A green stimulus to boost the energy transition?

By Sébastien Houde, Mark Olsthoorn, Joachim Schleich, Carine Sebi from Grenoble École de Management

Beyond its catastrophic impacts on health, the COVID-19 virus is wreaking havoc on the world economy and governments’ public finances. The length and depth of the economic crisis are unknown, but it is certain that few sectors will emerge stronger. This health crisis is a large, unexpected, and persistent shock that will change the market fundamentals for years to come. The need for stimulus funds has also put unprecedented pressure on government balance sheets. Central banks have been busy printing billions of dollars’ worth of currency, and while the stimulus packages are very much necessary, they’re unfortunately far from sufficient. What should be done next?

In Europe, like in many other economies, there have been calls to treat this crisis as a window of opportunity to address another crisis in the making: Global Climate Change. Earmarking of stimulus funds toward the energy transition has been a popular proposal among policymakers. However, this raises a number of questions. First, how will COVID-19 affect the energy transition? Second, if stimulus funds were to be put at work to enact a Green Deal, how should it be done?

COVID 19: a small blip in greenhouse gas emissions?

The current health crisis is at the source of opposite forces affecting France’s energy transition. On the one hand, the economic slowdown is putting a dent in greenhouse emissions. A recent scientific study shows that global per-capita emissions had dropped by 17% in the month of April, yet 2020 emissions are expected to be only 4-7% lower. For perspective, to meet the 1.5 °C target of the Paris Agreement, such a decline would be needed every year for decades.

In France, emissions dropped by up to 34%, especially in the road transport sector. In the past, however, such a momentary decrease have been followed by a quick rebound. For example, global and French greenhouse gas emissions took less than two years to bounce back from the dip caused by the 2008 economic crisis.

A long-lasting economic morass this time around could certainly lead to sustained emission reductions. However, it might also absorb the resources necessary to meet climate targets, which may require total investments of up to 75 trillion dollars globally until 2050 (Boston Consulting Group). A brighter scenario is that the health crisis will lead to structural changes and put the economy on a different, greener, path. Will it be the case?

COVID-19: a catalyst for the energy transition?

To gain insights on these questions, the recent Energy Barometer of the Grenoble Ecole de Management polled around 100 energy experts in France in May 2020. This group of experts comprise academics, policymakers, and entrepreneurs. We asked their views on the impacts of the current health crisis on the energy transition in France in general and in selected energy sectors.

Absent specific policy interventions, nearly half the experts, i.e., 44%, believe that the health crisis will reinforce the energy transition overall. Yet a sizeable 33% expect the opposite, that Covid-19 will slow the energy transition, and 23% expect it to have a neutral effect.

Behavior changes and changing behaviors

The experts foresee short-term (one year) and long-term (five years) behavior changes that may accelerate structural changes toward a low-carbon economy (Figure 1). While people are often quick to return to old habits, an extended crisis may provide enough time for new behaviours to stick. The experts polled believe that some observed behaviour changes, such as less use of public transportation and vehicle sharing schemes for fear of infection, will be transitory.

In comparison, they expect observed trends towards more energy-efficient behaviours, fewer flights for personal travel, and an increase in cycling to remain. In several French cities like Paris, Lille and Roubaix, local governments are already taking steps to help to make those changes permanent. These cities intend to allocate additional space to bike lanes after they were urged to create temporary ones as soon as the lockdown ended.

Figure 1: In your mind, what will be the effects of COVID-19 in France in one year and in five years?

Source: Energy Barometer June 2020, Grenoble Ecole de Management

Behaviour change alone is probably not enough to engineer a stronger energy transition. Policies will have to play a role and especially the way the post-crisis stimulus funds will be spent can make a difference. A recent survey of more than 200 senior economists and economic officials has shown a consensus that a ‘green’ stimulus would contribute to a better economic recovery (Hepburn et al., 2020). To encourage a transition to a low-carbon economy, there are three broad categories of policies on the menu: promoting investments in R&D and new technologies, investing in modernizing and developing the energy infrastructures, and investments to reduce the carbon footprint of buildings.

Investments in Energy-Efficient Buildings: A Priority

Facing similar policy options like the ones proposed by Hepburn et al. (2020), our experts believe that the stimulus funds should be first allocated to making the building sector more energy-efficient (table 1). With an estimated 7 to 8 million buildings in urgent need of deep energy-efficient retrofits, France offers a large potential. Investments in existing low-carbon technologies and energy infrastructures were also popular propositions. These two latter options are especially important if private investments in the cleantech sector dry up as a combination of a COVID-19 induced recession and low oil and gas prices.

Table 1: In your mind, which of the following policy measures best contribute to the economic recovery and the energy transition? [Please select the 3 most important policy measures]

Source: Energy Barometer June 2020, Grenoble Ecole de Management

It is not surprising that an energy efficiency is a popular option for the stimulus package among our experts. In fact, it is also a top priority for the non-experts that make up the French Citizens’ Convention for Climate – a group of 150 French citizens mandated by the Government to propose a series of measures to reduce greenhouse gas emissions by at least 40% by 2030 with a focus on social justice. French President Emmanuel Macron, too, regards the building sector as a catalyst for change. In his speech on June 14th, President Macron emphasized “building a sustainable model” by “working and producing more” so as not to “depend on others”. This should create new green jobs, made possible by “ecological reconstruction” that focuses especially on thermal retrofit activity.

Energy efficiency may indeed be the energy policy trifecta. In addition to reducing greenhouse gas emissions, increasing the rate of energy-efficient retrofits can fulfil a mission of social equity by lowering energy bills for people most in need while bringing significant health benefits. All that by putting small and large entrepreneurs in the building sector to work. There is one important caveat though. Retrofitting homes is not easy. It has long been recognized that the economics of energy efficiency often appear rosier than what they are in practice. Quality problems, bad design, or sometimes plainly fraudulent behaviours can also make this policy option less palatable than what it seems.

The COVID-19 outbreak has led to demands for radical system change. Triple-pane windows, efficient heat pumps, and bike lanes might not sound as radical as one would hope But few other measures targeting the most emitting activities have urgent and desirable socioeconomic side-effects and have gained widespread support. If not now, then when?