Modelling the economic effects of COVID-19 and possible green recovery plans: a post-Keynesian approach

Abstract

Only twelve years after the global financial crisis, in 2020 the world was again in economic crisis. This time around, the source of the crisis was the COVID-19 global pandemic, which has affected the economy differently than the global financial crisis. However, as they were in 2008-2009, conventional macroeconomic theory and models have once again been found wanting, and economists have again turned for insights to the work of Keynes and more recent post-Keynesian scholars. This paper explores a simulation of the macroeconomic impacts of COVID-19 using the E3ME macro-econometric model. It describes two potential recovery packages, one of which could be described as 'green'. The modelling shows that the green recovery package could support the global economy and national labour markets through the recovery period, outperforming an equivalent conventional stimulus package while simultaneously reducing global CO 2 emissions by 12%. Key policy insights. A green recovery plan is assessed against a reference scenario with COVID-19. It outperforms a non-green recovery plan of comparable value, while also reducing CO 2 emissions by up to 12% below the reference scenario (15% below no-COVID baseline). . The policies in the green recovery plan provide different relative impacts. Car scrappage schemes that promote the uptake of electric vehicles have the largest impact on GDP and jobs. Renewables, energy efficiency and electric vehicle promotion all have large impacts on emissions. . The green recovery plan boosts production levels in all sectors of the economy except for energy and utilities. It boosts the consumer services sector that has been most affected initially by the pandemic but also the investment sectors that could suffer longer-term damage.

COVID-19 recovery packages can benefit climate targets and clean energy jobs, but scale of impacts and optimal investment portfolios differ among major economies

“…23 Regarding the estimation on the potential outcomes of post-pandemic green recovery, modeling efforts have shed light on the gap between pledged recovery packages and the Paris-compliant investment needs, 24 as well as the impacts of possible green ways forward. 25,26 However, of these studies, only one considered employment implications 26 from a macroeconometric perspective and, like similar macroeconomic modeling studies, [27][28][29][30][31] provided only aggregated economy-wide insights. There is evidence from the Global Financial Crisis of 2008-2009 that renewable energy stimulus has a higher jobs impact than other stimulus measures.…”

Assessing Environmentally Effective Post-COVID Green Recovery Plans for Reducing Social and Economic Inequality

“…Without intervention, and strong policies to ‘build back greener’ traditional economics applied to fossil fuels will result in rapid rises in carbon emissions post any economic slowdown. Both COVID and the financial crash of 2008 resulted in big (> 30%) reductions in the price of crude oil (Li & Li 2021 ). The economic laws of supply and demand, therefore, mean any recovery will naturally take full advantage of these cheaper ‘dirty’ energy costs and result in increased carbon production until prices stabilise.…”

Paris Agreement requires substantial, broad, and sustained policy efforts beyond COVID-19 public stimulus packages

“…It adds further evidence to the underestimation of required low-carbon investments by A20 if the shift toward decarbonization takes place primarily through low-carbon investments. Nevertheless, further such insights from IAMs directly simulating energy investments, as well as those from other complementary approaches (Guan et al 2020 ; Hourcade et al 2021 ; Pollitt et al 2021 ), are needed to assess the long-term economic and climate implications of COVID-19 public stimulus packages. In particular, complementary analyses are needed to model several classes of investments according to their origin, destination, risk level, and/or expected return rate.…”