Green stimulus after the 2008 crisis

The Covid-19 epidemic led to an unprecedented macroeconomic and energy shock. Given the urgent need for proactive policies both to help the economy recovery and to accelerate clean energy transitions, several countries are interested in combining these policies to create green stimulus programmes. In this context, the experience of the green stimulus programmes implemented in the wake of the 2009 financial crisis provide useful lessons for policy design.

After the financial crisis, the most effective green stimulus programmes focused on scalable, modular technologies by expanding existing investment frameworks and addressing the financial weakness of key actors. However, stimulus funding for large, complex engineering projects tended to produce disappointing results. In some cases the technological maturity or the competitiveness of the industrial value chain was misjudged, deployment targets and policy support were applied too early, and hopes for a manufacturing value chain did not materialise.

Energy efficiency policies were and should remain one of the focus areas of green stimulus programmes. The most successful examples combined ambitious policy funding with standardisation, “plug and play” efficiency options and an appropriate consideration of the availability of skilled labour and industrial capability. The overall policy design needs to pay attention to broad impacts on energy security and social inequality.

The 2008-09 global financial crisis led to a global squeeze on credit and fragile financial markets, which brought about a deep economic recession. At the same time, public concerns about climate change intensified in the run‑up to the 15th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP15) in Copenhagen in 2009. As a result, several governments linked part of their economic stimulus to investment in clean energy. The United States set the direction with a large clean energy component in an early stimulus package as well as temporary, targeted state aid and bailouts. The European Union placed energy security, global competitiveness and low-carbon industrial growth at the heart of its stimulus packages.

Greenhouse gas emissions have been rising since 2009, and there is a new understanding of climate science. In consequence, climate concerns are much more pressing and decarbonisation objectives have become more ambitious, notably in the European Union.

Today, the coronavirus crisis and related containment measures have temporarily constrained economic activity around the globe. The world economy is expected to enter a recession deeper than that of 2008-09, with large-scale job losses, comparable to the Great Depression of the 1930s. During the lockdown phase, the focus has been on addressing the health impacts, providing quick economic support to the most vulnerable citizens, small and medium-sized enterprises, and supporting financial stabilisation. At the same time, governments have started working on stimulus programmes to foster economic recovery. Many countries want to maintain momentum with stimulus programmes that support green measure like renewables and energy efficiency.

As the lockdowns ease, economies face a difficult recovery in stages, which might be hindered by financial stress and weak confidence in the private sector. To complement monetary measures, recovery policy is likely to centre on direct fiscal intervention to stimulate demand. Clean energy is already being discussed as a focus area for such financial support.

Lessons from the response to the 2008-09 crisis can enable policy makers to design green stimulus efforts that achieve maximum macroeconomic and employment impact while successfully steering the energy system in a more sustainable direction. It helps that key technologies are now more mature, affordable and scalable.

The International Energy Agency (IEA) was among the first organisations to call for actions to make the economic recovery from Covid-19 an environmentally sustainable one and to build on the lessons learnt from the global financial crisis of 2008‑09.

This paper provides an overview of the various stimulus programmes in response to the financial crisis, notably those of the United States and the European Union, and it analyses their impacts on economic growth, competitiveness and support for a green, low-carbon future. Based on the lessons learnt, key recommendations are set out for policy makers that can guide the development of recovery packages in response to the Covid-19 crisis.

Lessons from the 2008-09 crisis can teach us how to expand and take advantage of successful components of previous green stimulus efforts, while reducing the risk of repeating unfavourable experiences. Stimulus funding is most successful where funding programmes:

• Are based on proven policy schemes.
• Target technologies that are ready for deployment.
• Consider the wider benefits, including social, energy security and industrial policy objectives.
• Tackle the structural barriers of investments.

In response to the financial crisis of 2008-09, large green stimulus programmes were implemented by the People’s Republic of China (“China”), Japan, Korea, the European Union and many of its member states, and the United States.

Broad components of green stimulus packages included renewable electricity production; building retrofits; efficiency technology upgrades; incentive schemes for low-carbon vehicles (such as scrapping schemes); energy network expansion; green transport infrastructure, including rail and mass transit; and clean energy research and technology investment. Stimulus programmes were layered over a multitude of policy and funding instruments.

