We May Be in Uncharted Waters, But We Aren’t Lost at Sea

As Canada navigates the COVID-19 pandemic from immediate response to short-term relief and, finally, long-term recovery, its leaders will face increasing scrutiny as to how much stimulus money is going where, and to what extent it will help us build back better.

If this all feels vaguely familiar, it’s because we’ve seen it before. When the global financial crisis of 2008 hit, governments around the world began structuring similar stimulus plans. We can learn a lot by looking back at how effective these turned out to be, both in terms of revitalizing economies and forging a path toward a low-carbon, sustainable future.

In the aftermath of the 2008 crisis, many countries implemented two kinds of policies: those that met urgent needs to support vulnerable sectors and people, saving industries and creating jobs; and those that aimed at longer-term recovery.

Taking the long road to recovery

In the latter category, countries such as the U.S. came out of the financial crisis with policies aimed at transitioning the energy system toward renewables, rolling out mass broadband, revolutionizing education and health care, investing in research and development, and renewing infrastructure.

While these kinds of long-term policies don’t fill the immediate need for jobs, they build a foundation for future growth and prosperity (the central tenet of building back better) by deliberately reshaping the economy.

While long-term policies don’t fill the immediate need for jobs, they build a foundation for future growth and prosperity (the central tenet of building back better) by reshaping the economy.

To do this, you need to have some idea of what you’re driving toward. Post-2008, countries including the U.S., Korea, Australia, Japan, and China used stimulus to support and nurture sectors that were poised to drive green recovery, which meant that economic rebuilding went hand in hand with immediate and lasting environmental improvements.

They put people to work retrofitting buildings to high energy-efficiency standards. China launched into its drive for global leadership on wind and solar power manufacturing. The U.S. forced its troubled auto manufacturing sector to reorient and start building fuel-efficient cars that would serve future markets.

It became clear that, in recovering from crisis, a nation could actively reshape its future to become at once greener and more prosperous.

The global financial crisis also taught us that bailouts of companies should be avoided, but if they are necessary taxpayers should be made whole at the end of the day, and conditions of bailouts should be onerous and tied to policy directives.

It became clear that, in recovering from crisis, a nation could actively reshape its future to become at once greener and more prosperous.

Because the auto bailouts in the U.S. were tied to improvements in vehicle efficiency, a lower emitting vehicle fleet was able to thrive, despite decades of resistance by the sector itself. The Canadian auto bailout came with daunting conditions; it forced restructuring and accelerated bankruptcy that wiped out shareholders, replaced senior management and took equity stakes. In the same vein, the present-day bailout of KLM-Air France was conditioned on limiting the airline’s ability to compete with France’s more environmentally friendly domestic rail services in cases where the journey by rail would be less than 2.5 hours.

Shovel-ready versus shovel-worthy

Investment in simple, ‘shovel-ready’ projects where finance was constrained also performed well after the 2008 crash, such as energy-efficiency funding for residential and municipal sectors. Areas where there was potential for a high number of standardized small projects, such as efficiency retrofitting, also performed better, and showed lower risk than large, complex infrastructure projects.

But governments must consider what’s shovel-worthy, too, applying the principles of smart industrial policy and targeting far-sighted support in areas where latent comparative advantage may take years to emerge. Many countries, notably Europe, made large investments in wind and solar power part of their post-2008 spending. For Europe, this led to a large wind-energy cluster, where countries like Germany held a mechanical engineering advantage.

The inevitable price of this kind of success is risk; the EU investments in solar energy did not create a similar cluster, in part because China already had an advantage in semiconductor electronics.

This is our chance to set Canada on a path of resilience and ensure we can compete in the low-carbon markets of the future.

Policy design is also crucial to avoid unintended consequences and rebound effects. In Australia, a home-insultation program was rapidly instituted, but failed because of a lack of consultation and poor design choices that traded safety, accountability, and effectiveness for speed of implementation. In Japan, subsidies to drive a massive shift toward more efficient, lower-emitting vehicles were a great success, but the decrease in greenhouse gases was largely offset by reductions in road tolls designed to boost tourism, which led people to drive more.

These kinds of pitfalls can be avoided by working across ministries, consulting with stakeholders, and carefully considering policy impacts (both intended and unintended).

We have an opportunity right now for a green transition, with an unprecedented global investment of public funds that will have decades-long repercussions. It’s our chance to set Canada on a path of resilience and ensure we can compete in the low-carbon markets of the future.

But in our rush to create policy solutions in these uncharted waters, let’s not forget that we can draw on rich experience to help us navigate toward this goal.

This op-ed originally appeared in the Hill Times on June 8, 2020. It has been republished with permission.