Posted: 06 Jul. 2020 10 min. read

Climate: The next great challenge

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The monitor is updated weekly and features a changing set of charts and tables illustrating key economic themes from the COVID-19 crisis and our forecasts for UK GDP growth over this year and the next. The latest update includes charts on global GDP and trade, the acceleration of new COVID-19 cases in the US, the equity market rally in the second quarter and expected increases in public debt.

The COVID-19 crisis has collapsed global economic activity, and with it, greenhouse gas emissions. The pandemic has brought cleaner air and skies across the world’s cities, but it also offers a glimpse of the scale of changes needed to mitigate the worst impacts of climate change.

A study by the University of East Anglia and Stanford University has found that daily global CO₂ emissions in early April 2020 were 17% lower than average levels in 2019. The International Energy Agency (IEA) estimates that carbon emissions will fall by at a record rate, of almost 8% this year.

Lower levels of pollution have come at huge economic cost. The global economy is expected to suffer its worst year since the great depression of the 1930s. Yet the United Nations estimates that if the world is to meet the Paris Agreement of limiting global warming to 1.5℃, a similar reduction, of 7.6%, in emissions will be needed in every year to 2030. The world faces a huge challenge.

But in the short term, emissions will rise as the global economic recovers. More profound is the risk that the primacy of growth and jobs could undermine the drive to reduce carbon emissions. We, however, take the opposite view. Here are five reasons why the COVID-19 crisis is likely to accelerate the climate transition.

Firstly, some of the behavioural shifts which have lowered emissions, such as increased in home working, video conferencing and less business-related travel, seem likely to stick. Oil majors Shell and BP have made substantial write downs on the value of their assets reflecting a view that the pandemic will dampen oil demand and prices and accelerate the move away from fossil fuels.

Second, the pandemic has vividly demonstrated society’s vulnerability to shocks and heightened awareness of the need to plan for future risks. A recent global poll by Ipsos MORI shows that 71% of those surveyed believe that climate change is as at least as serious a crisis as COVID-19. Last month a YouGov poll found that 56% of UK voters think government should either focus equally on the economy and climate or put climate first. Only 34% thought that the economy should come ahead of climate.

Nor does the pandemic seem to have weakened investors’ concern about environmental and social issues. In April a group of eight major investors said that tackling climate change must continue to be a priority for public companies despite the health and economic crisis. At about the same time Royal Dutch Shell became the world’s largest energy group to announce that it planned to cut its carbon emissions to net zero by 2050. According to a survey carried out by the FT and Savanta, a market research company, nine in ten wealth managers polled believed that the pandemic would result in increased investor interest in ESG investing.

The surge in Tesla’s share price testifies to the profit potential of electric vehicles. Last week Tesla became the world’s largest carmaker by market capitalisation eclipsing Toyota, a company which last year sold around 30 times as many cars.

Third. Renewables have made huge progress. Since 2010, the benchmark price for solar power has dropped by 84%, offshore and onshore wind by about half. It is a measure of the change that in mid-June the UK went for over two months without using electricity generated from burning coal. During this period 37% of Britain’s electricity came from renewable energy, up from 3% ten years ago.

Fourth. Greater government fiscal activism, made possible in part by very low borrowing costs, provides a golden opportunity to upgrade green infrastructure. In the initial stages of the crisis this was about supporting households and corporates; now the focus has moved to infrastructure investment. The returns appear to be attractive. An Oxford University study, carried out by economists including Nobel prize winner Joseph Stiglitz, found green projects create more jobs, deliver higher short-term returns per dollar spent and lead to increased long-term cost savings than traditional forms of fiscal stimulus.

Green projects are at the heart of the European Commission’s proposed €1.85tn recovery plan. Several European countries, including Germany, have announced fiscal packages that include support for climate-friendly industries including subsidising electric cars. (Twelve years ago, in the financial crisis, the German government provided extensive support for its overwhelmingly petrol and diesel auto sector. The absence of such general support in recent months is a sign of the times.) The French government added environmental conditions to the €15bn rescue plan for its aerospace industry, including higher levels of investment in electric and hydrogen planes.

Finally, US politics have a significant impact on climate policy. Support for Joe Biden in the upcoming presidential election has risen sharply since early May. Last week betting markets put the Democratic candidate’s chances of winning the election at over 59%, 23 percentage points clear of Mr Trump, according to RealClear Politics. Mr Biden has pledged to set a target of net-zero emissions by 2050 in what would constitute an about-face from the current administration’s stance.

Fifth. The requirements on companies to report climate change exposures are growing. Identifying and pricing such risk is one of the most effective ways of reducing carbon emissions. After eight years as the governor of the Bank of England Mark Carney has become the UN’s special envoy for climate action and finance. As governor of the Bank of England Mr Carney established the Task Force on Climate-related Financial Disclosures to shed light on the financial risks posed by climate change. Many companies voluntarily report under these standards and Mr Carney has called for them to become mandatory.

The COVID-19 demonstrates the urgency of preparing for external shocks and is likely to sharpen the urgency of efforts to reduce climate change. As Mark Carney said recently: “We can't self-isolate from climate change.” Public investment in green infrastructure is on the rise. Understanding and pricing of climate risk has grown over time. Renewables are increasingly commercially viable.

There is a view that it is only by shrinking economic activity, as has happened this year, that we can be sure of stopping climate change. Having emerged from a massive downturn the human consequences are becoming clear. In fact the experience of recent years shows that the economy and the environment need not be in opposition. The energy intensity of UK GDP fell by 38% between 2000 to 2015 even as the economy expanded by nearly one-third. The pace of the climate transition needs to quicken. But green growth is possible. Now, in the wake of COVID-19, could be its moment.

PS: We have been struck by the divergence between weakening corporate revenues and the modest widening in corporate bond spreads, a measure of default risk. Corporate bond spreads widened sharply at the start of lockdowns in March. Central bank interventions quickly improved financial conditions and spreads subsequently narrowed. In the UK insolvencies have not increased, partly because of the lockdown disrupting court operations and insolvency practitioner activity. In April and May, insolvencies were actually below pre-lockdown levels. Unfortunately, it may only be a matter of time before insolvencies increase. A report by TheCityUK estimates that about £100bn in business lending could prove unsustainable by the first quarter of 2021. In the US insolvencies have already risen to levels last seen in 2009.

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Ian Stewart

Ian Stewart

Partner and Chief UK Economist

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.