Liebreich: Covid-19 – The Low-Carbon Crisis

By Michael Liebreich
Senior Contributor

At the end of last year, in a comment piece for BloombergNEF entitled Peak Emissions Are Closer Than You Think, I predicted that energy-related CO2 emissions would peak and then drop by around 5% within the next decade.  Never before has one of my big predictions been proven quite so right quite so quickly – albeit for entirely unforeseen and tragic reasons. It now looks like emissions could easily drop by 5% or more this year alone as a result of the Covid 19 pandemic.

At the time of writing, it is hard to divine the full impact Covid-19 will have in the near term. Will emissions bounce back quickly, or will they remain depressed by a sluggish economy for a few years? Longer term, the question is whether changes in policy, technology, business processes and behavior during the crisis prove sticky enough to push 2030 emissions below the 5% fall I predicted just three months ago. And there I think we can be pretty sure the answer is yes.

Let me say up front that I don’t feel particularly comfortable speculating, given the scale of the human tragedy that is unfolding before our eyes. In the last week alone, 11,000 people have died worldwide of Covid-19, nearly 5,000 in Italy alone, and we may only be in the foothills of a catastrophe that could number its victims in the tens of millions. My main concerns right now are humanitarian.

Yet speculate about the future we must: there is too much at stake, too much fear, and also too much talk of quick recoveries and oh-so-clever green stimulus programs.

How badly is it hitting energy demand?

By the International Monetary Fund’s definition – an annual decline in per-capita GDP along with other indicators of economic activity – there have been four global recessions since World War 2: 1975, 1982, 1991 and the Great Financial Crisis of 2009. Of these, the Great Financial Crisis was by far the worst, with a 2.9% drop in real per capita global GDP, resulting in a drop in energy-related emissions of 1.4%. It seems inevitable that 2020 will join this list, quite likely right at the top in terms of severity.

Over the past months, it took far too long for macroeconomists to catch up with the scale of the shock to the world’s economy. (I have written elsewhere about the foolishness of the “Orthodoxy Window”, whereby mainstream forecasters’ herd behavior stops them from stepping out of line with their peers). As late as March 19, the OECD was still talking about global growth of 2.4% for 2020. Moody’s was still expecting 1% to 1.5%. Goldman Sachs and Morgan Stanley were estimating 1.25% and 0.9% respectively. IHS Markit and Bank of America were still expecting the world to escape recession, if only just. JPMorgan was the only major bank forecasting an actual global shrinkage – but only of 1.1%. Only in the past week has reality dawned. On March 22, the U.K.’s Centre for Economics and Business Research forecast a 2020 fall in world GDP of at least 4%, which seems much closer to the unfolding reality in the world’s high streets, offices and factories, but the eventual outturn could easily be worse.

According to China’s Bureau of Statistics, value added in its manufacturing industries for January and February was down by 17% versus 2019; exports were down 19%; car sales a shocking 46%. Even utilities were reporting year-on-year reductions of 7%. China’s economic activity has recovered somewhat now that the epidemic appears under control there, but is still far from pre-crisis levels. The country’s leadership may still be talking about 5.8% annual growth, but it is not going to happen: if you assume a 10% drop in activity in the first quarter of the year, the other three quarters would need to deliver growth of 11% over 2019 in order to hit the growth target. No stimulus is going to deliver that, particularly in the face of weak global export orders for everything except face masks and ventilators.

In the rest of the world, the current collapse in economic activity looks like being even more precipitous than China’s. Retail demand has plummeted 50% to 80% across countries as they have rolled out stay-at-home orders; power demand across Europe is down around 15%; many European countries have closed their borders; most airlines have canceled over 90% of their scheduled flights. The Indian railway has shut all passenger services; Singapore is closing its borders to through traffic; several million Americans are thought to have lost their jobs in the past two weeks alone; the global tourism, hospitality, fitness and live entertainment industries have effectively entered suspended animation.

How bad could it get?

If you think this will be over in a couple of months, I have some luxury cruise tickets to sell you. Yes, China has shown that a ruthless economy-wide shutdown, combined with pervasive digital surveillance, can stop the disease in its tracks. And South Korea, Taiwan, Singapore and Japan have done a good job of suppressing the spread of the disease by means of ubiquitous testing and contact tracing. It looks like European nations are belatedly following the same strategy, and the U.S. will eventually get there.

But suppressing infection and waiting for a vaccine is not a path that every country is equipped to follow, particularly poorer ones. We could end up in a few months with a two-speed world, in which some countries have all but eliminated the virus but in others it rages out of control. Setting aside the human suffering and equity issues – richer countries will be in no position to provide aid on anything like the needed scale to poorer countries being ravaged by the pandemic – in that scenario the global economy would certainly remain in deep recessionary territory.

