Insights Blog

How and Why COVID-19 Reconstruction Must Initiate the Great Green Transition

June 5, 2020

A recent article from Intereconomics, co-authored by Willi Semmler, director of SCEPA’s Economics of Climate Change project, argues that as governments struggle to regain economic strength amid the coronavirus pandemic, reconstruction programs must initiate the great green transition.

Contrary to the claims of some groups that “this is not the time to insist on strict climate protection goals,” Semmler and co-authors Claudia Kemfert and Dorothea Schäfer of the German Institute for Economic Research contend that the COVID-19 crisis illustrates the potential disastrous local effects of climate disasters and should spur us into action. Indeed, reconstruction programs in the wake of the COVID-19 crisis should capitalize on new investment opportunities and financing needs similar to those necessary for the rebuilding of the European economy after World War II. This is not the time for regression. Economic recovery after the pandemic is a unique chance to pursue bold, green policies for a new and sustainable growth regime.

The opportunity of this moment does not come without risks and challenges. European governments are striving to meet the ambitious goals of the Paris Climate Agreement of 2015, and the German government must still rapidly implement concrete steps to get there. These goals inevitably pose challenges to the financial sector, including the potential depreciation of assets or devaluation of legacy investments depending on the regulation of greenhouse gas emissions.

These challenges cannot be ignored, but the investment opportunities should not be underestimated either. The financing needs that come with transforming to a climate-protecting economy are massive, and can be compared to rebuilding the German economy after World War II, or the reconstruction of the East German economy after the reunification, the authors argue. Inevitably, a transition of this magnitude will require investments in all areas of the economy, including low-carbon and climate resilient infrastructure, energy, transport, water, sanitation, agriculture, and more.

Because the transition path is largely unknown, these changes come with huge uncertainties for financial institutions, who face two kinds of depreciation risks, depending on if they conduct a wait-and-see strategy and stick with traditional investment or switch immediately to funding innovative but not yet sustainable climate tech firms and technology. The crucial question is, then, how can the necessary investments be initiated, carried out, and funded without endangering the stability of the financial sector?

The authors outline several policies and approaches to achieve the great green transition: 

Macro instruments

  • Carbon pricing and green bonds
  • Greening central bank policy

Areas of action to foster the great green transition

  • Joint action from the public and private sector
  • Promotion of green technologies
  • Better climate risk insurance schemes

This moment is pivotal for economies and governments across the world. The pandemic and the ensuing economic recovery plans must be taken as an opportunity to build resilience measures against the next crisis. The optimal policy to induce an effective green transition and recovery and moderate conflicting interests should include fiscal instruments, targets and standards, public-private co-funding schemes, monetary policy, financial regulation, and disclosure practices. Additionally, international cooperation and the facilitation of risk-sharing will be necessary to scale up these measures. Despite the challenges of a transition so grand, the opportunities and rewards of building green and resilient economies in the wake of the crisis await.