The $16 trillion wipeout in global stock markets over the past month highlights the serious vulnerabilities of our economic system to shocks.
Around the world, millions became unemployed practically overnight and millions lost a huge portion of their savings.
These events will have catastrophic consequences for people’s well-being and will shape economic and political trends for years, if not decades. This doesn’t even account for the impacts of the Covid-19 pandemic on human health and the tragic situation unfolding in hospitals around the world.
Much will be written about this historical event as society takes stock of what just occurred, but one thing is clear: resilience must be a driving force in the policy response.
As investors of last resort, governments have the key role to play. The central bank playbook in 2008 and 2020 is similar, as liquidity evaporated and financial contagion spread, central banks had to step in as buyers of last resort with increasingly larger rescue packages.
At the same time, governments are working desperately on the fiscal front to provide economic stimulus to the real economy and prevent an economic depression. Estimates of bailout packages are in the order of $10 trillion globally and growing.
So where does this leave us?
Governments and taxpayers bear the ultimate risk and thus have the mandate and responsibility to reduce these risks.
There will be a cost but as we clearly see with the Covid-19 pandemic, the cost of prevention pales in comparison. The same could be said about climate change.
A working paper from the US National Bureau of Economic Research found that by 2100, the costs of climate change would reduce global GDP by 7.22% while the costs of prevention – by meeting the goals of the Paris Agreement – are substantially less, around 1.07% of global GDP.
For the US, the cost of inaction is even higher at 10.5% of GDP. To put things into perspective, this is roughly in line with the costs of a Covid-19 pandemic every year.
As we move forward past this crisis, policymakers should have resilience in the front of their minds. Below are some practical steps that can be taken in our policy response not only to enable us to boost green growth and reduce greenhouse gas emissions but also to create a more resilient financial system.
Rebalance incentives for publicly traded companies to reward long-term sustainability over short-term profits
Companies are too focused on the next quarter at the expense of their long-term financial viability. Fiscal and monetary policies need to reward long-term investment and risk reduction. Executives should not be compensated based on stock performance but broader metrics.
Company boards should emphasise long-term stability and survivability. Inherent in this is the need to address climate risk. Stock buybacks financed with debt should be forbidden.
Better safety nets
Our world is moving towards greater disruptions from climate change, but also other types of crises driven by greater interconnectedness, which generates systemic risk. As we see with Covid-19, a crisis in one place can quickly spread to the rest of the world and this is not limited to communicable diseases.
Financial crises in one corner of the globe can impact our supply chains, and our financial markets as trading in various financial products is linked in incredibly complex arrangements, again, generating systemic risk. A world with more risks needs better safety nets and more resilient systems. There is a need to improve safety nets for all citizens whether these are economic, health and climate-related shocks.
Eliminate fossil fuel subsidies
An estimated $5.2 trillion is spent annually on fossil fuel subsidies. This is wasteful and damaging to the environment. It leads to inefficient use and unnecessary greenhouse gas emissions, creates rent-seeking in the economy and presents a huge opportunity cost for taxpayers.
Trillions should, instead, be invested in industries of the future which have the potential to provide for our energy needs while eliminating the risk of climate change. With oil at around $25 per barrel, consumer subsidies could be eliminated now with very little consequences.
Embrace telework trends
As companies and consumers race to adapt to the massive disruptions from Covid-induced shutdowns, we have seen how millions of workers have adapted to working from home and used new technologies to collaborate in ways that were unimaginable a decade ago.
A distributed workforce can increase the resilience of business operations, can massively reduce transport-related emissions from commuting and work-related travel and can even increase the affordability of cities and generate distributional effects as there is less need to concentrate workers in one place.
Embrace the public sector
View the public sector not as an investor of last resort but as a leader, shaping future investment trends in a way that is aligned with societal goals. Public investment shapes markets and creates benefits to society that the private sector cannot provide.
Through publicly-funded research and development programmes, scientists have developed the core technologies behind the internet and modern medicine. Similarly, the revolutions taking place in renewable energy production, electric storage and electrified transportation would not have been possible without early-stage investments made by the public sector.
Investments for public benefit in areas like new energy technologies, public health and urban infrastructure are critical to reducing long-term risks and can ultimately lower public outlays when disasters strike.
While there is still hope for this public health threat to be minimised and, hopefully, eventually eliminated, our economic response will have repercussions for decades.
It’s the right time to focus on a vision for a resilient, inclusive, and sustainable economy.
Donovan Escalante is a manager at Climate Policy Initiative, an analysis and advisory organisation that works with governments and investors to drive economic growth while addressing climate change.