In the context of the current pandemic one of the key priorities advanced by the international community was the need to attain a “green recovery” from the global economic downturn. In particular, the IMF and other international organizations singled out environmental policy and the vision of a “green recovery” as the key gateway to overcoming the economic crisis. The good news is that in 2021 the global economy has in fact exhibited signs of emphatic growth, with the IMF projecting global growth to reach 6% in 2021 and 4.9% in 2022. This upturn in economic activity is accompanied by sizeable measures undertaken by governments, corporates and regional authorities to prioritize environmental/green development.
An important possible consequence of these trends may be that green/environmental policies may become part of the economic policy tool-kit just as the ESG agenda is becoming increasingly prevalent at the corporate level.
At the macroeconomic level “green policy” may be an important source of economic stimulus as the transition to clean energy necessitates substantial investment into infrastructure and technology. In this respect “green policy” may also serve as a platform for international economic policy coordination particularly during periods of downturns. This “green stimulus” may be counter-cyclical during downturns, while during upswings green policies in the form of higher taxation may dampen the excesses of recovery. In a way carbon taxes just as incomes taxes for individuals act as an “automatic stabilizer” with lower tax burden during economic downturns compensated by elevated taxation during upswings.
Importantly, “green policies” may also serve to extend investment time-horizons and render the economic policy framework more long-term focused. This could involve for example the budget process taking into account longer term risks associated with global warming as well as medium- and long-term outlays that are needed to meet environmental goals.
At the micro-level of companies the ESG agenda is already leading corporates towards superior governance practices, including with respect to the transparency and regularity of financial reporting. All this has important positive implications for the efficiency of macroeconomic policies that crucially depend on the reliability and transparency of financial reporting at the micro-level. There may be related elements of green policies in the prudential regulation for the Central Banks as the regulator will increasingly need to allocate greater risk weights in setting prudential norms to banks exposed to sectors/corporates with poor environmental track-record.
There will also be implications for the external economic policy of countries emanating from the rising prominence of the “green agenda”. “Green alliances” may emerge on the basis of de novo accords concluded on the basis of key environmental priorities that bring countries together. Or the basis for environmental accords can also be rooted in the existing network of free-trade agreements that are complemented by “green chapters” that set out the priorities for cooperation in the environmental sphere. Some of the FTA accords are already incorporating new chapters on environmental cooperation such as the Mercosur-EU accord.
Regional integration blocs and other regional arrangements will have an important role to play in the propagation of such environmental accords as the level of national states does not cope well with the spill-over effects and region-wide trans-border issues that are inherent in the environmental agenda.
Another element related to the green policy agenda will be “green protectionism”. Defensive measures will likely become more green — a trend that is already observed at the national level. At the same time, rather than attempting to resort to the WTO to counter such protectionism, a more efficient approach is likely to involve the creation of a more resilient regulatory framework governing environmental standards at the national, regional and corporate levels.
The green agenda is also likely to add to the divergence of national economic models in terms of the centrality of such factors as economic sustainability and prioritization of high growth rates. On this important count the Nordic model of economic development that has proven to be so successful in the past crises, already incorporates the ESG and the green policy agenda at the macro-level — something that may render the Nordic model even more attractive and competitive in the years to come.
In the end, the green agenda will serve as a major transformational force for economic policies across countries, with new possibilities emerging for industrial policies to support growth as well as new national and regional models of economic modernization. Furthermore, the green economy may serve as a spring-board to modernization just as in the past this role has been played by manufacturing. The multiplier effect coming from developing the foundations of the green economy surpasses mere inter-sectoral effects and encompasses factors such as greater capability of countries to forge ahead with integration into the global economy.
From our partner RIAC