Bridging the gap – implications of current COVID-19 fiscal rescue and recovery measures

The COVID-19 pandemic has brought unprecedented health and socioeconomic challenges – several of which will continue to have a profound effect on global society for many years to come. These new challenges compound many existing social and economic challenges, including widespread social inequality, rural/urban disparities and climate change. This confluence of challenges requires a considered response.


Introduction
The COVID-19 pandemic has brought unprecedented health and socioeconomic challenges -several of which will continue to have a profound effect on global society for many years to come. These new challenges compound many existing social and economic challenges, including widespread social inequality, rural/urban disparities and climate change. This confluence of challenges requires a considered response.
At the same time, COVID-19 rescue and recovery measures present an opening to stimulate the economy, while simultaneously accelerating a transition towards a lowcarbon economy consistent with the temperature goals of the Paris Agreement. Unless this opening is pursued, the Paris Agreement goals are likely to slip further out of reach (chapter 3).
Against this background, this chapter assesses two main questions:

▶
What can we say about the size and extent to which COVID-19 rescue and recovery measures to date support low-carbon or high-carbon development? (sections 4.2 and 4.3) ▶ What are the emerging lessons for governments in the pursuit of a low-carbon economic recovery? (section 4.4) Global fiscal actions to address the impact of the COVID-19 pandemic are of an unprecedented scale. As section 4.2 shows, in September 2020, fiscal actions amounted to around US$12 trillion, or 12 per cent of global gross domestic product (GDP). Particularly for countries with capacity to cheaply borrow funds (high 'fiscal space'), governments have been willing to spend large sums of money, often drastically increasing public debt. For nations without this fiscal space (often developing countries), public spending has been significantly lower to date.
To date, most governments have rightly focused on funding economic rescue measures to protect lives and businesses in their immediate economic response to COVID-19. As competing objectives and varied COVID-19 impact and response timelines have emerged around the world, some governments have also started sharpening their fiscal focus to funding recovery measures to reinvigorate their economies.
This chapter shows that so far, the opening to use rescue and recovery measures to support a low-carbon transition has largely been missed. Although there are examples of measures that support a transition towards a decarbonized world, most countries are currently adopting measures that support a high-carbon status quo of their economies -or even foster new high-carbon investments. This is particularly the case for rescue measures.
The jury is still out on whether COVID-19 rescue and recovery measures will lead to lower or higher global greenhouse gas (GHG) emissions in the longer run (see also chapter 3). However, this chapter illustrates that certain rescue and recovery measures can simultaneously support a rapid, employment-intensive and economically cost-effective economic recovery and a low-carbon transition. Such measures include i) support to low-carbon and renewable energy, low-carbon transport, zero-energy buildings and low-carbon industry; ii) support to research and development of zero-emissions technologies; iii) fiscal reforms of fossil fuel subsidies; and iv) nature-based solutions, including large-scale landscape restoration and reforestation.
A detailed evaluation of the appropriateness of given measures in various country contexts is required to assess the scope for rolling them out across countries, as impacts vary across different political, environmental, economic, business, legal, regulatory and social contexts. Well-designed spending can also tackle other pressing problems such as air pollution, natural capital deficit, wealth and income inequality, inadequate quality of life and rural/urban disparities.
The future can still be shaped in a way that helps bridge the emissions gap, through the decisions yet to be made on the composition and implementation of the announced recovery packages and on future recovery actions.

Unprecedented global fiscal spending on economic rescue and recovery measures
Fiscal actions to address the impact of the COVID-19 pandemic are unprecedented in scale (see figure 4. If monetary liquidity stimulus provided by countries' central banks is considered in addition to fiscal spending, the share of GDP spent on COVID-19 measures increases sharply: up to 70 per cent for some G20 members (ODI 2020). The range of fiscal and monetary interventions reflects the full policy space available to each country to respond to the COVID-19 pandemic.
Since many developing countries entered the pandemic with pre-existing vulnerabilities and limited fiscal space, and given the immediate threat to lives due to the health and income impacts of COVID-19, spending in these nations has primarily targeted short-term rescue measures. Key vulnerabilities include high levels of public indebtedness, slowing economic growth rates due to subdued global demand, and trade tensions. To date, this has left little room to fund recovery strategies with a longer-term perspective. In view of this, regional development banks and the international donor community have increased their commitment of support. At the regional level, for example, the African Development Bank initially responded by raising US$3 billion for a 'Fight COVID-19' social bond in March 2020, the largest US-dollardenominated social bond transaction in the capital markets to date (African Development Bank [AfDB] 2020a). This was followed by its creation of a US$10 billion response facility to assist governments and the private sector, its approval of loans and grants to individual member countries, and its support for regional efforts to combat the pandemic (AfDB 2020b; AfDB 2020c). Meanwhile for most European and Central Asian countries, the European Bank for Reconstruction and Development (EBRD) plans to devote more than half of its total COVID-19 recovery investments to the green economy (Bennett 2020).
The IMF doubled its COVID-19-related funding capacity from US$50 billion to US$100 billion in April 2020, had reached US$280 billion lending commitment by October 2020, and stands ready to deploy US$1 trillion in lending capacity to help its member countries to weather the impact of the pandemic (IMF 2020c; IMF 2020d; IMF 2020e). Meanwhile, the World Bank Group also significantly increased its commitment for COVID-19 projects from US$14 billion in March 2020 to US$160 billion in April 2020 (World Bank 2020a; World Bank 2020b). The World Bank had allocated US$43 billion of this pool as at September 2020 (World Bank 2020c). Reflecting global spending patterns, in the early stages of the COVID-19 outbreak, most World Bank projects supported emergency funding to address health priorities. More recently, the scope of funding has widened to include financial sector reform, education, governance, and market support. 2 The international donor community is likely to play an important role in supporting and steering funding towards measures that support an inclusive, resilient and low-carbon economic recovery (UN Regional Commissions 2020), especially in the least developed countries.

