Editing IPCC:AR6/WGIII/Chapter-15 (section)

=== 15.2.3 Impact of COVID-19 Pandemic ===

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The macroeconomic headwinds have worsened dramatically with the onset of COVID-19. Almost two years after the pandemic started, it is still too uncertain and early to conclude impacts of the pandemic until 2025–2030, especially as they affect climate finance. Multiple waves of the pandemic, new virus mutations, accumulating human toll, and growing vaccine coverage but vastly differing access across developed versus developing regions, are evident. They are causing divergent impacts across sectors and countries, which combined with the divergent ability of countries and regions to mount sufficient fiscal and monetary policy actions imply continued high uncertainty on the economic recovery paths from the crisis. The situation remains more precarious in middle- and low-income developing countries ( [[#IMF--2021a|IMF 2021a]] ). While recovery is happening, the job losses have been large, poverty rates have climbed, public health systems are suffering long-term consequences, education gains have been set back, public debt levels are higher (5–10% of GDP higher), financial institutions have come under longer-term stress, a larger number of developing countries are facing debt distress, and many key high-contact sectors, such as tourism and trade, will take time to recover ( [[#Eichengreen--2021|Eichengreen et al. 2021]] ). The implication is negative headwinds for climate finance with public attention focused on pandemic relief and recovery and limited (and divergent) fiscal headroom for a low-carbon transition, with considerable uncertainties ahead ( [[#Hepburn--2020b|Hepburn et al. 2020b]] ; [[#Maffettone--2020|Maffettone and Oldani 2020]] ; [[#Steffen--2020|Steffen et al. 2020]] ).

The larger and still open public policy choice question that COVID-19 now raises is whether there is room for public policy globally and in respect of their individual economies to integrate climate more centrally to their growth, jobs and sustainable development strategies worldwide for ecological and economic survival. The outcomes will depend on the robustness of recovery from the pandemic, and the still evolving public policy responses to the climate agenda in the recovery process. Private equity and asset markets have recovered surprisingly rapidly during the pandemic (in response to the massive fiscal and central bank actions generating large excess savings with very low or negative yields boosting stock markets). On public spending, some early studies suggest that the immediate economic recovery packages were falling well short of being sufficiently climate sustainable ( [[#Gosens--2020|Gosens and Jotzo 2020]] ; [[#Kuzemko--2020|Kuzemko et al. 2020]] ; [[#O’Callaghan--2021|O’Callaghan 2021]] ) but several governments have also announced intentions to spend more on a green recovery, ‘build back better’ and Just Transition efforts ( [[#15.2.4|Section 15.2.4]] ), although outcomes remain highly uncertain ( [[#Lehmann--2021|Lehmann et al. 2021]] ; [[#Markandya--2021|Markandya et al. 2021]] ).

An important immediate finding from the COVID-19 crisis was that the slowdown in economic activity is illustrating some of these choices: immediately after the onset, more costly and carbon-intensive coal use for energy use tumbled in major countries such as China and the USA, while the forced ‘stay-at-home’ policies adopted around the major economies of the world led to a –30–35% decline in individual country GDP, and was in turn associated with a decrease in daily global CO 2 emissions by –26% at their peak in individual countries, and –17% globally (–11 to –25% for ±1 σ ) by early April 2020 compared with the mean 2019 levels, with just under half coming from changes in surface transport, city congestion and country mobility ( [[#Le%20Quéré--2020|Le Quéré et al. 2020]] ). Along with the carbon emissions drop was a dramatic improvement in other parameters such as clean air quality. Moreover, longer-term behavioural impacts are also possible: a dramatic acceleration of digital technologies in communications, travel, retail trade and transport. The question however is whether the world might revert to the earlier carbon-intensive path of recovery, or to a different future, and the choice of policies in shaping this future. Studies generally suggest that the gains from long-term impacts of the pandemic on future global warming will be limited and depend more on the nature of public policy actions and long-term commitments by countries to raise their ambitions, not just on climate but on sustainable development broadly ( [[#Barbier--2020|Barbier 2020]] ; [[#Barbier--2020|Barbier and Burgess 2020]] ; [[#Forster--2020|Forster et al. 2020]] ; [[#Gillingham--2020|Gillingham et al. 2020]] ; [[#Reilly--2021|Reilly et al. 2021]] ). The positive lesson is clear: opportunities exist for accelerating structural change, and for a re-orientation of economic activity modes to a low-carbon use strategy in areas such as coal use in energy consumption and surface transport, city congestion and in-country mobility, for which lower-cost alternatives exist and offer potentially dramatic gains ( [[#Hepburn--2020b|Hepburn et al. 2020b]] ).