Perhaps I am being too pessimistic. The capacity of the world’s healthcare systems and supply chains is ramping up at wartime speed; the world’s doctors and researchers appear to be making progress on treatments; we are scaling our ability to test for infection and will soon be able to identify those who have recovered and should be immune. There is also some evidence that the virus spreads less aggressively in warmer environments, so the coming Northern Hemisphere summer may offer some respite.

A vaccine is, of course, the only thing that really puts a stop to all this. A few dozen groups around the world have been working on one, with several already beginning human trials. Maybe one will be available for general use before the end of the year, despite what most experts say. Here’s hoping. But the most likely scenario is that things will be very ugly through to the end of the year – and we have not even begun to talk about oil prices.

The oil sub-plot

With the message finally sinking in that the world is looking at peak demand within two decades, perhaps it was inevitable that there was going to be a fight for market share at some point, but it could not have come at a worse time. Just as the pandemic response began to hammer oil demand – we already know we are living through the first fall in demand for 11 years – Saudi Arabia decided to start a price war, abetted by Russia. The target, it seems, was the U.S. unconventional oil industry. At the time of writing, WTI crude is trading under $25 per barrel, prices not seen since 2002, and there is nothing on the demand side that looks set to push them significantly higher in the near term.

Saudi Arabia tried something similar in 2014-2015, crashing the price from around $100 to a low of $26, but had to admit defeat as U.S. shale oil producers cut costs and its foreign exchange reserves evaporated. There is no reason to believe this time will end differently: Saudi Arabia can boast of its $9 per barrel extraction cost, but the fact is that its fiscal breakeven is around $80 per barrel – think of the whole country as a massively inefficient oil producer. A sustained $30 oil price would drive most of the U.S. shale oil producers into bankruptcy, but much of it would just restructure and remain operational under new owners. Russia, with a $40/barrel fiscal breakeven and much more diversified economy, can survive low oil prices for a decade, but my view is that Saudi Arabia can last only 2-3 years before suing for peace.

Saudi Arabia at least has the option of crawling back to the negotiating table in a few years. Spare a thought for the poorer and less influential producer nations, which are facing the dual catastrophe of a cratering oil price and an uncontrollable pandemic. It is hard to see countries like Venezuela, Angola and Nigeria getting through the next 24 months without extreme pain, let alone Iran, suffering the additional burden of U.S. sanctions.

The need for stimulus

In summary, it looks like the combined impact of Covid-19 and the oil price war could be on a similar global scale to that of the Great Financial Crisis. Never before have I described a scenario and so much wanted to be proven wrong, but even if we hope for the best, we should be realistic as we look at the potential impact on clean energy, transportation, emissions, climate finance and diplomacy.

The team at BloombergNEF has been publishing over recent weeks a stream of research into the impacts of Covid-19 on clean energy and transport sectors around the world. They have revised their forecasts for wind and solar installations downwards – clients see this link, and the Theme page. They are monitoring levels of activity in everything from mining to aviation in real time. One thing is already clear: that has become exponentially harder to do deals over the past few weeks. Bringing together bankers, equity providers, developers, lawyers and insurers to sign off a large financing was always a complex bit of choreography; at the moment it is all but impossible. The longer the urgent crisis period is prolonged, the less new money will flow. At worst, the impact could claim casualties the length and breadth of the supply chain.

The clamor for a “green stimulus” has already begun. Realistically, the trauma to the global economy is so pressing that governments’ immediate priorities will be measures that keep people safe, fed and housed, and as many of them in employment as possible, even if idle. The idea that pouring billions of dollars into electric vehicle charging stations, renewable energy projects or solar rooftops over the next few months is the best way to do this is fanciful.

As soon as the immediate crisis has passed, however, and attention moves to reflating economies, that is the time to ensure that clean energy, transport and smart infrastructure is at the heart of any longer-term stimulus. How might that be achieved?

Some examples. First, instead of bailing out car companies with cash, send a wall of demand for electric vehicles their way. Food delivery and online shopping companies are going gangbusters, working round the clock, hiring new staff, and making unprecedented profits. They should be required to invest in an accelerated switch to electric delivery vehicles, simultaneously locking in better urban air quality (there have been claims that infection has spread quickest where air pollution is worst) and providing support for the automotive industry at a time when retail demand has evaporated. Along the same lines, we should embark on an accelerated program to switch buses, taxis, shared mobility vehicles and all publicly-owned vehicles to EVs.

