Be careful with an overly green Covid-19 stimulus

by Ingmar Schumacher, SFPLab editor.

Today I published a letter in the Financial Times that unfortunately was an abriged version of what I had submitted. And in this abridged version, with an altered title, my correct message does not get across: Don’t shock the supply chains by strongly prioritizing green companies. Instead, save the economy and then get on with the green transition.

There are many voices that demand the Covid-19 stimulus packages across the world to be dedicated to pushing ahead with greening the economy. I am a professor of environmental economics, and for quite a few years I have been advocating for governmental policies that strongly focus on inducing a green transition to a sustainable economy. However, I would argue that we need to be careful to now use the stimuli for that purpose.

The corona crisis, characterized by both a negative demand and a negative supply shock, affects companies of all sizes, across all sectors and along all supply chains. Especially the small and medium-sized companies tend to have few savings to keep on paying their employees and their rents. This implies two problems: firstly, the stimuli need to be distributed very quickly; secondly, it is difficult to know which companies are relevant for the supply chains and thus need to be prioritized. As time is of the essence, it is less costly if the governments hand out the stimuli as quickly as possible as this will minimize layoffs.

The main reason for overly prioritizing green companies is that this would speed up the push to a sustainable economy – the green companies will prosper, the traditional, dirty industry will have to find its own means to survive or falter. However, focusing the stimuli to a significant degree on green companies will lead to disruptions along supply chains which cannot be immediately offset. For example, there are no green substitutes for aviation, and our economies still run to a significant degree on oil and coal.

It would, however, be more than unwise to simply hand out the money for free such as during the 2018 financial crisis. This simply increases inequality and may not even lead to the desired effects, such as minimizing layoffs. Thus, it is vital to tie the stimuli to requirements that help avoid unemployment, bankruptcies and disruptions along the supply chains. Furthermore, the stimuli must be provided along all supply chains and markets, and certainly not favour the more traditional, polluting sectors over newer, greener ones. If, however, this crisis, for whatever reason, prolongs, then a suggestion would be to tie the stimuli to medium-term improvements in energy efficiency and measures that help a green transition. But it needs to be a transition, as the name says, and not come as a shock to the system, as any shock leads to undesirable consequences.

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