The largest single component of global green stimulus spending was rail infrastructure development in China, which received almost USD 100 billion from 2010 to 2012. This investment greatly improved the energy efficiency of the transport sector in China although the short-term effect was for energy-intensive construction activity. The most important policies in EU countries for mobilising investment in wind and solar PV were feed-in tariffs, amounting to USD 93 billion. Most of these were not part of the green stimulus from a narrow budgetary accounting sense but were introduced at the same time, giving the energy system a major boost. The net metering policies and feed-in tariffs as well as other incentives introduced in the United States at the time of the 2008‑09 financial crisis represented around USD 32 billion of subsidies.

The 2008 European Economic Recovery Plan included a substantial green stimulus directed to several areas, including:

• energy efficiency, with the aim of creating jobs and saving energy
• investment in clean technologies to boost sectors like construction and low‑carbon automobiles
• infrastructure and interconnections to promote efficiency and innovation.

The EU Recovery Plan also created several funds to boost solidarity and social justice, including the European Globalisation Adjustment Fund and an accelerated European Social Fund. A separate programme for energy, the European Energy Programme for Recovery put forward EUR 3.98 billion, which laid the basis for the creation of the first European Energy Efficiency Fund in 2011. Set up under the European Investment Bank, this fund leveraged market-based financing for commercially viable public energy efficiency and renewable energy projects, with a layered risk/return structure and a targeted public-private partnership.

The launch of the European Energy Programme for Recovery coincided with recurring gas disputes between the Russian Federation (“Russia”) and Ukraine. Energy security featured prominently in this programme, which allocated support to interconnections in gas and electricity, and innovation in low-carbon energy infrastructure (offshore wind and carbon capture, utilisation and storage, or CCUS), including:

• EUR 2.3 billion for gas (EUR 1.4 billion) and electricity (EUR 910 million) infrastructure projects
• EUR 565 million for offshore wind projects
• EUR 1.05 billion for 13 carbon capture, utilisation and storage projects
• EUR 146 million for the European Energy Efficiency Fund.

The overall EU green stimulus was an order of magnitude bigger than the European Energy Programme for Recovery, as several elements of the EU financial framework were mobilised for crisis management, most of which had a strong green component. This included structural and cohesion funds for energy efficiency and renewables, EU innovation funding for clean energy R&D and infrastructure funding from the Connecting Europe Facility. The European Investment Bank also scaled up its support for renewables and energy efficiency. It created innovative financial instruments, including the Risk Sharing Finance Facility to support R&D and the Loan Guarantee Instrument for Trans-European Networks to stimulate greater participation by the private sector. European Union support complemented national efforts, which were especially ambitious in France and Germany. In the area of energy efficiency, the European Energy Efficiency Fund was a minor contributor compared with the national programmes, notably compared with support for energy efficiency in buildings in Germany (EUR 3.3 billion) and France (EUR 400 million).

The American Recovery and Reinvestment Act was the main stimulus measure undertaken by the United States in response to the 2008-09 global financial crisis, with a total budget of around USD 800 billion. Under the Recovery Act, clean energy sectors received around USD 90 billion, which was divided across numerous sectors and provided via direct funding and tax measures.

Under the Recovery Act, the majority of clean energy funding (51%) was directed to renewable energy and energy efficiency. Notable shares went to mass transit (20%) and modernising the electricity grid (12%). Just over two-thirds of this clean energy funding was direct spending through 45 investment provisions focused on areas of high-value investment to support a sustainable 21st century economy. The third supported 11 tax incentives, focused on fostering new technologies in renewable energy and advanced vehicle technologies, and for energy efficiency measures.

Support for renewable energy under the Recovery Act was used to expand existing incentives and create new ones. The two main programmes that were expanded were the production tax credit for wind and investment tax credit for solar. The Recovery Act extended the production tax credit for renewable energy generation by three years, removed a cap on the investment tax credit and expanded eligibility for this credit to support small wind projects. Acknowledging that tax incentives would not benefit all renewable energy project developers, two new support programmes that provided loan guarantees and grants were created under this Act. The Section 1705 loan guarantee programme addressed difficulties in securing financing for renewable projects. The Section 1603 cash grant programme provided grants equal to 30% of renewable energy project costs as an alternative to taking the investment tax credit. As tax equity markets tightened during the financial crisis, Section 1603 grants supported development of renewable energy projects that lacked sufficient tax liability to take advantage of tax incentives.