Second, the airline industry. In the past few weeks, U.S. airline companies have asked Congress for a $50 billion bail-out; yet, according to an analysis by Bloomberg, over the past decade the largest of them distributed no less than 96% of their free cash flow back to investors via share buybacks. This week, the U.K.’s Easyjet announced that it would be making a 174 million-pound ($202 million) dividend payment at the same time as saying that it might need government support to survive. Boeing, fresh from its catastrophic launch of the 737 Max, is seeking $60 billion for the U.S. aerospace industry. When the financial crisis hit, as I was building New Energy Finance (the precursor to BNEF), it was my shareholders I turned to, not the government, for support. The airline industry should do the same. More importantly, this is an industry that either has to undertake a dramatic technological revolution or downsize if it is to hit the 50% reduction in emissions by 2050 that it has committed to under the terms of the Carbon Offsetting and Reduction Scheme for International Aviation (Corsia).

No bailout should benefit industries or business models that are not viable in the coming low-carbon world – such as low-cost airlines, coal-fired power generation, or uneconomic operations in shale oil and gas, oil sands and deep offshore oil.

Third, direct support of renewable energy projects is unlikely to be a smart way to spend stimulus money. Yes, it will probably make sense to extend existing tax breaks or support mechanisms for an extra year so that projects that didn’t manage to squeeze under the wire because of Covid-19 can be completed. But other than that, with wind and solar power so cheap, the issue is not so much making it cheaper, but addressing the structural issues that could hold back its deep penetration into grids. Think about interconnections, storage, smart charging and enabling demand response to compete in the flexibility markets – as well as accelerating the electrification of heating, transport and industry.

Fatih Birol, executive director of the International Energy Agency, makes the point that with demand suppressed by Covid-19, variable renewables are suddenly a far higher proportion of power supply than expected in many markets – it’s like a postcard from the future. Let’s learn from the experience and invest accordingly.

Another smart way to stimulate investment in clean energy would be to buy down the closure of aging fossil fuel plants – but only on condition that they are replaced with renewable-plus-battery combinations (which can be packaged with concessional debt or debt guarantees), not just as largesse for shareholders of assets that would anyway soon be stranded.

Fourth, energy efficiency. Given the crash in demand, oil, gas, coal and carbon prices are likely to remain low for some prolonged period, reducing the economic rationale for energy efficiency. That is one accelerator pedal from which we absolutely must not take our foot. Otherwise, when demand does eventually bounce back, we will find not only that emissions soar again, but that energy prices do too, acting as a brake on economic recovery. They say you should mend your roof when the sun shines – well you should insulate your building stock when there is excess capacity in the construction industry. Energy efficiency is often a positive net value investment – you could easily see a big stimulus package eventually recoup its costs – but unlocking it is hard. Now would be a good time for a massive, coordinated effort involving policy-makers, industry, financiers and consumers.

There is one final lens through which we must see any potential stimulus program, green or not. According to the Federal Reserve, of the $55 trillion increase in U.S. household wealth in the decade after the Great Financial Crisis, the top 10% captured 74%, of which over half went to the top 1%. I would not be surprised to see the Great Covid-19 Crisis wipe $15 to $20 trillion off U.S. household wealth over the coming two years. If the bottom 50% are disproportionately hit, and if they do not benefit equitably from the subsequent recovery, I doubt many of them will be prioritizing climate action and the backlash could make France’s “yellow vest” protests look very tame indeed.


For all the extreme uncertainty today, one thing we do know: the Covid-19 pandemic will pass, and relatively quickly. For a time the world will be in recovery mode, and then the time will come when life will once again feel normal. It may take two years, it may take four years, and it may be hard to believe right now, but it will come. Although it will feel normal, it will not be the same normality as we knew at the end of last year. Many of the new forms of behavior we adopt through necessity are going to prove sticky – and given that most of them involve staying at home or staying local, they are going to act as powerful long-term brakes on emission growth.

As I write this, over 500 million children are subject to school closures, with more lockdowns being announced every day. Before Covid-19, the technology for home-schooling was absolutely woeful. I expect it to improve quickly, to the point where the model of obligatory daily schooling and long holidays looks old-fashioned to the point of absurdity.

Video-conferencing software may already be better than home-schooling software, but it too has room for improvement, particularly multi-party conferences. Expect rapid innovation.

People are going to get so used to home-working they are going to demand it, at least for part of the week; and employers are going to get more comfortable offering it. Software could easily enable a massive shift of activity out of centralized locations. Why do you need to sit in a call center to deliver technical support? Can you really not supervise traders unless they are physically sitting in front of you? And are you sure your team finds your presence as inspiring as you think?

As for business travel, Covid-19 has entirely shut it down for the moment, and it will never be the same again. Every single conference at which I was due to speak in coming months has been postponed, with the organizers vowing to reschedule in the second half of the year or to come back stronger in 2021. My suspicion is that much of that won’t happen. Outside a few keynote sessions, most delegates prefer to hang out at conferences, drinking coffee and holding bilateral meetings. There must be a more efficient way to help build your networks than Brownian motion around the lunch buffet. I suspect in the next few months we may find it – and in the meantime we might even get some work done!

