OECD review

This OECD review examines the long-term impact of the COVID-19 pandemic and the associated government responses to the state of the environment.

The large-scale ENV-Links model is used, which links economic activity and environmental pressures, predicts medium - and long-term impacts on greenhouse gas (GHG) emissions, air pollution, material use, and land-use change.

For reference: ENV-Links describes economic activities in different sectors and regions and their interaction. It is a global economic model built on a consistent set of data describing the behavior of manufacturing sectors and consumers in different regions, with a focus on energy and international trade.

The shocks associated with COVID-19 are based on an assessment of the state of shocks to GDP, unemployment, productivity, trade barriers, incentive packages for companies and households, and final demand, based on OECD data and forecasts for April 2021.

COVID-19 has a long-term impact on the structure of the economy

The structure of the economy plays a key role in how economic impacts are expressed in changing environmental pressures.

The service sectors that have been hardest hit by the pandemic produce fewer emissions and use fewer raw materials than most industrial sectors.

The only sector to increase output in 2020 is pharmaceuticals, due to a surge in demand. In the medium term, the pharmaceutical sector will continue to perform more efficiently than other manufacturing sectors. The OECD forecasts that in the long run, the services sector and agriculture will recover faster than manufacturing.

The long-term environmental impacts are more significant than the macroeconomic impacts

In the context of environmental pressures, which are mainly related to energy use, there was a sharp decline of 7-8% in 2020, followed by a gradual recovery to 2-3% below the baseline forecast before COVID-19.

For reference: This includes emissions of greenhouse gases, nitrogen oxides (NOx) and sulfur dioxide (SO2), air pollutants, and the use of fossil fuel materials. In contrast, air pollution emissions, material use, and land-use changes associated with agriculture are less affected, both in the short and long term.

As for the use of materials, biotic resources are less affected. In the short term, the area allocated to arable land is more or less fixed, and the relatively rapid recovery in food demand ensures that land-use changes remain very close to baseline levels.  Also, the impact on forestry suggests that biodiversity and ecosystem services may not benefit significantly from reduced economic activity.

Other environmental pressures have a different set of economic factors and have different impacts. Particulate matter emissions, which include black an.organic carbon, are associated with transportation and residential activities. The use of metals is associated with manufacturing activities, which were less severely affected in the short term, but gradually began to perform worse than in other sectors. The immediate decline is marginally small and increases over time. The effect for non-metallic minerals is associated with a sharp reduction in construction volumes in 2020.

Regional differences in environmental impacts are significant

Regional changes in environmental pressures are driven by what happens to regional macroeconomics and changes in the structure of this economy. Regarding air pollution, regional differences have a significant impact on air quality. In the short term (presumably 2025), the pandemic and the response will lead to a regional reduction in the environmental burden, or reduce greenhouse gas emissions and the use of materials. In the OECD, the reduction in greenhouse gas emissions and material use still exceeds the impact on GDP, which means that these countries are more specialized in relatively clean sectors as a result of the COVID-19 pandemic and response measures.

A slower recovery increases the long-term impact on the economy and the environment

The speed with which the economies of various countries will recover from the pandemic and the medium-term consequences are unclear. If the GDP recovery is slower, the economic impact will last significantly longer in all countries, and by 2025, the differences will be particularly large for countries that will recover faster. A slow recovery means a major loss of GDP, as heavier losses to the global economy are particularly damaging for major exporters such as India and China. The slower recovery has an impact on all sectors, but to varying degrees.

A slower recovery leads to a wider gap between sectors in terms of the impact on production levels

The effects on environmental pressures associated with more capital-intensive sectors, namely energy and manufacturing, persist longer than those associated with agriculture. However, the main effect of the slower recovery is a reduction in macroeconomic activity in the medium term and a reduction in the environmental burden.

The impact of the pandemic on sectoral economic activity has not yet been clearly identified. In many countries, recovery packages have not yet been defined, although most have announced that their recovery packages will be "green", the model does not include specific support for environmental goods and services.

Final conclusions:

• The COVID-19 pandemic and response measures have a significant short-and long-term impact on macroeconomic activity, as well as on the structure of the economy.
  
  
• Short-term reductions in the environmental burden are significant: energy-related emissions decreased by 7%, while the environmental burden associated with agriculture decreased by 2%. The decline in the use of non-metallic minerals, including building materials, has reached double digits.
  
  
• Long-term changes in environmental pressures will depend crucially on economic factors and regional impacts.
  
  
• Some sectors, such as manufacturing and construction, are more affected than, for example, agriculture. Regional differences are also large, with strong long-term consequences, for example, in India.
  
  
• A long - term-potentially permanent-downward impact on environmental pressure levels of 1-3% is projected, depending on the indicator. A slow recovery can double these effects.

The full version of the review can be found here