What Covid-19’s true impact on CO2 can teach us

The lockdown's effect on CO2 emissions is temporary, but does it give us a glimpse of what a fossil-free world could look like?


Since lockdown measures have been implemented worldwide to contain the spread of Covid-19, carbon emissions have fallen by 6% (according to the World Meteorological Organization Secretary-General) thanks to a wholesale reduction of transport and manufacturing activity. Will it help keep the global temperature increase at below +2°C in line with the Paris Agreement? Not without a change in mindset. Trevor Allen – Sustainability Research Analyst at BNP Paribas Markets 360, explains why and envisages a realistic post-lockdown scenario.

Will the lockdown really have a positive impact on carbon emissions?
In the long term, not really. Although financial crisis and CO2 emission are correlated, carbon in the atmosphere is actually the one responsible for raising the Earth’s temperature as it acts as insulation. Despite popular belief, this level is not affected by market downturns or short-term losses in production and consumption. We observed this during 2008 financial crisis and the same is almost certainly true now.
Atmospheric CO2 growth vs major market indices
Sources: NASA, NOAA, Bloomberg, BNP Paribas

The Covid-19 pandemic-induced market downturn is unlikely to be better in providing respite from the causes of climate change, despite a few months of lower emissions. Not to mention that we’ve already passed the ‘tipping point’ of atmospheric carbon for limiting the rise in the Earth’s reference temperature to 1.5°C above pre-industrial levels (the 2019 level of 411 parts per million was already well above the 1990 level of 350PPM); and we now rely on carbon dissipation, which remains extremely slow, to achieve that target. Simply relying on this pause in emissions will not be enough.

So what can we actually learn from this crisis to help fight climate change?
Climate change has been one of the hottest topics in finance for years. Yet, this is the first time we witness the environmental effects if nations decided to turn away from fossil fuel use suddenly and dramatically: wildlife has returned to Venice’s canals, which are once more clear and blue, while the snow-capped peaks of the Himalayas are visible from more than a hundred miles away. While the sobering social, health, and economic consequences create the opposite of an ideal sustainable economy, the effects on atmospheric carbon in the short term , and the knowledge that economies globally will need to be restarted, should act as a wake-up call for governments, corporates and consumers to join in a global effort to take action.

What could governments, corporates and consumers do to achieve a sustainable post-lockdown recovery?
Countries could contemplate an exit from this pandemic by re-engineering their economies with an emphasis on reducing greenhouse gas emissions. For example, they might allocate capital to creating more renewable energy, electric vehicles, battery storage, recycling plants and affordable, energy-efficient housing.

As for corporates, they could also consider issuing more green and sustainable bonds – especially in emerging markets – enabling them to recapitalise and change their business models to ‘greener’ products, but also improve the resilience of companies to supply chain disruptions.

Fortunately, the sustainability bond market is still growing, with issuance volumes up more than 40% ($85.5 billion in Q1 2020 compared with $59.5 billion in Q1 2019). The pandemic hasn’t had a negative impact: $7 billion of sustainable bonds have been issued in response to Covid-19 to support economies and healthcare systems via social bond programmes, which target social, rather than environmental objectives.

Nonetheless, investor appetite for sustainability bonds is still growing, as some bond issues this year have been over-subscribed as much as 11 times. And ESG/SRI funds are still outperforming traditional counterparts in Q1 2020.

European ESG and SRI equity indices, performance YTD
Sources: NASA, NOAA, Bloomberg, BNP Paribas

Finally, the shift must also happen among consumers. Once the pandemic subsides and lockdown measures are lifted, we can expect a bounce-back in many sectors – especially in consumption and transport – where driving and aviation contribute more than 80% of transport’s CO2 emissions.

Covid-19’s effect on carbon emissions in the short-term will not have long-lasting consequences that combat the environmental crisis. However, it gives us a preview of the potential for a greener future, an undoubted wake-up call that should give an impetus to governments, corporates, and consumers to walk the talk and take action.

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