IEA: A sustainable recovery plan is needed for job creation, economic recovery and climate goals

• Many recovery plans from the Covid-19 pandemic have focused on growth first, ‘green’ later
• A joint IEA-IMF analysis of energy-related investments during the next three years finds that job creation, economic growth and cost-effective GHG emission reductions will all result from sustainable recovery projects
• Financial institutions looking for bottom-line recovery should focus on boosting their capacity to finance green projects in energy, building & retrofits, and transportation

With many countries coming out of the worst of their Covid-19 lockdowns, the focus is now shifting to economic recovery. Research conducted by the International Energy Agency with support from the IMF has found that ‘green recovery' plans offer the best way forward to promoting a jobs and economic recovery while working to prevent a GHG emissions rebound in the pandemic’s wake

The IEA recommends that continuing to invest in the traditional energy mix is a ‘poor match’ for the global economy’s immediate and future needs. In reaching this conclusion, the IEA evaluated different energy-related investments across five metrics linked to the themes of creating jobs, boosting economies, and improving energy sustainability and resilience.

The IEA looked specifically at major fossil fuel sources of electricity and found that new investments in gas and coal, as well as new carbon capture, use & storage, and small modular nuclear power, are a poor fit for the global economy’s immediate and future needs. They rank poorly not only in their ability to decarbonize with reasonable cost per ton of CO2 emissions reduced, but also to put people back to work.

One concern that has arisen in the wake of Covid-19 is that the needed investments for economic recovery will inhibit the transition to a low-carbon economy. A shortening of investment time horizons as companies and financial institutions focus on returning to profitability does not necessarily mean shifting the focus away from the low-carbon transition.

For example, some of the most effective measures for jobs, the economy and reducing greenhouse emissions are building and appliance efficiency, clean cooking, reforming energy subsidies and some types of urban infrastructure and transportation electrification depending on their efficiency in enabling people’s mobility. For the finance industry to respond in line with these objectives, they will have to revisit business as usual, but some are already on the way as a result of their investment in responsible finance capacity, which puts them ahead of their peers.

For financial institutions that have already developed capacity to finance renewable energy, and financial markets where refinancing capacity is already in existence, an opportunity can be found. For example, many of Malaysia’s green sukuk have been used to finance new solar PV and small hydro facilities as a part of the country’s plans to increase the renewable share of electricity to 20% by 2025.

Most other countries have similar targets for renewable energy sources as a part of their Paris Agreement pledges. Green recovery plans and the increasing cost-competitiveness of renewable energy even without subsidies will magnify these opportunities. Financial institutions that don’t have capabilities in this area will need to develop them rapidly to compete in providing financing to this growing market.

Other types of investment, particularly in green buildings or retrofits, will benefit the economy, create jobs and help to move towards the Paris Agreement targets by reducing energy demand growth through reductions in wasted power. These investments are targeted at providing jobs for people who may have faced furlough during the initial stages of the crisis, as with most construction jobs, which couldn’t be worked from home. They are also more likely to be able to return to work under social distancing rules than the hardest-hit retail and restaurant sectors.

What the IEA outlines for a sustainable recovery program offer is a way to start thinking more clearly about what measures should be taken – and how financial institutions can help finance them – to move beyond the immediate economic crisis to build back better. As countries embark on economic recovery plans, the only reason to prefer a dirty, unsustainable recovery over a green recovery is a misperception that the economic and employment benefits from brown trump green. The IEA’s analysis adds another layer of credibility in support of sustainable recovery plans.

Want to learn more about how RFI Foundation can help you identify your biggest opportunities in responsible finance? Contact us for more information through our Membership Page or by email at info@rfi-foundation.org.

Republished from the RFI Foundation's weekly newsletter. Subscribe for free here!