The Weatherization Assistance Program (WAP) provided grants to support energy efficiency improvement for low-income households. The Recovery Act increased the Weatherization Assistance Program’s funding by USD 5 billion. One reason the WAP was targeted for a large funding increase was that the programme was easier to scale up because of the existing administrative capacity and industry experience with the programme. To support rapid and expanded allocation of funding from the Recovery Act, the WAP income eligibility requirement was adjusted from 150% to 200% of the poverty line and the average insulation cost per site was increased from USD 2 500 to USD 6 500.

Through the Residential Clean Energy and Energy Efficiency Tax Credit, the Recovery Act provided over USD 10 billion to encourage homeowners to invest in renewables and energy efficiency. This programme expanded existing tax credits for energy efficiency investments by removing or raising maximum credit amounts, allowing for a tax credit equal to 30% of the costs of qualifying investments.

The Recovery Act also created the Energy Efficiency and Conservation Block Grant Program to support local investments in energy efficiency and conservation. This programme allocated USD 2.6 billion in grants to 2 187 cities, counties, states, territories and tribes, across 14 grant categories. The majority of funding went to efficiency retrofits (39%), financial incentive programmes (18%), and buildings and facilities (10%). The Recovery Act also supported energy efficiency by allocating USD 3 billion to the State Energy Program, which helped state governments to develop strategic energy plans.

The Recovery Act allocated over USD 18 billion to cleaner transportation helping public transit authorities to purchase 12 000 buses, vans and rail vehicles, and construct or renovate over 850 transit facilities. High-speed rail projects received USD 8 billion. It also directed USD 6.1 billion to programmes to promote research on and deployment of next-generation batteries, advanced biofuels, plug-in hybrids and electric vehicles, and the infrastructure needed to put these technologies into operation, including deployment of over 4 600 electric vehicle charging stations. Programmes included funding for a tax credit for plug-in hybrid electric vehicles and dedicated electric vehicles of up to USD 7 500 per vehicle, with USD 2.2 billion allocated.

Outside Europe and the United States, the large stimulus programmes were in China and Japan.

China was the only major developing economy to implement a significant green stimulus programme, primarily focused on high-speed rail, electricity networks and water management. By 2019, the high-speed train network built in China in the post-financial crisis decade displaced around 0.5 million barrels/day of jet fuel not burned in domestic aviation.

Japan focused on the accelerated replacement of household appliances. In the case of Korea, green stimulus was 80% of the total stimulus programme, with USD 6 billion spent on improving the energy efficiency of buildings. India had a small rail component in its overall stimulus spending in response to the crisis.

Measuring the actual impact of green stimulus programmes is not easy, as it requires quantifying the benefits for jobs, the economy and the environment that would not have happened without the stimulus measures. In the European Union and the United States, large-scale ex post evaluations have been made.

In most jurisdictions, the clean energy financing component of the stimulus was overlaid on several existing investment policies for clean energy. Sometimes the stimulus programme expanded and prolonged existing policies. In other cases, it provided additional financing.

Moreover, there has been a complex interplay between EU and national investment schemes in Europe and between federal stimulus and state-level renewable and efficiency policies in the United States and other federal jurisdictions. As a result, separating the pure stimulus impact from the effect of existing investment policies is a challenge.

Regulatory support for renewable energy has been an important component of the economic stimulus but is often overlooked in evaluations. Feed-in tariffs are functionally equivalent to a production subsidy financed by a consumption tax on electricity. However, in most countries they were structured so that from a legal point of view they were not considered as a budgetary expenditure. As a result, feed-in tariffs are usually not counted as a fiscal stimulus measure. However, they resulted in funding for clean energy projects that was comparable to the green stimulus spending by central budgets.

In the United States, energy efficiency programmes that received stimulus funds were evaluated using a robust ex post measurement methodology that accounted for “net impacts” due to the stimulus. This method was peer reviewed and approved by the US Office of Management and Budget. As the energy efficiency industry in the United States has a solid track record for evaluating energy efficiency programmes in this way, it was essentially standard practice to do so; utilities and states that received stimulus money were accounted for in addition to the national evaluation. The European Union evaluated the European Energy Programme for Recovery and the major green stimulus programmes of the member states ten years after their implementation.

Regardless of macroeconomic stabilisation efforts, practically every renewable energy and energy efficiency investment programme introduced in the last decade has been at least partly justified by green jobs and macroeconomic spillovers. Consequently, we will take a broad approach in evaluating the lessons from the green stimulus policies in the crisis recovery period given that it is not possible to make a clear distinction between “stimulus” and “non-stimulus” green investment policies.

