Towards a Net-Zero Recovery

Amid record-breaking energy costs, escalating inflation and economic recession in the aftermath of the pandemic and the war in Ukraine, calls are growing for governments to respond with policies and investment that not only boosts energy security and reboots the economy but also transforms it to address the other great crisis of our time – climate change. 

The value of a net-zero-aligned approach is clear. McKinsey analysis of one European country shows how a €75-150 billion low carbon stimulus portfolio leads to 1 to 3 million new jobs, €180-350 billion of gross added value to the economy, and a 15-20 percent reduction in carbon emissions. Recent modeling demonstrates that every US$1 million spent on renewables generates 7.5 full-time jobs compared to just 2.6 when spent on fossil fuels.

Meanwhile, a Carbon Brief analysis demonstrates how net-zero policies can reduce the sky-rocketing cost of energy, revealing that had government funding for renewables and energy efficiency programs continued at previous levels, £2.5 billion would have been saved from UK energy bills.

The case for a net-zero-aligned response to our economic and cost-of-living crisis is strong and the timing is right.

Framework for Decision-Makers

At its most basic, government decision-makers need to be guided by a simple framework, which prioritizes stimulus measures on the basis of the following, critical criteria:

• Economic benefit – will it reduce dependency on higher-cost energy sources and support inflation reduction efforts? How many jobs will the measure create per dollar invested and what will be the economic value generated?

• Climate benefit – how many tons of greenhouse gas emissions will the measure prevent or remove per dollar invested and is it critical to the transition to net zero?

• Co-benefits – does the measure have any additional public benefit, for example for cost of living, public health, energy access, or reduced social inequality in line with Sustainable Development Goals?

• Market failure – is the government best placed to tackle the issues this measure addresses?

Governments should strike the right balance between measures that generate near-term impact and those which, although slower to materialize, will sustain jobs for longer, deliver productive assets for the future, and reduce the cost of the transition to net zero. The latter may include investment in grid modernization, energy storage and greenhouse gas removal technologies. 

Feasibility should also be a factor. Identifying initiatives that are quick and easy to scale and then proactively implementing enabling conditions for businesses to act and private investment to flow will help struggling economies to recover. 

Two Clear Priorities 

Every country will merit a different approach but evidence is emerging that energy efficiency and renewables should be policy priorities in the design of economic packages across the world. 

Energy Efficiency

Arguably scoring highest against these criteria is energy efficiency. Its climate and job creation potential is well documented but its fast-acting and highly feasible track record, especially when delivered through scalable existing programs, makes it distinguishable. When targeted at lower-income households, important co-benefits include alleviating energy poverty and health issues associated with cold homes. Energy efficiency also strengthens the wider energy system: reducing demand lessens the amount of generation required and dampens demand peaks.

While there is still huge scope to improve residential energy efficiency, the non-domestic sector remains relatively overlooked, even though it represents about 35 percent of energy use in developed economies and provides a greater CO2 saving per dollar invested than domestic energy efficiency. Governments, meanwhile, should lead by example with their own public sector buildings.

Renewables 

The job creation potential of renewable energy is significant, making it an important sector to prioritize in an impending recession. Moreover, renewables generate substantial energy cost-savings, with the International Renewable Energy Agency recently concluding that the new renewables projects of 2020 alone will save emerging economies $156 billion over their lifespan. As well as this, its co-benefits – from reducing air pollution to improving rural electrification – should not be underestimated. 

Priority technologies will depend on their potential in any given country. In many developing economies, including India, Mexico and South Africa, onshore wind and solar photovoltaics still have huge untapped potential, which tried and tested policy mechanisms and incentives for investment could unlock. Offshore wind has been a success story for the UK, showing what can be achieved through a combination of government support and industry action.

For many economies, decarbonizing heat is also vital to achieving net zero. If economic value is to be maximized, governments might focus on mature technologies like heat networks and heat pumps via existing programs for early action and rapid job creation, while advancing technologies like hydrogen for long-term reward. Energy efficiency continues to be a priority here, as it increases the compatibility of building stock with heat pumps and networks.

Enabling Action

Any government’s first port of call should be the scaling, replication and repurposing of existing initiatives to deliver jobs and economic prosperity. To maximize efficiency and swift impact, the key is to design once and apply many times, constantly adapting to changing markets and context: experiment, pilot, learn, refine, and roll out.

The design of financial support for a net-zero recovery is also crucial. Governments should consider all possible options, including subsidies for purchasing electric vehicles, direct investment in technology and infrastructure companies, low interest energy efficiency loans and grants for green training and upskilling.

Ultimately, however, public investment alone will never be sufficient to fund the scale of transition required for net zero; facilitating private sector investment is critical. Governments must accelerate the “greening” of investment by embedding environmental factors into core financial frameworks and regulation, such as mandating disclosure of companies’ climate-related financial risks and opportunities to investors.

Another important piece of the puzzle is to fast-track changes to the regulatory system to create the right drivers for businesses and consumers to act. For instance, minimum energy efficiency standards for properties at the point of sale, zero carbon targets for new builds and bringing forward bans on sales of new diesel and petrol cars. All of these would also reduce investment risk and therefore the cost of stimulus.

Beyond this, there are two key breakthrough areas where government could unlock business innovation. Changes to planning, such as optimizing consenting processes, allow the rapid deployment of new energy, transport, building and industrial infrastructure necessary for net zero. Meanwhile, support for digitalization, including expanding broadband connectivity and incentivising local, circular supply chains, would significantly reduce travel emissions and protect global supply chains from the shocks witnessed during the pandemic. 

Amid the current economic crisis, a better world can be built if governments are proactive in taking action and follow the evidence on what works. Now is the time not only to rebuild our economy but to ensure it is climate-proofed for the future.