Zaheer Allam, Urban Strategist, The Port Louis Development Initiative

Technology has the potential to be a tool as well as a mean for a faster and more sustainable post-Covid recovery in Mauritius.  In this article, Zaheer Allam reminds us that SMEs are key players in digital innovations and a crucial component of a more equitable growth path.  Governments should put SMEs and technology driven infrastructure at the heart of their recovery plan to catalyse the socio-economic benefits of boosting technology driven activities.   

While warning signs usually precede recessions, the COVID-19 story unfolded at unprecedented speed and gave no prior indication. In just five months after the coronavirus outbreak, we are bracing ourselves as we enter what is forecasted to be one of the worst recession since the Great Depression. Then again recessions are not new, we are equipped to understand what’s coming, and today we have new tools at our disposal to better respond to incoming economic blows.  Leveraging on the power of technology will be more important than ever, and will provide a much needed boost to some economies to better address sustainability and inequality.

Unprecedented crisis

Over the last seventy years, the world has experienced a number of economic crises and while each have had their own specificity, they have shattered economies. The current crisis is no different. The latest projections by the International Monetary Fund (IMF) hints that the year 2020 will experience, at best, a negative 3% growth and, at worst, an 8% drop in global GDP. Unfortunately, the latter forecast seems probable. Experts in the medical sector indicate that the earliest and most optimistic projection for a vaccine is late 2021.

The crisis is already triggering unemployment as seen in the record numbers reached in the USA and Europe. The International Labour Organisation (ILO) projects that unemployment may reach half of the global labour force, equating to 1.6 billion. Similarly, in Mauritius, an initial estimate by the Minister of Finance and Economic Development (MoFED) projects unemployment figures to reach 100,000, equivalent to 17% unemployment, a figure last seen in 1984. In response to this, numerous fiscal measures were provided as social buffers, namely in the form of Wage Assistance Schemes (WAS) to prevent layoffs. The extension of lockdowns and sluggish demand post-lockdown will dangerously thin down SME liquidities resulting in 3 possible scenarios: forced salary cuts, termination of employees, or bankruptcy.

Leveraging on the power of technology will be more important than ever.

Recessions are generally followed by a reduction in private investments, especially in infrastructural non-residential projects, leading to a slow growth in governmental revenue [1]. Low private investments reverberates into relatively slow rates of emergence of new businesses and industries during recovery periods. Arguably, such severe trend is somehow understandable as during the past crises, save for the 2007-2009 one, technological advancement was not as extensive as it is now.

Technology can speed recovery

Today, countries host a wide technological infrastructure, with affordable services, and an array of technological tools [2]. We have the power to stir up the emergence of new businesses, promote innovations, and allow for a quicker economic recovery compared to past average recession recovery period.

While there is no direct precedence on tech-infused recovery mechanisms, we do know that recovery periods can be shortened through different avenues. The case of  China is helpful here, where the country recovered in six months to over 65% of its economic growth post 2008 recession.

Technology towards a sustainable recovery

Recoveries from previous recessions have been far from sustainable. Each recessions over the past seventy-year stressed the global economic system and created inequalities on an unprecedented scale.

Past recovery models have tended to only addresses short term problems and failed to act on more fundamental economic and humane concerns such as poverty and inequality. Unless we change our approach as we address the current crisis, we will inherently end up with the same result -a global disruption rendering inhumanely larger and deeper inequalities.

Many small scale start-up rose from the ground during the Covid-19 crisis.

At the edge of crafting economic emergency-response packages that may have an impact on the world for decades to come, it is time to do things differently, to go deeper -in a more meaningful way, and adopt a different approach rendering a decentralised, more resilient and less capitalistic global ecosystem. For now, this may seem as an ambitious call, but since the wake of the fourth industrial revolution, characterised by advanced technologies, there is hope that we have the tools to adopt a paradigm shift to build a more resilient and equitable system.

Interestingly, technology based solutions tend to be offered by the smaller scaled companies, providing new opportunities and an increasing competitive edge against large corporations. This has the potential of building  a more sustainable and inclusive economic and tech landscape. Indeed, SMEs have been identified as key to more inclusive growth.

