Covid-19 briefing: Covid-19 crisis, climate change and green recovery

Misa Tanaka

The Coronavirus pandemic and measures to contain contagion had far reaching consequences on economic activities, which also led to a sharp fall in CO2 emissions. This has sparked new debate about how the recovery from the crisis could be made compatible with the Paris climate goals. In this post, I survey the emerging literature on the link between the economic recovery from the aftermath of the pandemic and climate change.

Covid-19 crisis and greenhouse gas emissions

A by-product of the widespread lockdown was a sharp fall in CO2 emissions. Using a confinement index to capture the extent to which different policies affect emissions and daily activity data for six economic sectors (power, industry, surface transport, public buildings and commerce, residential and aviation), Le Quéré et al (2020a) estimate that global CO2 emissions declined by 17% in April relative to mean 2019 levels. The reduction in surface transport was the biggest contributor to this decline. In a more recent update, however, Le Quéré et al (2020b) find that, by early June, CO2 emissions recovered to levels which are only 5% below the 2019 levels as confinement measures were eased. They estimate that the impact on 2020 annual emissions will depend on the duration of the confinement, with a low estimate of -4% relative to 2019 levels if pre-pandemic conditions return by mid-June, and a high estimate of -7% if some restrictions remain worldwide until end-2020. The latter figure is broadly in line with the IEA (2020)’s forecast of an 8% reduction in CO2 emissions in 2020.

Large economic shocks can have a lasting impact on emissions if they lead to a structural change. Hanna, Xu and Victor (2020) find that, out of the five major global economic shocks since the 1973 oil crisis, four of them were followed by a slower growth of CO2 emissions than before the shock. The only exception was the 1998 Asian Crisis which was followed by a decade of rapid industrial expansion in China, fueled by coal. They also note that CO2 emissions growth halved to 1.6% per year in the decade which followed the 2007-08 Global Financial Crisis, and observe that 15% of the global stimulus funding after the crisis went into developing and deploying green technologies. The drop in CO2 emissions in 2020 – which is likely to be the largest since the Second World War – will itself ameliorate future warming. But the long-term impact of Covid-19 shock on climate change will depend on whether the policies that support the economic recovery are consistent with curbing the CO2 emissions path. Thus, to meet the Paris climate goals, the post-Covid economic recovery will need to achieve less carbon-intensive output growth and job creation than in pre-Covid days.

The role of central banks and green recovery

Governments and central banks have responded to the economic fallout by implementing large fiscal and monetary stimulus packages. Hepburn et al (2020) conduct a survey of fiscal measures adopted by G20 countries by April, and judge that 92% of them are consistent with maintaining the status quo with regard to green-house gas emissions, while 4% will reduce emissions and 4% will increase them. They argue that near-term fiscal policy choices will determine the long-term trend in CO2 emissions and identify five policies to support a sustainable recovery: clean physical infrastructure investment; building efficiency retrofits; investment in education and training to address immediate unemployment from Covid-19 and structural unemployment from decarbonisation; natural capital investment; and clean R&D. Krebel et al (2020) make recommendations for green investment which is more specifically tailored to the UK context.

Several central banks have taken steps to help ensure that financial institutions take into account climate-related risks in their decisions. But some have argued that central banks should do more to align their policies with climate goals. For example, Dikau, Robins and Volz (2020) review policy actions taken by central banks and supervisors since the onset of the Covid crisis and conclude that their responses to Covid-19 have not taken account of climate change or wider sustainability goals. They propose a number of ways in which central bank policies could be made ‘greener’. The proposed measures include i) adjusting the eligible collateral pool, collateral haircuts and collateral valuation to account for climate-related risks; ii) aligning asset purchases with the Paris climate goals, e.g. by decreasing the share of assets exposed to climate-related transition risks in corporate debt purchases; iii) calibrating prudential policies for climate-risk exposures, e.g. by distinguishing low-carbon and high-carbon assets in calibrating risk weights for capital requirements; and iv) adopting sustainable and responsible investment principles for portfolio management.