A new consensus and compact towards such a structural change and economic stimulus instruments may therefore need to be redrawn worldwide, where an accelerated low-carbon transition is a priority; and accelerated climate finance to spur these investments may gain by becoming fully and rapidly integrated with near-term economic stimulus, growth and macroeconomic strategies for governments, central banks, and private financial systems alike. If that were to happen, COVID-19 may well be a turning point for sustainable climate policy and financing. Absent that, a return to ‘business-as-usual’ modes will mean a likely down-cycle in climate financing and investments in the near term.

Expectations that the recovery package stimulus will increase economic activity rely on the assumption that increased credit investment will have a positive effect on demand, the so-called demand-led policy ( [[#Mercure--2019|Mercure et al. 2019]] ). The argument for a green recovery also draws on the experience from the post-global financial crisis in 2008–2009 recovery, in which large economies such as China, South Korea, the USA and the EU observed that green investments propelled the development of new industrial sectors. Noticeably, this had a positive net effect on job creation when compared to the investment in traditional infrastructure ( [[#UKERC--2014|UKERC 2014]] ; [[#Vona--2018|Vona et al. 2018]] ; [[#Jaeger--2020|Jaeger et al. 2020]] ). For a more in-depth discussion on macroeconomic-finance possible response see [[#15.6.3|Section 15.6.3]] . Here, we conclude with the options for reviving a better globally coordinated macroeconomic climate action. The options are some combinations of five possible elements:

1. Reaffirmation of a strong financial agenda in future UNFCCC Conference of Parties meetings, and a new collective finance target, which will need to be undertaken by 2025. Given that the shortfalls in financing are likely to be acute for developing regions and especially the more debt-stressed and vulnerable ( [[#Dibley--2021|Dibley et al. 2021]] ; [[#Elkhishin--2021|Elkhishin and Mohieldin 2021]] ; [[#Laskaridis--2021|Laskaridis 2021]] ; [[#Umar--2021|Umar et al. 2021]] ), developed countries may wish to step up their collective support ( [[#Resano--2021|Resano and Gallego 2021]] ). One possibility is to expedite the new Special Drawing Rights (SDR) issuance allocation rules for the USD650 billion recently (2021) approved, most of which will go to increase the reserves of G7 and other high-income countries unless voluntarily reallocated towards the needs of the most vulnerable low-income countries, raising resources potentially ‘larger than the Marshall Plan in today’s money’ ( [[#IMF--2021b|IMF 2021b]] ; [[#Jensen--2021|Jensen 2021]] ; [[#Obstfeld--2021|Obstfeld and Truman 2021]] ), with decisions to be taken. [[#Ameli--2021a|Ameli et al. (2021a)]] note the climate investment trap of the current high cost of finance that effectively lowers green electricity production possibilities in Africa for a cost optimal pathway. Other initiatives could also include G7 and G20 governments (especially with the lead taken by the developed members for cross-border support to avoid over-burdening public resources in developing countries) running coordinated fiscal deficits to accelerate the financing of low carbon investments (‘green fiscal stimulus’).

2. Introducing new actions, including regulatory, to take some of the risks off the table from institutional financial players investing in climate mitigation investment and insurance. This could include the provision of larger sovereign guarantees to such private finance, primarily from developed countries but jointly with developing countries to create a level playing field ( [[#Dafermos--2021|Dafermos et al. 2021]] ) backed by explicit and transparent recognition of the ‘social value of mitigation actions’ or SVMAs, as fiscally superior (because of bigger ‘multipliers’ of such fiscal action to catalyse private investment than direct public investment) and the bigger social value of such investments (Article 108, UNFCCC) ( [[#Hourcade--2018|Hourcade et al. 2018]] ; [[#Krogstrup--2019|Krogstrup and Oman 2019]] ).

3. Facilitating and incentivising much larger flows of cross-border climate financing which is especially crucial for such investments to happen in developing regions, where as much as two-thirds of collective investment may need to happen ( [[#IEA--2021a|IEA 2021a]] ), and where the role of multilateral, regional and global institutions such as the International Monetary Fund (IMF) (including the expansion in availability of climate SDRs referred to earlier) could be important.

4. Global central banks acting in coordination to include climate finance as an intrinsic part of their monetary policy and stimulus ( [[#Carney--2019|Carney 2019]] ; [[#Jordà--2019|Jordà et al. 2019]] ; [[#Hilmi--2021|Hilmi et al. 2021]] ; [[#Schoenmaker--2021|Schoenmaker 2021]] ; [[#Svartzman--2021|Svartzman et al. 2021]] ).

5. An acceleration of Just Transition initiatives, outlined further below ( [[#15.2.4|Section 15.2.4]] ).

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