Combining economic recovery with climate change mitigation: A global evaluation of financial instruments

Abstract

Although some countries are gradually returning to production and life, the COVID-19 pandemic continues to affect the world, further motivating recovery policies. Using a global computable general equilibrium (CGE) model, this study evaluates the environmental and economic impacts of COVID-19 on the world, both today and in the longer term. This study explores the post-pandemic impacts conditional on varied fiscal policies (including forgone revenue and additional spending) and their combination with a carbon tax. This study finds that the pandemic shocks in 2020 slowed regional economies worldwide, and a continued pandemic in 2021 will further stymie economic activity. Among the government’s recovery policies, indirect tax reduction has the best positive stimulus to regional economies; however, it is not conducive to low-carbon energy development and will also lead to an increase in CO2 and pollutant emissions. A post-pandemic green recovery plan could prioritize replacing indirect production taxes with taxes on GHG emissions, which would both improve economic turnover metrics and reduce environmental emissions in 2021. In the long run, this tax shift will not only minimize the economic damage to the global economy but also help governments around the world to get back on track in meeting the goals of the Paris Agreement.