Fiscal COVID-19 spending has so
far primarily supported the global status quo of high-carbon economic production This section provides a preliminar y assessment of the extent to which COVID-19 fiscal rescue and recovery measures to date support low-or high-carbon development, and whether they have a positive net effect on GHG emissions. As at October 2020, COVID-19 fiscal spending had primarily supported the global status quo of high-carbon economic production. While it is understandable that immediate rescue measures were directed to incumbent industry, later rescue and recovery measures could have supported low-carbon development, without forsaking opportunities for economic gain (Hepburn et al. 2020).
Only a few countries have transformed green rhetoric into low-carbon recovery measures (that is, measures that lead to a reduction in GHG emissions). For most, recovery spending has mostly been high-carbon (that is, implying negative net effects GHG emissions) or neutral (that is, having no discernible effects on GHG emissions). Furthermore, in a number of cases, the effect on GHG emissions is still unclear. Focusing on G20 members, figure 4.2 provides an overview of climate negative, neutral and positive fiscal rescue and recovery measures ▶ Assessments of the effects on GHG emissions are preliminary (see chapter 3), but will become more robust as the composition and implementation details of rescue and recovery packages become clearer.
Methodologies for identifying and quantifying the climate impacts of rescue and recovery measures and times of analysis vary slightly across institutions, bringing corresponding variance in results (figure 4.2, Annex II). However, for all trackers and across geographies, lowcarbon measures are significantly outweighed by neutral and high-carbon measures.
Preliminary analysis 3 indicates that low-carbon policies have been slightly more prevalent in recovery measures than in rescue measures (O'Callaghan et al. 2020). This

Emerging lessons and examples for governments in the pursuit of lowcarbon economic recovery
The previous sections show that the economic rescue and recovery measures announced by governments worldwide are unprecedented in scale. Although section 4.3 clearly shows that measures supporting a low-carbon transition have been limited to date, there is scope to adjust announced recovery measures to become more lowcarbon and to design future packages in a manner that supports an inclusive, resilient and low-carbon economic recovery (UN Regional Commissions 2020).
As chapter 3 illustrates, global GHG emissions are projected to be significantly reduced by 2030 only if COVID-19 economic recovery is used as an opening to pursue decarbonization. Therefore, bridging the 2030 emissions gap critically depends on the extent to which this opening is used and integrated into substantially more ambitious new or updated nationally determined contributions (NDCs). Previous editions of the Emissions Gap Report have highlighted the major long-term sectoral transformations that are needed to bridge the gap and reach net-zero GHG emissions globally and these are also relevant to consider in the context of recovery measures (box 4.1).
Governments evaluate fiscal rescue and recovery spending, taxation and regulatory options against a variety of criteria. In most instances, the ability to stabilize or stimulate the economy through a specific measure is likely the first criteria considered by policymakers. However, measures that have similar short-term economic characteristics may differ considerably in terms of their social, environmental and long-term economic impacts. Considering medium-to long-term economic, environmental and social indicators can therefore help governments maximize the long-term prosperity benefits of their recovery measures. Various studies discuss, in a global context, the benefits of aligning policy with different indicators. These are summarized in  Economic activity (including short-and longterm impact and multiplier effects) Government budget capacity (including the impact on fiscal space, e.g. producing future fiscal revenues or savings to the government) GHG emissions (including short-and longterm and potential lock-in)

Other environmental benefits (including air quality and water)
Social benefits (including access to public resources, health, gender equity, cost-of-living reductions for low-income earners or improved public health)    Queensland has frozen fees and charges for coal and gas explorers until July 2021 (State Government of Queensland 2020), and South Australia has implemented a partial suspension of permitting and licensing fees in the oil, gas and mining sectors (State Government of South Australia 2020)

4
Brazil Reduction of royalties for small or medium-sized companies exploring, developing and producing oil and natural gas to initiate further private sector investment (Brazil, National Energy Policy Council 2020) 3 4

