Government spending earmarked to rescue and stimulate economies following the disruptions of COVID-19 related lockdowns and restrictions has been framed as a once in a lifetime opportunity to propel the world towards a greener and more sustainable future. At Igneo Infrastructure Partners, we are awake to the impact new spending can bring to innovation in areas such as renewables, particularly within industries ripe for innovation such as transportation and energy infrastructure.
Swathes of new government spending have been earmarked for economies following the global pandemic, with some of this money finding its way into programs designed to address climate change in line with greenhouse gas reduction pledges made under the 2015 Paris Agreement.
The extent to which this spending will transform technologies and entire industries remains to be seen as evidence for this transformation will be collected over decades to come. Based on current greenhouse gas emissions footprints, traditional transportation and energy infrastructure are two areas which could benefit most from recovery spending.
Indeed, the United Nations Environment Program Emissions Gap Report 2021 singled out transportation and energy infrastructure as the most attractive areas for applying recovery spending to reduce emissions. The report noted these industries have the potential both spur economic growth in a contractionary environment as well as mitigate emissions through electric vehicle incentives and public transport modernisation, clean energy infrastructure investments, energy efficiency upgrades, natural capital investments and clean research and development programmes.
Igneo Infrastructure Partners continues to ramp up its focus on clean energy and energy efficient upgrades by directing capital to innovation in these areas over the long-term. In the transportation sector the conversion to battery power on the ferries linking Germany and Denmark is a current example. Igneo are currently piloting battery powered technology in other areas which are traditionally diesel powered such as rail through its investment in US rail investments.
Governments globally have identified transportation as the sector most likely to benefit from low carbon fiscal spending.
Source: United Nations Environment Program Emissions Gap Report 2021
More than 500 low-carbon rescue and recovery measures have been introduced worldwide, covering most emerging and established low-carbon industries, The UN Environment Program has noted. The 2021 report highlighted that the range of spending has been notably wider in advanced economies, with emerging market and developing economies focusing their low-carbon recovery funds primarily on clean energy generation and natural gas capital investments.
Finding its mark
COVID-19 pandemic recovery spending has been measured by UNEP as both short-term rescue spending to keep businesses and people alive, longer-term recovery investment to reinvigorate the economy, and reinforcement spending to embed new economic trajectories into long-term development plans.
The agency defines low-carbon rescue spending as incentivising decarbonisation through green conditionalities attached to short-term business support. It states that low-carbon recovery investment has set out to accelerate the low-carbon transition directly by supporting green projects and indirectly by incorporating green incentives into traditional investment.
Green reinforcement initiatives deliver long-term support to the projects and sectors targeted by green recovery investment, The UNEP states.
Approximately US$16.7 trillion was spent through May 2021 on COVID-19-related rescue and recovery packages (excluding unallocated European Union funds), The UNEP report estimates. However, most resources have been for immediate rescue spending, mostly on unemployment and worker support programmes, pandemic management, and health – care services. It says US$2.25 trillion is considered recovery spending. Of this, only around 17–19 per cent (US$390–440 billion) is likely to reduce GHG emissions.
According to the UNEP Emissions Gap Report report, seven countries account for almost 90% of this spending: China, France, Germany, Japan, the Republic of Korea, Spain and the United Kingdom. High-carbon, neutral and spending with an unclear purpose – which the UNEP estimates as up to 97.5% of total spending – either worsens or maintains the unsustainable status quo of the current global emissions trajectory.
The Global Recovery Observatory has found that Canada, Denmark, Finland, France, Germany and Norway can be considered as ‘leaders’ in low-carbon recovery, with their low-carbon spending as a share of recovery spending ranging between 39 and 75 per cent. Spain, Sweden and the United Kingdom also rank highly according to Vivid Economics’ Greenness of Stimulus Index, the UNEP 2021 Emissions Gap Report highlights.
The United States continues to work on passing its Building Back Better legislation which earmarks billions of dollars for tackling climate change in line with the country’s Paris Agreement pledges. The Bill contains grants, tax incentives and other programs designed to boost jobs and improve technologies in energy and transportation in particular through renewable energy, sustainable vehicles and public transit services.