them less adequate for crisis response. However, the corona crisis's "unique nature" would allow the creation of a "green infrastructure pipeline" that could start generating growth as soon as circumstances permit it.
Working from home has been one of the most immediate and palpable consequences for people in many countries as lockdowns took effect. The remote work experience could potentially open up new prospects for reducing the number of commuters and hence transport emissions also in the long term, the think tank FÖS argued. Apart from the potential climate benefits of facilitating work from the "home office," freeing up office space would take pressure off inner-city housing markets, it added.
However, the quick rise in data traffic due to people spending more time online at home rather than in the office or outside with friends also requires an expansion and better energy management of IT infrastructure, if climate impacts are to be minimised.
A relaunch of economic activity that responds to demand and virus containment measures would mean workers in certain professions or sectors would be grounded longer than others. With many employees facing forced "holidays," the FÖS said this time could be used for training purposes, for example with the aim of improving their companies' environmental performance.
Giving households and companies higher liquidity through tax cuts is a traditional stimulus measure to quickly increase spending. Instead of reducing taxes, think tank Agora Energiewende proposes to reduce the stubbornly high power price for German customers by drastically reducing the renewables surcharge by five cents/kWh, which would cut the bills for private households by 20 percent and for business customers even by 25 percent.
A smaller power bill would especially help small and medium-sized companies and allow them to step on a level playing field with other European countries. However, at an estimated 22 billion euros, the price tag for the state of this measure would be substantial.
Due to the crisis-induced drop in energy demand and other factors, allowance prices in the EU ETS have dropped quickly and made the use of fossil power relatively cheaper. At the same time, the market price of oil has also plummeted. This would offer an opportunity to cut subsidies to oil and other fossil sources without inflating the bill for customers, the FÖS argued.
Finance think tank carbon tracker also said the price drop on fossil fuel markets provides an opportunity to cut subsidies and review fiscal approaches to emissions-intensive businesses.
The European Commission estimates that funding needs for the European Green Deal will exceed one trillion euros over the next decade. It stated that it remains determined to raise the required money regardless of the pandemic, arguing that a clear focus on sustainable finance principles must be part of the economic recovery ahead.
But as the corona crisis is about to drain national budgets, financing through the European Investment Bank (EIB) become crucial keeping track with the deal's ambitions. Agora Energiewende argued that the EIB's reorientation to become "Europe's climate action bank" would mean credit allocation is strictly tied to energy efficiency and decarbonsation projects. The European Central Bank (ECB) therefore should therefore greatly expand its purchasing of bonds issued by the EIB to boost the investment bank's liquidity for projects related to the Green Deal in individual member states.
NGO Bürgerbewegung Finanzwende called for a stop to short-selling stocks at the European level, arguing sellers would benefit from the crisis by betting on falling prices, aggravating the situation for everyone. The organisation led by former Green Party MP Gerhard Schick also said Germany should clear the way for so-called corona bonds for EU member states as a prudent way to show European solidarity and avoid mistakes made in the wake of the financial crisis, arguing that even many economists who so far rejected the idea of joint EU debt liability changed their minds in the corona crisis.