Evidence suggests that the macroeconomic benefit of green stimulus programmes ranged between 0.1% and 0.5% of GDP for around two years, depending on the size of the stimulus programme. This could be counted as a success, as in most countries the global financial crisis was associated with a GDP decline of 3% to 5%.

The initial shock of the financial crisis and the most immediate crisis management were focused not on the energy sector but on stabilising the banking system, resolving unsustainable debt positions and providing direct income support. In this context, for the more ambitious green stimulus programmes to comprise 10% to 20% of the total recovery is a respectful result.

Given the high capital intensity and low labour intensity of the energy sector, the green stimulus programmes contributed proportionally less to employment than they did to GDP. In the area of renewables, the creation of local engineering and manufacturing jobs has been strong but was partly reduced where equipment was imported (outside China). In the United States, around 200 000 jobs (or job years) were created from US stimulus funding of energy efficiency projects, taking into account direct job creation of the efficiency projects, manufacturing the equipment and the impact of increased consumer spending. Most of the indirect and direct jobs were generated in the first few years following the global financial crisis, while the second-order effects contribute to additional jobs out to 2050 (i.e. based on measured life and projected savings benefits).

The European Union did not launch the Energy Efficiency Fund until 2011. While this came too late for the global financial crisis itself, the European economy faced the subsequent eurozone crisis when additional stimulus was beneficial.

In the European Union, economic impacts from green investment ranged from around 0.6% to 1.1% of GDP at national level, and up to 1.5% of GDP at European level.

An evaluation by the European Commission of the European Energy Programme for Recovery, carried out in 2018, showed 35 out of 44 gas and electricity infrastructure projects had been completed, 4 out of 9 offshore wind projects were operational; but only 1 of the 6 CCUS projects was completed and 3 were terminated prematurely. Investments in interconnections were successful where the project already had a final investment decision and was at an advanced stage in its planning or was related to major upgrades (like reverse flow projects on gas pipelines).

In the United States, the Recovery Act resulted in several benefits. The Section 1705 Loan Guarantee Program supported the construction of the first five large solar PV projects of over 100 MW and resulted in 1 502 MW of new renewables capacity. Through 2015, Section 1603 grants provided USD 25 billion, helping 9 915 businesses to deploy 33.3 GW of renewable energy projects. Under the Recovery Act, over USD 27 billion was spent to improve building energy efficiency and to increase research and demonstration on energy-efficient technologies. The majority of this funding was directed to credits and existing energy efficiency programmes. From 2009 to 2010, over 13 million residential energy credits were claimed. The Weatherization Assistance Program was able to rapidly allocate grants to renovation projects, with the majority of its funding spent by 2013. This supported insulation of over 800 000 buildings from 2009 to 2013, with an estimated 28 TWh of energy saved. WAP also supported directly and indirectly 28 000 jobs in 2010 alone. Another initiative under the Recovery Act is the Smart Grid Investment Program, which completed the installation of 16 million smart meters by 2016.

Under the Recovery Act, clean energy investments leveraged an estimated USD 150 billion in additional private and non-federal capital in investments. The Act supported clean energy manufacturing through tax credits (including the investment tax credit and 48C grants) for a wide range of technologies, including renewable energy, energy storage, energy efficiency, CCUS, fuel cells and biofuels fuels. Many tax credits were awarded to clean energy manufacturers on a competitive basis. Interest in the programme greatly exceeded initial expectations, with over 500 applications seeking USD 8 billion in credits. In response, the initial funding level was increased, allowing USD 2.3 billion to support 183 clean energy manufacturers. For CCUS, of the initial USD 3.4 billion allocation, the US Department of Energy returned USD 1.3 billion to the US Department of Treasury for four CCUS projects that were not able to advance to the point that the Recovery Act funding could be spent. The Air Products and Chemicals Inc. hydrogen facility in Port Arthur, Texas, was one of the successful CCUS projects, combining CCUS and enhanced oil recovery.

Stimulus programmes in the energy sector also increasingly attracted institutional investors and promoted a new asset class, infrastructure investment, which provides a long-term, stable, regulated rate of return to investors. In the aftermath of the 2008‑09 financial crisis, pension funds, hedge funds and other institutional investors discovered the energy sector, which had been largely served by debt from the capital markets until 2008. In 2012, the European Investment Bank launched the Europe 2020 Project Bond Initiative as a financial instrument to leverage such new investors at a time when Europe was unbundling its energy networks and building new offshore wind facilities. Many institutional investors entered the energy infrastructure sector.