Bailout of fossil fuel companies without conditions for zero-emission transition Canada
Short-term unconditional liquidity support and higher-risk fi nancing for Canadian oil and gas companies to support operational requirements over a 12-month period of up to around US$46 million (CAD 60 million) per company announced in April 2020 (Business Development Bank of Canada [BDC] 2020). While this specifi c programme does not include requirements for zero-emission transition, the Government of Canada has also announced other recovery investments in the oil and gas sectors designed at reducing emissions while stimulating the economy and creating jobs.   However, rapid capacity addition in recent years (nearly 60 per cent of India's coal capacity was commissioned between 2010 and 2020), lower-than-forecasted growth in demand, and competition from renewable energy have created a power surplus. The entire coal fleet is facing low utilization rates (55-60 per cent) and competition for limited coal supply. Forty GW of coal-fired projects were financially stressed in 2018 (India, Ministry of Power 2018). In addition, new pollution control norms will add costs to coal-based electricity production. Reflecting these developments, in her budget speech for 2020, the Finance Minister suggested that old thermal plants with high carbon emissions should be closed, and the Power Minister later announced that 5.1 GW had been earmarked for shutdown due to noncompliance with pollution standards. Two major states, Gujarat and Chhattisgarh, have announced that they will no longer construct new coal plants (Carbon Copy Editorial Team 2019).
In the medium term, COVID-19 is expected to cause a sustained decline in electricity demand compared with pre-COVID-19 trends (Spencer 2020). This could reinforce a move away from coal. Analysts have identified accelerated retirements of coal plants as a catalyst for reviving the power sector, while reducing air pollution and GHG emissions. Studies estimate that there is a strong economic and environmental case for decommissioning 27-36 GW of old, expensive or polluting plants in the short term (Fernandes and Sharma 2020; Srikanth and Krishnan 2020). This would release debt-ridden utilities from contractual fixed cost obligations and improve the utilization of younger, more efficient and cleaner plants, while also releasing lowcost coal linkages.
At the same time, it would result in considerable savings in terms of system-level costs and GHG emissions (Dang, Nuwal and Acharya 2020; Ghosh and Ruha 2020). It would also generate upstream benefits on the balance sheets of public sector banks at a critical moment. Increasing the usage of cleaner plants would avoid the cost of retrofitting old, dirty plants with air pollution control equipment. Furthermore, utilities would be free to lower their power purchase costs by replacing the lost generation with cheaper renewable energy or power exchange.
Implementing an accelerated retirement programme for old coal plants will face technical and political constraints, particularly if the promoter has not fully recovered their equity. Proposals to overcome such challenges have recently emerged, such as bundling the decommissioning costs into renewable energy auctions (Dang, Nuwal and Acharya 2020) or raising government bonds funded by ratepayer surcharges to buy out brownfield assets (known as 'securitization') (Shrimali 2020).
One aspect not directly considered in this chapter is the extent to which the implications of COVID-19 and associated rescue and recovery measures may influence underlying drivers of high-carbon production and consumption. Box 4.2 provides an example of how COVID-19 could compound economic and environmental incentives for a transition out of coal, using India as an illustrative example.

Republic of Korea
Reduction of car sales tax for new cars from 5 per cent to 1.5 per cent between March and June 2020 and to 3 per cent from July to December 2020, without preferential measures for electric or hydrogen vehicles (Ho-Jeong 2020), despite an additional temporary tax cut on purchases of all-electric and hydrogen fuel-cell electric cars having been extended to 2022 (Kim 2020)

BUILDINGS AND CONSTRUCTION SECTOR: low-carbon and high-carbon interventions
Total of 14 low-carbon retrofi t spending measures identifi ed in 9 out of 50 countries and nine high-carbon infrastructure spending measures (excluding transport and high-carbon energy) in 5 out of 50 countries as at October 2020 (O'Callaghan et al. 2020)

Country Case study Studies
Financial and regulatory support for energy-effi cient retrofi ts of existing buildings, and accelerated construction of low and zero-energy buildings Germany Additional funding of around US$2.5 billion in 2020 and 2021 for a building renovation programme targeting energy effi ciency improvements (Germany, Federal Ministry of Finance 2020) 1 2 3 4 5

Republic of Korea
Retrofi tting of old public facilities such as day-care centres and public housing with a total investment of around US$5.2 billion between 2020 and 2025 (Republic of Korea, Ministry of Economy and Finance 2020) and creating more than 243,000 employment opportunities

Republic of Korea
Funding component of around US$2.1 billion as part of the Green New Deal for 2020-2025 to restore the terrestrial, marine and urban ecosystems, involving the creation of more than 100,000 employment opportunities (Republic of Korea, Ministry of Economy and Finance 2020) Suspension of conservation laws in the logging industry for the next decade by the State of Victoria, as part of the Regional Forestry Agreement which exempts loggers from having to comply with certain federal conservation laws (Morton 2020) 1 Total of 25 low-carbon spending measures identifi ed as green spaces and natural infrastructure investment identifi ed in 11 out of 50 countries as at October 2020 (O'Callaghan et al. 2020) (2020 )