We must not sacrifice the environmental crisis just to resolve an economic one

Both economic growth and decarbonisation can be fostered from the current crisis, argues Gilles Moëc, chief economist at AXA Investment Managers

Governments should beware sacrificing global decarbonisation efforts on the altar of economic prosperity, but likewise must not decelerate growth to achieve a cleaner world. Better to find a way to do both.

Covid-19 has brought to the forefront two themes prevalent in current economic attitudes towards global warming.

Firstly, it has shown there is a very worrying attitude among politicians, economists and possibly the public that addressing green concerns is a luxury and must take a back seat when economies are struggling. As recouping the lost growth seen over the past couple of months might take decades, green issues could permanently take a back seat until economies are back to something resembling the levels of early 2020.

Secondly, it has heightened the opposite risk of the public reacting to the pandemic by rejecting global trade and globalisation, iand instead embracing restrictive economic models which at first glance could reduce CO2 emissions, but at a massive cost to global economic growth.

In this 'de-growth' scenario, the lack of a recovery seemingly becomes the main tool against global warming. However, it is questionable whether it would be politically or socially acceptable for economies to collectively forfeit any rebound from the current recession in 2021, then accept a decade-long recession that a degrowth agenda would achieve.

Looking at carbon intensity as one unit of carbon per unit of GDP, we expect to see world GDP growth show that CO2 emissions fall by six per cent this year. While this might seem to show that less global growth is better for the environment, this is still very far from the rate of decline calculated by the Global Investor Coalition (GIC) as necessary to keep global warming under 1.5 degrees by the end of the 21st century.

We would still need to see a further 13 per cent fall and would very much expect CO2 emissions to rebound, as they did after the 08-09 financial crisis, in 2021. The economic contraction has therefore not given us more time to solve global warming, nor has the recession made any meaningful impact on changing our production of CO2.

Despite the crisis, we cannot postpone increasing our efforts to decarbonise our economies. If we do, soon we will be left with two bleak choices - either we give up on curbing global warming and accept the devastating environmental, social, economic and geopolitical costs, or we enter a period of durable recession.

Estimates from the European Commission suggests that to achieve a green transition, investment efforts need to be at around 2-3 per cent of annual GDP. While many of these 'transition investments' do not show immediate profitability, what should be more seriously taken into consideration is the true cost that global warming will ultimately have on domestic and international economies.

The recession however does have a silver lining for investments to tackle global warming. By taking advantage of the low level of interest rates, a European Climate Emergency Fund that could offer joint long-term debt would be able to use the investment to fund green transition projects. These would be taken on by governments or corporations and could provide the opportunity to bring together economic growth and curb global warming. European fiscal integration, which this crisis has shown is much needed, could also benefit from such a venture and lead to further growth.

It is entirely understandable that green concerns were sidelined in the immediate term in order to focus policy efforts on the pandemic, and I commend governments and businesses that have taken appropriate steps to protect employees and business continuity.

However, we must now not to lose track of the transition towards a green economy as we start recouping our losses and remember that an environmental crisis in the future could be just as - if not more - damaging.