Sustainable recovery in a 90% economy

While we have been looking forward to the post-corona era for the past few months, we now realise that it is better to talk about a co-corona time. The coming period in which we will live with the corona virus, waiting for a vaccine. In the meantime, our habits adapt to life at a safer distance.

The weekly surveys conducted by the National Bank of Belgium (NBB) show that, in mid-March, businesses and the self-employed saw their turnover fall by an average of 30%. In the hotel and catering and leisure sector, it was 80 to 90 percent, in food and logistics 10 to 20 percent. (1) We note that in countries such as China, where people are already in the recovery phase, economic activity is not yet fully recovering. Recently, The Economist launched the term '90% economy' to refer to economic activity with wings clipped.  

The New Zealand Prime Minister called on the country to work less as a solution to the crisis. (2) In this new Kiwim model everyone switches to a 4-day working week. Through a redistribution of work and an increase in leisure time, she expects a revival of the economy. In doing so, she responds to the principle that we must influence consumer behaviour, rather than imposing strict rules, as part of a solidarity measure. In Flanders, too, the idea of a collective reduction in working time for companies in difficulty has already been put forward. 

In addition to the economic effects, we also wonder to what extent the crisis will have a (lasting) impact on our environmental footprint. Does the reduced economic activity also lead to the desired reduction of greenhouse gas emissions? Will the climate at least emerge better from this difficult period?

At VITO, we have a macro-economic model (type "CGE") to calculate the impact of a policy measure on the Belgian economy and emissions. We brought together some possible scenarios of the 90% economy in order to evaluate the possible effects. And to give an immediate conclusion, the climate gain is less than the economic loss, but there is hope to reverse that.

We ask ourselves whether a targeted intervention by the government can correct this imbalance. Can green investments limit the economic damage and reduce the climate impact? This is in any case the logic that is also propagated at the European level with the Green Deal (3) and the Action Plan Circular Economy. The latter is strongly focused on strengthening local cycles and activities.

In order to demonstrate that a double positive effect is indeed possible, we are working out an example within the construction sector. This is based on local supply channels and provides a lot of local employment. In addition, targeted renovation can reduce many greenhouse gas emissions: heating is responsible for 70% of all household emissions. The heating of houses contributes 14% to territorial emissions in Belgium. (4) Far-reaching energy renovation can therefore significantly reduce CO2 emissions. Individual home renovation is not the only option to improve the energy performance of houses; for some neighbourhoods, for example, heating networks can offer a solution. But for this example, we focus on energy renovation.

90% to 95% of houses and apartments in Belgium currently do not meet the energy performance label A or A+. Good insulation, the installation of solar panels and possibly a heat pump can reduce a household's energy consumption by 70%. But such renovation offers even more advantages. Through better light, air circulation and general comfort, residents become healthier, happier and more productive (working from home!). A renovated neighbourhood also makes residents feel safer. The market value of the renovated property increases and operational costs decrease.(5) 

We pass on the effect of a subsidy or tax reduction. Through a subsidy of 120M€ the government stimulates extra citizens to make the decision to renovate. They relieve citizens of their worries and offer, for example, the possibility of leaving the planning and follow-up of the renovation to an architect. The subsidy covers the extra service and supports the households to take the actual decision to start the renovation. In response to these measures, some 80 000 families decide to carry out the energy renovation of their house or apartment.

The application of public intervention in the 90% economy scenarios mentioned above limits the loss of GDP. The targeted housing renovation policy increases GDP by 0.045% to 0.048% depending on the scenario. This seems limited, but on average it represents an increase of 176 million euros, for an investment of (only) 120 million euros.

The economic loss of the crisis is thus compensated to a limited extent. But what's more, the effects on climate are positive. Climate emissions decrease by 0.34%, which is much more than the economic gain of 0.04%. In the kiwi model, the climate gains are greater (504 kton reduction) than for the consumer scenario (490 kton less CO2 for 90% economy in non-essential sectors). By stimulating the energy renovation of dwellings in a targeted manner, both economic added value and climate gains can therefore be achieved. What's more, the climate gains achieved do not cost money, but bring net gains for public finances through payback effects. 

The example shows that targeted investment in a locally anchored sector leads to a switch in the economy that benefits both GDP and the climate. The crisis is causing GDP to fall more sharply than CO2 emissions. A sustainable policy aimed at stimulating the local economy leads to an increase in GDP and a relatively larger reduction in CO2 emissions. This double positive result is achieved when we focus the incentives on a sector that has a large local component, i.e. employs many people and obtains its products from the local market. Similar effects can therefore be expected for local (bio)agriculture or locally targeted services.