In the midst of a protracted and divergent recovery from COVID-19, strong recovery packages that also lay the foundations for a sustainable transformation must remain at the top of Finance Ministers’ agendas, argue Amar Bhattacharya and Anika Heckwolf.

Leaders around the world have committed to implementing a ‘green recovery’ and to ‘building back better’ from COVID-19. The question of how countries can do this has become an important area of focus for the Coalition of Finance Ministers for Climate Action. Launched in 2019, the Coalition now has 68 member countries and has become a core component of the global architecture focused on accelerating climate action. In July 2020, the Coalition’s Better Recovery, Better World report laid out the unique opportunity of finance ministers to design and implement comprehensive stimulus packages that can drive a strong recovery and build a better future. Now, a follow-up report titled Building Momentum for a Strong Recovery and Sustainable Transformation takes stock of the recovery to date and looks at the agenda that lies ahead. We summarise some of the report’s messages in this commentary.

Taking stock: a divergent and protracted recovery

Almost two years into the pandemic, the world is experiencing a protracted and divergent recovery. While advanced economies and China are back on their pre-pandemic growth trajectories, most emerging market and developing economies (EMDEs) continue to grapple with the ongoing impacts of the pandemic. Their per-capita incomes are expected to be substantially lower than was projected before the crisis and, following a decade of declining investment growth and a collapse in investment at the beginning of the pandemic, they risk a protracted investment slowdown.

COVID-19 response trackers and a survey conducted among members of the Coalition highlight the greater firepower of advanced economies, which have spent up to 20 times more on a per-capita basis than EMDEs on their COVID-19 response. However, they also show that around the world, investment-led recovery programmes have been slow to build, with most money going towards immediate rescue stimulus. Moreover, only a small share of the announced spending – around 20% – was spent in a way that is likely have climate and environmental benefits. Green spending has been low particularly in EMDEs, which for the most part have not been able to put in place significant rescue programmes, let alone recovery plans.

The task of putting in place recovery programmes that can resuscitate growth and accelerate the transformation to a low-carbon, climate-resilient economy still lies ahead, especially for EMDEs.

Looking ahead: the investment push needed for recovery and sustainable transformation

A strong investment push led by green investments is crucial to lay the foundations not only for a sustainable recovery from the COVID-19 crisis, but also for the transformation needed to meet climate and development goals. Recent estimates suggest that this will require sustained investments of at least 2% of GDP per year in advanced economies over the next decade, with even greater investments needed in EMDEs.

Existing recovery packages are falling far short of meeting these targets. For instance, the International Energy Agency finds that spending committed so far amounts to only 35% of what is needed to reach zero-carbon energy systems. There is therefore an urgent need to accelerate recovery spending in both developing and developed countries,and to anchor recovery plans innational development and growth strategies, particularly long-term strategies and updated Nationally Determined Contributions (NDCs). To do so, countries need to design well-articulated investment plans and translate them into concrete and viable project pipelines with a focus on two priority areas: accelerating the shift to zero-carbon energy and enhancing investments in adaptation and resilience to climate change impacts.

Putting in place the right policy and finance

Finance Ministers are central to designing the investment plans needed for recovery and transformation, building the macro-fiscal and policy frameworks that will support the green transition, and in mobilising the necessary finance. 

The implementation of such plans will face significant macroeconomic challenges – particularly in EMDEs, where fiscal space is tight and there is greater vulnerability to potential shocks in the global economy. However, the response to the 2008 financial crisis has shown that austerity is not the answer and is likely to slow down the pace of the recovery. Fiscal expansion, by contrast, used to finance growth-enhancing investments, will enable economies to recover from the economic shocks caused by the pandemic, and lay the basis for new and better forms of growth. Domestic fiscal reforms that increase the effectiveness and efficiency of the tax system, as well as efforts to mainstream climate into economic policies, and climate-informed public financial management through green budgeting and public procurement, will also be crucial, to increase fiscal space and improve the quality of spending.

In addition to a growth-oriented macro-fiscal framework, a strong supportive policy framework will be vital to accelerating change. Carbon pricing and fossil fuel subsidy reform must play a critical role in tackling market failures, shifting incentives towards sustainable investments, and generating government revenue. To be effective, carbon pricing needs to be supplemented by complementary regulations that address market failures and provide clarity and confidence for business, investors and consumers. Policies will also need to ensure a just transition for impacted workers and communities.

Last but not least, particularly in EMDEs, the scale of investments needed for a strong recovery and transformation will require mobilisation of all sources of finance: domestic and international, public and private. Moreover, it will require the acceleration of the alignment of the wider financial system with the goals of the Paris Agreement. There is now a real opportunity for public and private finance to work together to sharply accelerate the shift to zero-carbon investments with a much greater focus on emerging markets and developing countries.

A continued key role for the Coalition of Finance Ministers for Climate Action in driving the green recovery agenda

As we enter 2022, a range of short-term challenges, including worries around persistent inflation, rising interest rates in advanced economies and concerns around debt sustainability in EMDEs, threaten to shrink government budgets and further stall nascent recovery efforts. These challenges could thwart the scaling up of green investments that are urgently needed to sustainably exit the pandemic and meet climate goals. The continued support for strong and transformative recovery packages must remain at the top of Finance Ministers’ agendas.

The Coalition has an important role to play in driving coordinated action that can set the global agenda for a sustainable recovery. There are tremendous benefits for Finance Ministers in working and moving together. As countries continue to design and implement their recovery packages, the sharing of expertise and experiences as well as the ongoing efforts under the Helsinki Principles can continue to provide important inputs and can inspire the scale of action needed to recover from the pandemic – while propelling the transformation needed to reach climate and development goals. 

The full paper, Building Momentum for a Strong Recovery and Sustainable Transformation, is available on the website of the Coalition of Finance Ministers for Climate Action. It is an update to the report published by the Coalition of Finance Ministers in July 2020, Better Recovery, Better World: Resetting climate action in the aftermath of COVID-19.

The views in this commentary are those of the authors and do not necessarily represent those of the Grantham Research Institute.

About the Coalition of Finance Ministers for Climate Action

The Coalition of Finance Ministers for Climate Action was launched in 2019 by governments from 26 countries. Its work is organised around the six Helsinki Principles. Mirroring the growing recognition of the pivotal role finance ministers play in addressing climate change, the number of member countries has since more than doubled to 68. Over 30 institutional partners, including the Grantham Research Institute on Climate Change and the Environment and Brookings Institution, also support the Coalition.

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