May 27, 2020
This article was a collaborative, global effort by Hauke Engel, Alastair Hamilton, Solveigh Hieronimus, and Tomas Nauclér, with David Fine, Dickon Pinner, Matt Rogers, Sophie Bertreau, Peter Cooper, and Sebastien Leger, representing views from the Public & Social Sector and Sustainability Practices.
The tragedy of the COVID-19 crisis has taken much attention away from the threat of climate change, as institutions devoted themselves to protecting lives and livelihoods. Sustaining an effective public-health response remains a top concern for many policy makers and business executives. Severe job losses and revenue declines in some sectors, along with the high likelihood of an economic recession, have also compelled policy makers to mount an unprecedented financial response, which already exceeds $10 trillion, according to McKinsey estimates.
Important as it is to repair the economic damage, a swift return to business as usual could be environmentally harmful, as the world saw after the 2007–08 financial crisis. The ensuing economic slowdown sharply reduced global greenhouse-gas emissions in 2009. But by 2010, emissions had reached a record high, in part because governments implemented measures to stimulate economies, with limited regard for the environmental consequences. The danger now is that the same pattern will repeat itself—and today the stakes are even higher. The period after the COVID-19 crisis could determine whether the world meets or misses the emissions goals of the 2015 Paris Agreement, which were set to limit global warming to 1.5°C to 2°C.
Achieving those goals is a distinct possibility. A low-carbon recovery could not only initiate the significant emissions reductions needed to halt climate change but also create more jobs and economic growth than a high-carbon recovery would. Our analysis of stimulus options for a European country suggests that mobilizing €75 billion to €150 billion of capital could yield €180 billion to €350 billion of gross value added, generate up to three million new jobs, and enable a carbon-emissions reduction of 15 to 30 percent by 2030. Such a package need not involve economic compromises. A recent survey of top economists shows that stimulus measures targeting good environmental outcomes can produce as much growth and create as many jobs as environmentally neutral or detrimental measures. 1 But a high-carbon recovery could make it hard to meet the goals of the Paris Agreement, and heavy relief and stimulus spending might leave governments too debt-strapped to pay later for emissions cuts.
Finding a low-carbon, high-growth recovery formula isn’t easy. It requires assessing stimulus measures with respect to complex factors, including socioeconomic impact, climate impact, and feasibility. But our analysis highlights the chance for policy makers to assemble a package that quickly creates jobs and economic demand, produces steady growth, and accelerates the uptake of zero-carbon technologies. Governments can use the framework described in this article to design and carry out a low-carbon recovery agenda that could meet the immediate economic needs and improve the long-term well-being of their people.
The coronavirus pandemic has not only had tragic effects on health and lives but also taken an immense toll on livelihoods. That cost is visible in the rising unemployment figures that many countries continue to report. And the worst may be yet to come. A McKinsey analysis published in April suggests that lockdowns could make up to 60 million jobs in Europe and up to 57 million jobs in the United States vulnerable: subject to reductions in hours or pay, temporary furloughs, or permanent discharge. 2 In one McKinsey scenario for a muted world recovery, the EU-27 unemployment rate peaks at 11.2 percent in 2021 and remains unlikely to achieve 2019 levels even by 2024. 3
Although the COVID-19 crisis has brought sickness and economic hardship to countless households, the urgency of responding to the pandemic is arguably matched by the urgency of addressing climate change. 4 Already, climate change brings on storms, floods, wildfires, and other natural disasters that inflict billions of dollars in damage. Additional warming over the next decade is locked in, so it is crucial to plan for physical climate risk. 5 To avert the further buildup of physical risk and to keep temperatures below thresholds that would trigger runaway warming, significant near-term reductions of greenhouse-gas emissions must happen. Achieving them will require rapid, capital-intensive action across every part of the economy. 6
The simultaneity of the COVID-19 crisis and the climate challenge means that the post-pandemic recovery will be a decisive period for fending off climate change. In the aftermath of COVID-19, any number of factors could slow climate action: reduced political attention (this year’s UN climate summit, COP26, has been postponed to 2021), the easing or delay of environmental regulations in the interest of economic growth, depressed oil prices that make low-carbon technologies less competitive, or stimulus programs that consume funds governments might otherwise invest in a zero-carbon transition.
By contrast, a climate-smart approach to economic recovery could do much to put the world on an emissions pathway that would hold the average temperature increase to a relatively safe 1.5°C. Since recovery efforts usually involve much higher public spending than governments lay out in noncrisis years, they can bring about extensive, lasting changes in the structure of national and regional economies. As we explain in the next section, targeted low-carbon programs could restart growth and hiring while ushering in a more environmentally sustainable “next normal.”
