COVID-19 and Climate Change: Should Governments Tie Corporate Bailouts to Environmental Efforts or Strengthen Current Environmental Policies?

This article was published in Environmental and Resource Economics  – Special issue « Perspectives on the Economics of the Environment in the Shadow of Coronavirus » (Aug. 2020)

The coronavirus pandemic is having a serious impact on the economy. Eurostat estimates that seasonally adjusted GDP decreased by 3.5% in the EU during the first quarter of 2020, compared with the previous quarter. In certain sectors, the COVID-19 crisis has led to the temporary or even permanent closure of sites, a collapse in demand and an increase in production costs linked to the fight against the spread of the virus. This decline in activity can trigger bankruptcies, which result in unemployment and the destruction of physical and human capital, leading in turn to a loss of specific knowledge and skills and to market concentration and the partial relocation of production activities. From an environmental point of view, bankruptcies and relocation may generate higher emissions by increasing production in more polluting sites abroad and by increasing the transportation of goods. In addition, the decline in economic activity may have a negative effect on research and development spending, which is crucial for future growth and the development of more environmentally friendly technologies.

Many measures have been put in place to limit the economic effects of the COVID-19 crisis. At the European Union level, a number of measures such as direct subsidies, selective tax benefits, advance payments, state guarantees for loans and subsidized public loans to companies have been implemented. In addition, many large companies are being bailed out and there is a debate on whether conditions should be attached to this state aid. These conditions could relate to various commitments such as relocating activities, paying taxes, safeguarding employment, and protecting the environment. On 8 May 2020, the EU confirmed that large companies receiving emergency cash during the COVID-19 crisis will not be obliged to devote funds to “greening” their operations. Rescued firms will only have to report on their use of the aid and in some cases the aid could be attached to conditions such as a ban on dividends and management bonus payments. Nevertheless, member states are free to design national measures in line with additional policy objectives, such as further enabling the green transformation of their economies. Many stakeholders are still pushing for conditions to be attached to the bailouts. For instance, the EG3 think tank proposes making the rescue of airlines conditional on the use of less polluting fuels and tying aid to car manufacturers to the development of electric vehicles. A group of German companies has also requested that state aid be linked to climate actions.

This article examines the merits of making aid conditional on environmental efforts. We focus on the rescue plans for companies rather than on recovery plans or the European Green Deal, which was launched before the COVID-19 crisis. We show that tying aid to environmental efforts is difficult to implement and requires both controls and sanctions, as well as a large amount of information. We also discuss the merits of tying bailouts to environmental efforts compared with implementing more stringent environmental policies (presuming that companies will be bailed out in any case).

Read the article on the website of the Environmental and Resource Economics review