An immediate question is whether implementing such measures at a time of turbulence could have unintended consequences. But a deeper issue is that most central banks do not have a mandate to engineer structural changes to transition the economy towards a low-carbon growth trajectory. Thus, unlike governments, they do not have at their disposal targeted tools that are designed to induce such structural changes. Several papers have argued that using prudential policy and monetary policy tools for the purpose of engineering such a structural change could run the risks of creating unwanted side-effects, and compromising central banks’ ability to achieve their primary aims. For example, Batten, Sowerbutts and Tanaka (2016) argue that calibrating prudential policy tools to climate-related risks does not necessarily achieve the aim of cutting CO2 emissions because, unlike carbon tax, it cannot be targeted to emission intensive activities. Campiglio et al (2018) also noted that deploying monetary policy tools for the purpose of engineering a low-carbon transition could potentially compromise their effectiveness in meeting the price stability objective. 

That said, highly-rated financial instruments issued by other entities which do have a mandate and tools to fund a low-carbon transition have been used in some central banks’ monetary policy and financial market operations. For example, eligible securities for the ECB’s Public Sector Purchase Programme includes securities issues by the European Investment Bank, which is committed to increasing the share of its financing dedicated to climate action and environmental sustainability to reach 50% of its operations in 2025.

Central banks have also invested their foreign exchange reserves into the green bond fund managed by BIS Asset Management. This fund consists of US dollar-denominated green bonds issued by sovereign and quasi-sovereign entities and now has a market value of over US$1 billion. Thus, Bolton et al (2020) suggest that central banks could play a role in coordinating their own actions with a broad set of measures to be implemented by other players, including governments, the private sector, civil society and international community.


There is a growing consensus among many central banks that they should factor in climate-related financial risks in their operations, and substantial progress has been made in this direction in recent years. Nevertheless, central banks’ responses to Covid-19 crisis attracted renewed calls that their policies should also be calibrated to help support climate goals. The existing literature, however, cautions that most central banks do not have a mandate to engineer a low-carbon transition, and thus the tools at their disposal may not best suited for this purpose. The lesson from this literature seems to be that any role of central banks in supporting a green recovery will need to be defined within an overall policy strategy to engineer a low-carbon transition.

Misa Tanaka works in the Bank’s Research Hub.

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4 thoughts on “Covid-19 briefing: Covid-19 crisis, climate change and green recovery

  1. If the “settled science” was in any way correct, the drop in CO2 emissions should have translated into a drop of atmospheric CO2. I mean isn’t it the crux of the proposed solution? to decrease anthropogenic CO2 emissions in order to restore atmospheric CO2 back to lower “safe” past levels in order to halt global warming?)
    Yet the data disagree:

    October 2019: 408.52 ppm
    October 2020: 411.28 ppm

    a significant drop of anthropogenic CO2 emissions DOES NOT result in a drop of atmospheric CO2, significant or not. Atmospheric CO2 has increased over the past year.
    So what’s gonna happen now? back to rationality or more hysterical “it’s worse than we thought (yet the science is settled)!”
    My money is unfortunately on the hubris of men, never disappoint!

  2. We have also summarized some recent research on finance, COVID-19 and the green recovery for a paper. I paste them here in hope that it could be useful for similar research.

    Hepburn et al. (2020) identified five policies, which include the natural capital investment and clean R&D, that have a high potential of both economic and climate impact for the green recovery. Dikau et al. (2020) argued that central banks and financial supervisors need to align their COVID-19 response measures with the Paris Agreement to avoid lock-in to a high-carbon recovery and to fulfil their mandates for financial stability. Kemfert et al. (2020) argued that during the COVID-19 pandemic, there exist good investment opportunities to transform the economy from climate-distorting to climate-protecting. Lahcen et al. (2020) suggested that well-designed public policies can help achieve both economic growth and a disproportionally large decrease in emissions. Cojoianu et al. (2020) showed evidence that the GHG emission-intensive industry tends to get more from European energy rescue programmes. Andrijevic et al. (2020) argued that a modest fraction of current global stimulus funds can put the world on track to achieve Paris Agreement goals.

  3. Alos, in our theoretical modelling work, we find that financial regulator could play an important role in helping the green recovery. This pandemic provides a good time window to fasten the policy-driven green transition by strengthening the so-called green financial policy.

    See: Pan et al., Financial Policy, Green Transition and Recovery after the COVID-19. Available at SSRN:

  4. @John Doohold great post, two ways to read it:

    (a) you achieved a stunning reversal of the scientific consensus with a quick Google search

    (b) you made a fifth-grade math error

    [Hint: it’s (b)]

    Yep, if CO2 emissions are going *up by less* than last year, they’re still going up, so the total quantity of atmospheric is going to be higher, like your data shows.

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