What will be the impact of the Covid-19 pandemic on climate change?

21 April 2020

Michele Catalano, Lorenzo Forni, Emilia Pezzolla

The economic crisis triggered by Covid-19 is already leading to a significant reduction in emissions. However, its contribution to climate transition is uncertain. On the one hand, the reduction in emissions is transitory and has a marginal impact on the accumulation in the atmosphere of greenhouse gases which are the main cause of climate change. On the other hand, the crisis will absorb a lot of resources and it is unclear how much will remain available to support green investment. In addition, low oil prices and public support for polluting sectors (such as aviation, cars and possibly oil) could contain the drop in emissions even during the recession. The impact that the crisis will have on climate change then will depend on the policies introduced in that period. If the recovery builds on smart working and is able to return to pre-crisis energy production levels with a greater share of green energy, then Covid-19's contribution to climate transition will have been positive. Prometeia’s simulations show that supporting the recovery with green investments would have the dual benefit of achieving emissions neutrality earlier than planned, and a more robust recovery because of the reduction in climate risks.

 

The social and economic crisis triggered by the Covid-19 epidemic has disrupted the lifestyles of most societies worldwide in many ways.

One of the implications of what is happening is the rapid decline in energy consumption and the CO2 and greenhouse gas emissions profile. Worldwide, demand for electricity has declined as commercial buildings, factories and other major electricity users have had to slow down or even discontinue their activities. However, residential electricity use has increased but not enough to compensate for the decline in industrial use. Daily electricity consumption from 1 to 16 April compared to the same period in 2019 was down by about 10% in Germany, 20% in France and 30% in Italy. The mobility of people has reduced by 85% in Italy, 70% in the UK and around 45% in the US and Germany. In many countries, the decline on an annual basis in the number of passenger flights exceeds 90%. The latest figures available on Tuesday, April 14, 2020 show around 93% fewer flights to Italy than on the same day in 2019.

Overall, the coronavirus crisis is affecting a wide range of energy markets - including coal, gas and renewables. Its impact on oil markets is particularly strong because it is severely hitting demand for transport fuels. The price of crude oil has fallen sharply since 2019, by more than 60%. The fall in oil prices has also affected natural gas prices. According to the International Energy Agency, global demand for oil in 2020 is expected to shrink by about 9.5%, the first decrease since the global recession of 2009. 

Using the Prometeia IAM (Integrated Assessment Model) model, we estimate that a drop in global GDP between 1.5% and 3% would reduce emissions in the same year by about 6%-12%. While the change in CO2 emissions (flow variable) due to the recession goes in the same direction as mitigation policies, the significant effects of climate change risk reduction will occur only with a significant reversal of CO2 concentrations (stock variable), and therefore the efforts to reduce emissions will have to be much greater. 

In the face of the economic crisis, governments around the world are moving to support the economic system. There is an interesting debate emerging around the definition of actions to increase the energy efficiency of stimulus programs. On the one hand, economies will face an increase in the debt-to-GDP ratio due to the enormous fiscal support injected into the system which will reduce the green transition space, and which also needs strong public support. In addition, many resources that had been collected laboriously to launch green transition programs (such as in the European Union) now risk being diverted to support the economic recovery. 

On the other hand, the Covid-19 emergency has created an opportunity. Apart from the transitional reduction in emissions and the temporary shift towards neutrality targets, it is likely that the Covid-19 shock will affect many brown sectors of the economy: the fossil fuel-based energy sector, the aviation sector and the cement sector which are among the largest emitters of CO2 will be affected by the decline in aggregate demand. If the crisis does not reverse quickly, these sectors will have to reduce production capacity significantly. Therefore, in the recovery phase there would be room to increase production with a greater share of green energy. 

Using the Prometeia IAM model we have simulated public intervention scenarios to support a world economy in recession. Assuming a global GDP loss for one year of 5%, we have estimated the effects of a fiscal stimulus in green investments to support the economy.  We find that the stimulus could have a dual benefit: achieving carbon neutrality five years earlier (compared to 2060 in the pre-Covid baseline scenario) and generating higher growth after a few years and one that is higher than the previous path due to its being less subject to the negative impacts of climate shocks. Supporting the recovery with green investments would be akin to killing two birds with one stone.

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