COVID-19, climate policy and carbon markets

A post by Simone Borghesi


The COVID-19 pandemic is having a dramatic impact on economic activities worldwide. This has both direct and indirect effects on greenhouse gas emissions and global warming. On the one hand, the current pandemic has a direct and immediate effect on emissions since the fall in production and traffic volumes drastically reduces emissions, as it has already been observed after a few weeks of lockdown in a growing number of countries. On the other hand, COVID-19 might have multiple indirect effects on emissions which could run in the opposite direction, especially in the medium-long run. In the first place, the deep economic recession which might affect the world economy in the next years is likely to slow down the technological progress that is needed to progress along a low-carbon economic path. In the second place, the economic recession obviously has a large impact also on carbon markets: the fall in production brings about a sharp decrease in the demand of emission allowances, which causes a reduction in the allowance prices, and thus also in the incentive to invest in cleaner technologies. Finally, the health emergency may hinder international negotiations on emissions reduction and on the rulebook for international emissions trading to be agreed under the climate pact, as clearly emerges from the recent decision to postpone COP26 to 2021. All these indirect, negative consequences of COVID-19 on emissions reduction might well overtake in the long run its direct, short run effects on emissions.

In any case, COVID-19 has already diverted attention from the climate emergency to the much more urgent health emergency. This is certainly logical, legitimate and partially unavoidable given the present extraordinary circumstances. But we should bear in mind that climate change was estimated to cause about 150 thousand deaths in 2000 by the World Health Organisation (the same organization we now correctly rely on for estimates on COVID-19). The WHO (2014) warned us that this number is expected to raise to 250 thousands per year between 2030 and 2050 if appropriate measures will not be taken. As Phoebe Koundouri recently wrote, climate change has the potential to cause more deaths than COVID-19 but its consequences are generally perceived as only long-run problems (though its effects are visible also in the present) since they are spread over time.

While all our efforts are now reasonably devoted to finding a way out of the health emergency, we should also start thinking about the future economic and climate policy packages that will be needed once the health crisis will be over (hopefully soon). It will be important to be ready when the pandemic will be gone. Any crisis brings also an opportunity to re-think the existing paradigm. As Kåberger and Sterner have pointed out, the present crisis brings the opportunity to carry out a Schumpeterian process of creative destruction that restructures our economies towards a more sustainable path. If we will focus exclusively on spurring the economy, no matter whom gets the countries’ subsidies, no matter how polluting subsidized firms can be, then this opportunity will be lost. And I don’t think we can afford to miss this opportunity if we are to avoid a new peak in emissions in the future. In this regard, we should learn from the recent past: in 2009 the financial crisis caused CO2 emissions to fall by 1,44%, but the following year emissions increased by 5,13% (much more than before the crisis) as a consequence of the policy measures that were taken to push the economies.

For these reasons, it appears particularly important to identify in advance a suitable economic-climate package which may relaunch clean investments when economic activities will resume and avoid a sharp growth in emissions when the pandemic will be gone.

As in any crisis, there are lessons to be learnt. One lesson is that international cooperation is crucial to face global threatens. We knew we are all on the same ship but now is much more evident than ever. In a globalized world the problems of “the others” end up being our own problems, whether we like it or not. It applies to COVID-19, as much as to global warming. In this sense, by promoting international cooperation among different jurisdictions on climate policy in general and on Emission Trading Systems in particular, I believe the LIFE DICET project is more important than ever.

All ETSs are now under pressure because of low allowances demand. This creates a further opportunity to exchange information and learn from each other on how to deal with this common threat. In this regard, differently from the past, the EU ETS is now fortunately sheltered by the presence of the Market Stability Reserve (MSR). But the MSR is currently designed to adjust supply with a two-years lag, thus not offsetting any demand shock, however significant, that occurs within this time. This lag might prove crucial in case of a COVID-induced economic downturn. Therefore, one might reconsider the introduction of a price floor as in other ETSs. As suggested by Flachsland et al. (2020), a price floor could be used as a complementary policy to the MSR, as a further safeguard against unexpectedly low prices and unforeseeable circumstances like the ones we are going through.

The climate crisis, as the current global health crisis, gives us no other choice but exchanging information, learning from each other and cooperating to find solutions. Both the climate crisis and the health crisis will be very challenging fights, but we’ll either win them acting all together or lose them all together. My wish is that the current difficult experience may reinforce this awareness and that international cooperation in climate policies may not only survive but actually be reinforced and even extended after the pandemic.


References

Flachsland, C., Pahle, M., Burtraw, D., Edenhofer, O., Elkerbout, M., Fischer, C., Tietjen, O. and Zetterberg, L., (2020). How to avoid history repeating itself: the case for an EU Emissions Trading System (EU ETS) price floor, Climate Policy, 20 (1), 133-142.

Kåberger, T. and Sterner, T. (2020). Let’s not waste this chance to transition to an environmentally sustainable future, Financial Times, March 27, 2020.

Koundouri, P. (2020). Never Waste a Good Crisis: For a Sustainable Recovery from COVID-19, Sustainable Development Solutions Network, April 1, 2020.

World Health Organization (2014). Quantitative risk assessment of the effects of climate change on selected causes of death, 2030s and 2050s. WHO Press, World Health Organization, Geneva, Switzerland.


Register for the Online Debate “COVID-19, global climate policy and carbon markets: expected impacts and possible solutionson the 7th May 2020 from 11:30 to 12:30 – CET.