Targeted low-carbon programs could restart growth and hiring while ushering in a more environmentally sustainable “next normal.”
In many countries, efforts to provide economic relief and restart growth after the pandemic are well under way. Governments around the world have devoted more than $10 trillion to economic-stimulus measures. McKinsey estimates that the G-20 nations have announced fiscal measures averaging 11 percent of GDP—three times the response to the 2008–09 financial crisis. Some countries have said they will commit up to 40 percent of GDP to their economic-stimulus packages. Preliminary reports on the European Commission’s green-recovery plan indicate that it will provide some €1 trillion in economic assistance.
Support is mounting for a low-carbon recovery from the COVID-19 economic crisis. The informal green-recovery alliance, launched in April by 12 environment ministers from European countries, 79 members of the European Parliament, and 37 CEOs and business associations, has been joined by more than 50 banking and insurance CEOs. Top executives at upward of 150 companies signed a public statement calling for a net-zero recovery. European Commission president Ursula von der Leyen and German chancellor Angela Merkel have said that the European Green Deal should form the center of Europe’s economy recovery plan. Populations around the world favor recovery policies that also address climate change (Exhibit 1).
Amid debate over how to spend stimulus funds, some have questioned whether low-carbon programs generate sufficiently strong economic returns. Yet research suggests that many such programs stimulate growth and create jobs as effectively as—or better than—environmentally neutral or harmful programs. In a survey reported in a recent working paper, more than 200 economists and economic officials said that “green” economic-recovery measures performed at least as well as others did. 7 An econometric study of government spending on energy technologies showed that spending on renewables creates five more jobs per million dollars invested than spending on fossil fuels (Exhibit 2). 8
Faced with the COVID-19 recession, governments don’t have to compromise economic priorities for the sake of environmental ones. By carefully designing low-carbon stimulus packages, they can address both sets of priorities at once.
In assessing stimulus measures, policy makers may wish to balance several factors, such as socioeconomic benefits, climate benefits, and feasibility, before turning to implementation.
To add climate change to post-crisis stimulus planning, policy makers might pay attention to a wide range of considerations as they evaluate programs that might receive public funds:
Socioeconomic benefits. These can be assessed by various criteria, including the number of jobs created per sum of money spent, the GDP or gross-value-added (GVA) multiplier, or the benefits to particular population segments, sectors, or geographies. The last consideration may be especially important, for COVID-19’s economic fallout has landed unevenly. A McKinsey analysis of the United Kingdom and the United States shows that less-skilled workers, younger workers, lower-paid workers, and racial and ethnic minorities hold disproportionately large shares of jobs made vulnerable by lockdowns. 9
Other areas to consider include regions and demographics affected by the low-carbon transition—for example, those exposed to phaseouts of coal mining and fossil-fuel power generation.
Climate benefits. A stimulus measure’s decarbonization effect can be gauged by tons of greenhouse gases prevented (or removed) per year or by the ability to enable other carbon-reducing changes. Reinforcing the energy grid, for example, promotes more distributed microgeneration, which can cut emissions.
Time frame for economic stimulus to take effect. Certain measures have a more immediate effect on job creation and GDP growth; for example, programs to construct bicycle lanes can ramp up and create jobs quickly. Other options take longer to play out. Big infrastructure projects require extensive planning before economic activity starts in earnest.
Time frame in which carbon emissions are reduced. Some stimulus measures, such as efforts to improve industrial efficiency, can lower emissions in the near term. Measures to support the development of low-carbon technologies, such as advanced batteries or carbon capture and storage (CCS), may take longer to make a difference. But that difference can become enormous when such technologies are deployed widely, as we have seen with solar power, wind power, and battery storage. The cumulative decarbonization benefits of advanced technologies can make investments in innovation a valuable element of economic-stimulus portfolios.
Feasibility. The ease of implementing stimulus measures also matters. Construction programs, for instance, might require training or reskilling large numbers of workers. Expansions of renewable-energy capacity might proceed slowly until regional supply chains are more developed. COVID-19 also introduces new feasibility issues, such as the need to maintain physical distancing.
All these factors matter not only when governments assess individual stimulus options but also when they assemble them into a stimulus package. Options that quickly put people to work might be attractive, but not all boost employment for long. Sustained growth might call for projects that create jobs for years to come, even if they require extra time to ramp up. A mix may provide the best employment outcomes. Similarly, policy makers might combine some measures that cut greenhouse-gas emissions in the near term with others that reduce them after several years.
