Finance ministers have a unique opportunity to design and implement comprehensive stimulus packages that can drive a strong recovery and build a better future: so argues a new paper prepared at the request of the co-chairs of the Coalition of Finance Ministers for Climate Action and summarised in this commentary.

The COVID-19 context

The world has been transformed by the COVID-19 crisis. Beyond its tragic human costs and loss of life, the pandemic and the necessary lockdowns have resulted in severe economic impacts with immense loss of jobs and a major threat of global depression. Impacts differ across countries, with emerging markets and developing countries also hit by historic declines in commodity prices, tourism and remittances and unprecedented reversals in capital flows, which have fuelled a deep loss of confidence and exacerbated vulnerability to other potential shocks. Finance ministers have had to respond quickly and act decisively, shaping and implementing rescue plans and securing international support where needed.

Despite the huge amount of global stimulus to date, a fast bounce-back cannot be guaranteed. The outlook is uncertain and it could take several years to recover from this crisis, with long-lasting effects, including for debt and fiscal positions.

At the same time, the climate and nature crisis remains just as pressing, requiring urgent action. Concentrations of greenhouse gases in the atmosphere are likely to keep rising and the world could see temperatures far outside human experience over the next few decades. Much stronger action on mitigation, resilience and adaptation will be necessary. The importance of protecting nature has also become much clearer and sharper in the COVID-19 context: failure to protect nature has increased the risks of infectious diseases emerging and led to immense social and economic damage.

The world was on an unsustainable and vulnerable path prior to the crisis and the recovery must avoid the dangers and fragilities of the past – there can be no going back to the old normal. Attempts to unwind existing environmental regulations and policies and return the economy to the old model, which was characterised by low productivity, high inequality and climate/environmental risk, would be misguided and could severely hinder the ability of finance ministers to respond to the multiple challenges, vulnerabilities and forces of change they are facing.   

An opportunity for finance ministers to lead a strong recovery and build a better future

Finance ministers have an opportunity to design and implement comprehensive and ambitious stimulus packages that both restart their economies, including restoring confidence and delivering on the urgent challenge of jobs, and set a path of sustainable, inclusive and resilient growth. This calls for clarity of strategy and direction, to chart a purposeful course over the next decades.

The recovery has to be green, but much more than green. In particular, inclusion and sustainability can and must go hand in hand. There will need to be a strong focus on employment, especially for the young generation, to respond to the immediate shock and longer-term structural challenges. Stimulus packages that aim to grow the denominator of debt/GDP through productive and sustainable stimulus investment are also the most attractive route to debt sustainability; a path of austerity that leads to a great depression would be particularly damaging – socially, economically and environmentally.

The recovery packages finance ministers need

There are three key elements of stimulus packages that finance ministers need to get right for a better recovery and future. They need the right investment, the right supporting policies and the right finance.

The right investments are fast, labour-intensive in the short run and have high multipliers. There are strong arguments, supported by mounting evidence, that green investments perform well, if not better, than alternative investments, across most of these dimensions. Green investments also address climate risk and have other attractive co-benefits. Green investments are available in a broad range of productive complementary assets, including physical and human capital, knowledge and intangible capital, as well as natural and social capital.

The transformational opportunities for better growth are looking ever more attractive, with fast moving technological advances such as in sharply falling costs of round-the-clock solar and growing awareness of co-benefits, for example of reduced congestion and pollution.

There are a range of tools that can help finance ministers get the investment decisions right, including applying a wellbeing lens, green budgeting, project-level guidance and checklists, sector-level guidance and tools for resilience, broadly defined.

The right policies can help to maximise the benefits of the investments for jobs and sustainable growth. Three key policies are carbon prices, supportive regulations and bailout conditions.

Falling fossil fuel prices provide an opportunity for carbon pricing and inefficient subsidy reform, which can provide a source of much needed revenues, and can be part of wider fiscal reforms to restore fiscal sustainability. Complementary and supportive regulations and competition policies can provide clear signals, policy certainty and induce innovation in growth sectors, lowering the level of public stimulus expenditures required to bring an economy back to full activity. Bailouts with conditions can save jobs and accelerate low-carbon restructuring in ‘brown’ firms/industries. All policies will need to carefully consider distributional consequences to ensure a just transition for workers and communities.

The right finance is needed to fund the investments for recovery and long-term transformation. With an extremely difficult macro-fiscal context, especially in emerging markets and developing countries – many will also face debt difficulties and heightened vulnerabilities – finance ministers will need to find ways to create fiscal space and unlock finance for the best growth and job enhancing investments available to them. They will also need to anticipate and lay the foundations for the substantial investments needed to drive the transformation to a low-carbon and climate-resilient economy.

To do this it will be critical to mobilise all pools of finance and utilise them more effectively. This includes strengthening domestic public finance foundations, bolstering and making more effective use of international climate finance, and enhancing the role of international and national development banks. It will also be crucial to augment substantially the mobilisation of private finance and align all finance with the Paris Agreement and Sustainable Development Goals (SDGs).

Implications for the Coalition of Finance Ministers for Climate Action

The global context and the recovery packages we need will have important implications for the priorities and work agenda of the Coalition; finance ministries will be central in the design and implementation of these packages.

The work of the Coalition around the Helsinki Principles was fortuitous; most of this work can help support a better recovery. Some elements of the work will be of particular benefit, e.g. revenue-enhancing measures and pricing, including carbon pricing and inefficient fossil fuel subsidy reform; some elements will need to be expanded, including around mobilisation of private finance, and in other cases some new work will be needed to align with the COVID-19 context, including around complementary regulations and bailout conditions.  

There are tremendous advantages to Finance Ministers working and moving together at a time when joint action can bring the urgency and scale of action needed to reach climate and development goals.

The full paper, Better recovery, better world: Resetting climate action in the aftermath of COVID-19, is available on the website of the Coalition of Finance Ministers for Climate Action.

The views expressed in this commentary are those of the authors and do not necessarily reflect those of the Coalition or its members, or the Grantham Research Institute.

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