Whenever recessions or economic crises hit, governments usually respond with fiscal stimulus to get the economy back on track. The same is happening now as we begin the post-COVID-19 economic recovery; federal and provincial governments are looking for ways to increase spending to kick-start economic activity and get people back to work.
But the present recovery has introduced a relatively new term to the policy lexicon: “green recovery.” In fact, directly after her appointment to Minister of Finance, one of Minister Freeland’s first statements on Canada’s economic recovery was: “The restart of the economy needs to be green.”
The idea of a green recovery is pretty straightforward: money spent by the government to restart the economy should not solely focus on getting individuals back to work and consumers back to the mall; but also on reducing our environmental footprint.
In other words, a green recovery means fiscal stimulus should be used to increase incomes of individuals and businesses and lower emissions. And ideally, it should be more than just a short-term fix. Done well, it can also set us up for long-term prosperity, where Canadians see their job opportunities, incomes, and quality of life improve over time—well beyond the aftermath of COVID-19. It can also be inclusive of Canada’s natural resource sector.
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Canada is not alone in advancing this idea. Many countries have already put their money where their mouth is: Germany, France, South Korea, Denmark, the UK, and China have all announced billions of dollars in spending to this end. Many, like Canada, see economic recovery from COVID-19 as a golden opportunity to get back on track to meeting their climate change targets as outlined in the Paris Agreement and elsewhere.
The opportunity is a big one: Carbon Brief estimates that green recoveries across the globe could prevent 0.3C of warming by 2050. Experts believe this amount would mean “a good chance” of meeting the temperature goal set forth in the Paris Agreement of limiting warming to roughly 1.5C, the threshold set to limit the most dangerous effects of climate change.
It’s not just good for the environment. From an economic perspective, leading economists expect green recovery spending to have a greater “multiplier effect” on the economy than would traditional stimulus like building roads and bridges, so long as it is spent in areas with the maximum impact.
So, what does it take to be a leader in a green recovery?
Six countries have already announced over a billion dollars in green recovery spending. Collectively, the top six countries account for around $100 Billion USD in green stimulus dollars. In total, Germany is the clear leader with $50 Billion USD announced as of September 10, nearly double the amount of the second-highest country, France. Taking into account the relative size of their economies, however, Denmark leads with green spending amounting to 1.67% of their GDP.
The benefits of being a global leader in a lower-carbon economy are immeasurable. These countries are moving quickly and for Canada just to keep pace—never mind be a leader itself—that means billions of dollars in well-directed spending. Roughly keeping pace with Denmark and spending 1.5% of GDP on a green recovery will mean something in the neighbourhood of $32 billion. And that’s just based on what those countries have announced so far; more is likely on the way.
But what, specifically, are the leading countries spending their money on?
Source: Carbon Brief International Policy Tracker (Green spend as of 9/10/20), categorized by BCA
About 1/3 of the green recovery dollars announced from these countries is going toward transportation-related initiatives. This includes improvements to public transportation, subsidies for fuel-efficient or zero-emission vehicles, infrastructure for electric buses and vehicles, and lowering emissions from aircraft.
Another 1/3 is going towards improving the energy efficiency of the existing building stock. That includes building renovations and retrofits such as improved insulation and window replacements.
The third-largest category, capturing about 13% of green spending dollars, is dedicated to hydrogen development and strategies. Hydrogen—the “green” variety of which is made from renewable power and the “blue” variety of which is made from natural gas with emissions then captured through carbon capture and storage technology—is seen as a promising, no-carbon emissions energy source for the future economy. This is closely followed by spending on research and development on low-emissions energies and technologies.
Source: Carbon Brief International Policy Tracker (Green spend as of 9/10/20), categorized by BCA
It’s also interesting to note that, for the most part, these countries’ spending is not being directed at specific technologies or energy types. Rather than prescribing solutions, they are focusing on outcomes. This includes most of the R&D spending as well as the money earmarked for building efficiency upgrades.
When countries ARE focusing on specific solutions, they tend to be prioritizing hydrogen followed by renewables and electric vehicles. Specifically, Germany has dedicated $10.65 Billion USD to a hydrogen strategy, with about 80% of this investment dedicated to domestic production, transportation and use, and the remaining 20% dedicated to an international strategy for export.
Nations across the globe are recognizing the opportunity in not just lowering emissions and recuperating the economy from the COVID fallout, but in gaining a long-term competitive advantage for a given energy, technology, or area of expertise. In fact, IEA notes that one of the lessons of green spending from the 2008 recession is the importance of using spending to build on and grow competitive advantages which can be exploited in the global market.
Hydrogen, it seems, is an area of competitive advantage for Canada, and Ottawa is already taking note. Alberta has a huge cost advantage in blue hydrogen production. This fact, combined with the province’s pipeline infrastructure, carbon capture technology and vast fossil fuel reserves that can be used as a feedstock in creating virtually emissions-free fuel, put us in a unique position to be a truly global leader in this area.
But Germany and France are already racing ahead in this space. To keep pace, Canada would have to spend between $6 billion and $14 billion on a hydrogen strategy. And it goes without saying that throwing money at a problem does not guarantee a solution. Those dollars would need to be invested smartly, in consultation with businesses, researchers and others, focusing on technology development, lowering production costs, commercialization and scaling, and enabling infrastructure.
So how do we thread this needle? How do we promote economic recovery today, and set Canada up for a prosperous low-carbon future without breaking the bank?
In our view, there are three components we need to see. First of all, the scale of government support for a green recovery (and future) needs to match the size of the problem and the spend of competitors. Second, it needs to target areas of Canada’s existing strengths and competitive advantages. That means an inclusive recovery that involves Canada’s natural resources industries as partners. Finally, given the federal government’s fiscal challenges, tax and regulatory policies need to be heavily oriented towards competitiveness and economic growth.
In future commentaries, we’ll look more closely at the kinds of messaging, policy changes and investments that would be needed to enable exactly that.