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Wealthy nations must ignore calls to rein in public spending as the economic recovery from the Covid-19 pandemic gathers pace, or risk a fresh crisis, the climate economist Nicholas Stern has warned.
Leaders of the G7 industrialised countries are meeting in Cornwall this weekend, to discuss vaccines, the recovery from the pandemic, and the climate crisis.
They must tie these issues together and forge a green recovery that would shift their economies permanently to a low-carbon basis, said Lord Stern, former World Bank chief economist and former adviser to the UK Treasury.
He warned that calls for spending restraint were misguided. “It would be a mistake to confuse fiscal responsibility with premature austerity,” he told the Guardian in an interview. “Fiscal responsibility is crucial, but in this case you must build up the fiscal position as growth returns. Premature austerity will threaten growth, it will choke off growth and make the fiscal position worse.”
More investment is needed in the green economy to boost low-carbon technologies, such as renewable energy and electric vehicles, and to invest in the necessary changes to infrastructure, such as home heating, in order to reach the targets of net zero emissions by 2050, which all the G7 countries have signed up to.
Stern said now was the time to make such investments, rather than holding back. He pointed to the recovery from the financial crisis of 2008, when some governments including the UK moved quickly to cut public spending in a quest to cut the deficit and “balance the books”. Many economists argue that such austerity policies hindered the return to growth and caused unnecessary hardship.
Stern also warned governments to avoid the seemingly easier path of a Covid-19 recovery boosted by a boom in pent-up consumer spending, which might seem attractive in the short term but would fail to build the foundations for long-term sustainable and low-carbon growth.
“We need strong investment to recover in a strong and sustainable way,” he said. “We want to avoid a consumption-led recovery, like the Roaring 20s of 100 years ago. That would be a mistake. What we really need is an investment-led recovery, if it is to be sustained and sustainable.”
With greenhouse gas emissions rebounding rapidly from their dramatic falls during last year’s coronavirus lockdowns, fears are rising that some governments are missing the opportunity to reset their economies with policies that promote low-carbon activity and phase out fossil fuels.
Fatih Birol, executive director of the International Energy Agency, the global energy watchdog, said some countries were taking the actions needed, and urged all to follow their example.
“Europe is going very much in the right direction, on its green recovery efforts,” he said. The EU has a “green deal” plan, covering all aspects of the economy from agriculture to transport and energy, and several member states have their own massive green recovery programmes, including France, which is funnelling about a third of its $100bn recovery funds into green and low-carbon ends.
Birol also pointed to the efforts of US president Joe Biden, who is pushing recovery spending plans worth trillions through Congress, with a focus on renewable energy and low-carbon infrastructure. “In the US, I very much hope this recovery plan goes through which includes lots of critical measures for a green recovery,” he said.
But he warned that much more effort was needed in other G7 nations. “Other countries are following suit, but this is not yet a success story, on the green recovery among the G7,” he said. “There are steps in the right direction, but it is not there yet.”
He added that the G7 countries should be doing more to help developing countries cut their greenhouse gas emissions, in the global effort to reach net zero by mid-century, and to halve emissions by 2030, which scientists say is needed to hold temperature rises within 1.5C of pre-industrial levels. He said a seven-fold increase in spending on clean energy investments, from $150bn to more than $1tn, was needed in the developing world.
“If you reduce emissions in Jakarta, or Bristol, Oslo or Detroit, it has the same effect,” he said. “But it is much cheaper to do so in developing countries – and they are receiving much less investment than the advanced economies.”
One of the key topics on the G7 agenda is supplying climate finance to developing countries, to help them cut emissions and cope with the impacts of climate breakdown. Rich countries have failed to meet the target they set for providing such finance, which was supposed to reach $100bn a year by 2020, but has fallen short by about $20bn.
Stern said the developed world should aim to double the climate finance from public sources, from $30bn a year in 2018 to $60bn a year by 2025.
Birol added that the development banks funded by rich countries should be given a mandate to invest in low-carbon projects and a green recovery. He said: “The G7, being some of the richest nations, have a moral responsibility [to provide such help] but also a huge economic opportunity, to support green investment in the developing world.”
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