From an energy point of view, the results of green stimulus programmes have been mixed. Overall, the recovery from the financial crisis was energy- and carbon-intensive. During 2010, the world economy witnessed the sharpest upswing of energy use and CO₂ emissions in history. In contrast to previous recoveries, the financial crisis was followed by a marked increase in the carbon intensity of the global economy. The rebound after the financial crisis resulted in an increase in global CO₂ emissions of 1.5 Gt from 2009 to 2010.

Compared with previous economic crises in the early 1980s and 1990s, the 2008‑09 financial crisis resulted in the lowest improvement in carbon intensity. The average annual improvements in the carbon intensity of the global economy in the three years following these global recessions were 1.5% in 1982 and 1.8% in 1991 but only 0.9% in 2009.

However, during the post-financial crisis recovery there was an important change in the global composition of energy intensity. A very ambitious and infrastructure-focused stimulus rapidly put China back onto a dynamic, energy-intensive growth path. In Europe, the region with the lowest energy intensity, the financial crisis was followed by the eurozone crisis and several years of subdued economic activity.

The global financial crisis also led to a measurable reduction in energy intensity in every country, including China. China, the European Union and the United States have all made major energy efficiency gains between 2000 and 2020.

In addition, there was a marked structural break in electricity demand in Europe, Japan and the United States. Before the financial crisis, electricity demand had a measurable income elasticity in both Germany and the United States: 1% growth in GDP was associated with growth in power demand of 0.8% in Germany and 0.6% in the United States. In Japan, electricity demand growth was dynamic even after the “lost decade” after the real estate bubble. This relationship was broken during the recovery, however, and most advanced market economies transitioned to a pattern of all but stagnating electricity demand. Some of this change is attributable to the relocation of energy-intensive industrial activities to other economies, but there is clear evidence that energy efficiency improvements played a strong role. The structural break happened regardless of the very different end user price levels, even in North America which benefited from energy-intensive industrial investment due to low energy prices.

Such a structural break was not detectable in gas demand for heating buildings. The nature of the efficiency investment appears to explain this difference. For electricity, modular and scalable technical options were already available, namely replacing incandescent lightbulbs and deploying variable speed drive engines in industry. For gas, by contrast, replacing insulation and heating systems requires a time‑consuming design process and needs to overcome barriers of consumer information and convenience.

In countries where the stimulus programme included an ambitious building sector efficiency component, such as Germany and the United Kingdom, building sector gas demand displayed a continuous gradual decline over several years rather than a sudden structural break. In the United States, the efficiency efforts funded by the stimulus coincided with collapsing gas prices due to the shale revolution. Given the impact of Covid-19 on global oil and gas markets, such a headwind from low fossil fuel prices is almost certain to occur again.

The green stimulus programmes implemented after the global financial crisis of 2008-09 provide useful lessons for the design of current green stimulus efforts. Policy makers need to reflect on the urgency of the unemployment challenge of Covid-19, and expand and leverage existing clean energy investment frameworks in an ambitious manner. In the IEA World Energy Outlook Sustainable Development Scenario, clean energy and efficiency investment scales up by around USD 1 trillion per year by 2025 from the current level, providing ample scope for a clean energy investment push that is big enough to accelerate macroeconomic recovery. The forthcoming IEA World Energy Outlook 2020 special report will present new analysis on bolstering economic growth and the long-term transformation of the economy.

Governments also need to anticipate fiscal consolidation after the stimulus programmes. Previous stimulus programmes have demonstrated that more private investment can be leveraged with well-targeted and well-functioning policy frameworks, thus lowering the need for budgetary support.

Modular technologies that benefit from learning-by-doing proved to be more suitable targets for a short-term stimulus than large, complex engineering projects with lengthy project development times. Given its labour intensity and strong interactions with the hard-hit construction industry, energy efficiency was at the focus of the post‑2009 green stimulus efforts, and there is potential to repeat this emphasis in current policy responses. However, infrastructure projects often face licensing delays and can be held up by the financial weakness of municipalities. “Shovel-ready” projects, on the other hand, proved to have powerful positive macroeconomic spillovers.

Finally, the Covid-19 pandemic appears to have an even more serious impact on social cohesion and inequality than has the global financial crisis of 2008‑09. Policy makers need to assess post-financial crisis experience and design the green recovery in a fashion that incorporates distributional considerations and ensures broad benefits and social acceptance.