In fact, it’s hard to think of a sector that is not going to see long-term changes, all tending to reduce emissions: supply chains will be getting shorter; uptake of 3-D printing will be accelerating; countries dependent on long-haul tourism will be diversifying; food security will be moving up the agenda, and so on.

Healthcare is another sector that will see permanent change. For the past few weeks, it has been practically impossible to get an appointment with a general practitioner, primary medical care has gone mainly remote. Our phones are replete with sensors, it is not hard to add more – to turn them into ECG recorders, blood pressure or glucose monitors, hand-held cell scopes and so on. Then there is artificial intelligence, which could sit in on remote consultations as well as combing through digital data, and deliver enormously improved diagnosis, monitoring of compliance, and so on. By year-end, it will be clear that in-person provision of primary medical care should be the exception rather than the rule – not just because of infection risk but because it leads to better service, better record-keeping and better outcomes.

At the very least, the new familiarity with home-schooling, home-working and remote medical services will enable a tremendous increase in flexible working hours. Wouldn’t it be wonderful if one of the positive legacies of Covid-19 was the death of the rush hour? Think how much more cost-effective investment in public transportation would be if demand were flat across the day, rather than lurching from over-crowded to idle? And as we spend more time in and around our homes, won’t we start to demand that our streets are more pleasant, our parks better-maintained, our air cleaner?

Indeed you could go further: with the streets emptied of vehicles, and public transport a locus for viral transmission, what is to stop temporary diversion of road space to pedestrian areas and protected lanes for cyclists? Do it in such a way that signage and road furniture can be removed as traffic recovers – but you might find the temporary solution is popular enough to keep, leaving lasting improvements to our urban fabric.


Covid-19 will cast long-lasting psychological and political shadows, in the same way that the Great Depression or the World Wars inhabit the global psyche. The bulk of the world’s population has been living a charmed life for many decades, not only in the developed world, but also the emerging middle classes in the developing world. For all the news stories about cyber-threats, terrorism, economic inequality and yes, even climate change, the reality is that this has been the best period to be alive the history of mankind. The data – so brilliantly curated by the late Hans Rosling’s Gapminder Foundation and Our World in Data – prove it, but people can sense it.

We have, however, been complacent. The past 20 years have seen five potential pandemics: SARS, H1N1, Zika, Ebola and MERS. The U.K. and much of Europe also seen outbreaks of Foot and Mouth and Mad Cow Disease. Any one of these would have been one genetic mutation away from being as serious as Covid-19. We should have been acting as though we face a pandemic threat every three or four years, because that is the reality.

Epidemics are not the only systemic risks to which we have been oblivious. In the run-up to the Great Financial Crisis we were oblivious to the systemic risks to our financial system posed by extreme levels of leverage and risky, opaque derivatives. And most people are still complacent about the systemic risks to our planetary environment posed by thoughtless economic development. Is it fanciful to hope that that as a result of Covid-19 the world pays a bit more attention to those urging us to respect our planetary boundaries, and a bit less to those pretending they do not exist?

In summary: Covid-19 is causing a massive drop in emissions this quarter, perhaps as much as 20%; after that, emissions will rebound, but remain significantly down until a vaccine enables a full recovery; even after that, they may well remain depressed for some years by an economy again hobbled by a colossal mountain of debt; and in the longer term, the stickiness of some of the new behavior, business models and technologies will certainly accelerate the transition to a low-carbon economy. Out of this terrible period, some good will come.

And finally, alas poor COP26 and Tokyo 2020

Let me finish with a closing thought on COP26. Put simply, it would be best to postpone it for a year. It is simply facing too many headwinds: an unsuccessful predecessor leaving intractable issues to negotiate; insufficient time to complete preparatory work; Covid-19 distracting governments around the world; a reasonable chance that the coronavirus will still be on the loose this December; unfortunate timing vis-à-vis the Brexit and U.S. trade negotiations; and uncertainty as to whether the next U.S. President will be supportive or destructive. Far better to postpone early and shoot for a spectacular outcome in 2021, recapturing the spirit of Paris.

It was certainly the correct decision to push back the Tokyo Olympics. What better symbol could there be for the year we are all losing to Covid-19 than holding the 2020 Olympics in 2021? As an Olympian (Albertville 1992), I feel for the athletes who have trained so hard and sacrificed so much to compete this year, but no sporting event is worth the risk of worsening the pandemic. Let’s have something magnificent to look forward to when this is all over – so that we may, like Dante Alighieri, “leave hell and again behold the stars.”

Michael Liebreich is founder and senior contributor to BloombergNEF. He is on the international advisory board of Equinor. He is a former advisor to Shell New Energies.

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