Our analysis of stimulus options across four sectors in one European country illustrates the possibility of assembling a balanced, effective low-carbon stimulus program. By our estimates, deploying €75 billion to €150 billion would produce €180 billion to €350 billion of gross value added, create up to three million new jobs—many in sectors and demographic categories where jobs are highly vulnerable—and support a 15 to 30 percent reduction in carbon emissions by 2030 (Exhibit 3).
These outcomes rest on a careful selection of stimulus measures from an initial menu of nearly 50 options. We based estimates of the GVA multipliers of each potential measure on those observed for similar activities in major EU economies. Job-creation potential was estimated through a regression analysis that considered direct, indirect, and induced employment with respect to the features of various economic activities. (Since it is difficult to be precise when making such estimates, we have given them as wide ranges.) To gauge each measure’s decarbonization impact, feasibility, and fit with the skills of the workforce and the needs of individual sectors, we drew on expert interviews and academic research.
This approach yielded a list of 12 feasible stimulus measures with strong socioeconomic benefits (including multiregional job creation) and decarbonization effects in the near, medium, and long terms (Exhibit 4):
According to our analysis, this stimulus package would deliver substantial economic and environmental returns. For this example, we assumed that the capital mobilized would range from €75 billion to €150 billion. The exact cost to a government would depend on how the measures were funded—for instance, whether the government invested directly or private-sector capital provided some funding. In any case, we estimate that half of the money would be spent in the first two years and the vast majority within five. Our analysis suggests that every €1 spent would generate some €2 to €3 of GVA.
The employment boost from this stimulus package would also be substantial: 1.1 million to 1.5 million new “job years” of employment at the low end of the spending range and 2.3 million to 3.0 million at the high end. 10 These are conservative estimates, accounting only for jobs created as money is disbursed; additional self-sustaining employment could also be created. By design, most of the jobs would be low- or medium-skill jobs, for which demand will be greatest, and many are in sectors (for example, industry) that have large numbers of jobs at risk. Some are in categories with enough labor flexibility to concentrate hiring in regions with the highest unemployment rates. Hiring for these stimulus measures would begin on a range of dates, from the near term to the medium to long term.
All of this spending and labor ought to help the country’s transition to a low-carbon economy move forward. By our estimates, these measures could help cut CO2 emissions 15 to 30 percent, from current levels, by 2030. Such a decrease would account for a good portion of the 50 percent emissions reduction that is considered necessary to achieve a 1.5°C warming pathway by 2030.
Policy makers can use various mechanisms to deliver stimulus measures. We classify these in two main groups: pushes and pulls. Pushes are regulatory interventions or backstops that give companies more certainty about future regulations and thereby encourage forward planning. Building codes are one kind of push, target dates for phasing out technologies another.
Pulls—financial interventions that compel companies to take particular actions—generally fall into one of four main groups:
Many stimulus measures produce the greatest benefit if delivered through a combination of pushes and pulls.
In addition to direct regulatory pushes and financial pulls, policy makers can also implement indirect “nudges” of both kinds, such as high-occupancy vehicle lanes. At modest cost, these nudges can complement and reinforce more direct measures.
Many stimulus measures produce the greatest benefit if delivered through a combination of pushes and pulls (Exhibit 5). Since stimulus packages often target a variety of companies, policy makers can create delivery mechanisms that allow wide access to funds by designing each measure to reach its intended beneficiaries. CCS network build-outs, for example, could require negotiations with just a few companies, while home retrofit programs might engage thousands of small businesses. The sequencing of pulls and pushes can also make a big difference. To foster new hiring and growth before regulations begin to restrict certain economic activities, policy makers might consider funding ahead of new regulations.
It now appears that recovery from the COVID-19 economic crisis will require stimulus programs lasting for months or even years. Those coming months and years will also be a decisive time for efforts to keep global warming within 1.5°C to 2°C. Low-carbon stimulus measures can help policy makers fulfill both needs at once—but the clock is ticking. This is the pivotal moment for policy makers to unite their economic and environmental priorities to improve and sustain the well-being of individual citizens and of the planet as a whole.
Hauke Engel is a partner in McKinsey’s Frankfurt office. Alastair Hamilton is an associate partner in the London office. Solveigh Hieronimus is a senior partner in the Munich office. Tomas Nauclér is a senior partner in the Stockholm office. David Fine is a senior partner in the London office. Dickon Pinner is a senior partner in the San Francisco office. Matt Rogers is a senior partner in the San Francisco office. Sophie Bertreau is a consultant in the Paris office. Peter Cooper is a consultant in the London office. Sebastien Leger is a partner in the Paris office.