There is hope that we have the tools to adopt a paradigm shift to build a more resilient and equitable system

Technology at the centre of a recovery plan 

Some examples are the mobile applications for contact tracing such as Singapore’s Bluetooth powered tracing solution (the first in the world). They are among the tools available that have already been tested in  Singapore, South Korea and 27 other countries.  Those solutions are backed by data -which is now available from a vast array of different sources, and these could be enhanced further by investing in new, or existing, digital infrastructures, in the likes of Smart Cities, where the use of thermal cameras are often integrated.

Unfortunately, with scarce financial resources, current government funds tend to be directed towards tackling immediate health and economic needs rather than towards investing and supporting technological infrastructure development.  Yet, on the health front itself the use of technology is playing a critical role in winning the war against the pandemic. In my research with G. Dey and D.S. Jones, we showed how the role of Artificial Intelligence (AI), Machine Learning and Natural Language Processing algorithms aided in providing an early detection of the coronavirus in China.  This is arguably the start of an increasing role for technology in supporting policy making beyond the health dimension. Hence, in anticipation of this near future, we must align our current policies accordingly. As resources are being re-allocated to support the health sector and economic recovery initiatives, this should not be done at the expense of the digital sector.  Indeed, the latter is both a tool and a mean towards a more rapid and sustainable recovery.

Support tech start-up to boost recovery

On the societal front, there is ground for worry regarding the foreseen increasing inequality that will emerge post-pandemic, particularly in developing economies. Evidence is suggesting that bailout money is disproportionately reaching large corporations at the expense of SMEs. Yet the informal sector, freelancers, and small businesses are essential to the balance of the economic fabric. In a digitally connected world, we need to find new ways to look at wealth (re)distribution to ensure an equitable process, not aimed at enriching mostly corporations as a result.

Since the emergence of the digital revolution, the world has witnessed a disruptive process, with start-ups and IT companies taking the lead. In the financial sector, the global consumer market is now shifting to digital transactions; thus, prompting the even the established institutions like banks, and large insurance companies to shift toward adopting digital mechanisms. The knowledge that the coronavirus survives temporarily on the surface of  banknotes and coinage is providing the financial landscape with incentives to look into ways to improve the digital transaction experience. Similar changes are conspicuous in the retail market where online shopping is seen to be emerging locally generally spearheaded by small startups and individuals in a makeshift fashion. Even if those temporary setups may be short lived post-virus, government support and incentive schemes should focus on how to cater for those small and informal businesses and startups.

By ensuring an equitable bailout strategy, we underline the need for these small businesses, and the service brought about by informal economies in the crafting of our communities.

We shouldn’t forget that, during this current crisis, SMEs were the ones that sustained communities and emerged as innovators by designing different avenues for ensuring that goods and services reached almost every individual in the society. By ensuring an equitable bailout strategy, we underline the need for these small businesses, and the service brought about by informal economies in the crafting of our communities. Doing so, we’ll have the opportunity for a better redistribution of resources, while at the same time, stimulate the growth of varying scaled companies, from an array of different sectors -helping everyone equally.

Towards an equitable recovery

While we are heading into hard times, a fairer and more just global economic system is needed. In Mauritius, we have both the hard and soft infrastructural capacity for this actualisation. The country boasts strong financial and trusted systems, a robust judiciary, and a decent digital infrastructure network. Hence, driving innovation-supportive of tech-infused policies should be easier as limited renovation and investment will be required.Therefore, bailouts should not only be crafted as relief mechanisms but as transitional mechanisms to building a more economically resilient and inclusive fabric.  They should be designed such that they also accommodate financing options for businesses irrespective of scale, size, and location. The technological backbone that led to a quicker recovery post 2008 needs to be replicated and reinforced as we respond to this current crisis. By ensuring the actualisation of technology through our recovery mechanisms, it may be possible to spur new opportunities that would empower communities. It would be a source of economic growth bringing new job opportunities, new form of products while encouraging market competition across sectors.

Since long, we were wary of disrupting economic systems but, today, our economy is at a standstill. We have the opportunity to turn towards new solutions, even if those call for radical changes riding in the digital realm. One challenge to this will be to ensure decentralised solutions for the creation of resilient economic systems, where the measure of success would be redefined, and quantified equally on its humanity.

[1] Almor, T. Dancing as fast as they can: Israeli high-tech firms and the great recession of 2008. Thunderbird International Business Review 2011, 53, 195-208

[2] Allam, Z. Cities and the digital revolution: Aligning technology and humanity. Springer International Publishing: 2020.

Charles Telfair Centre is an independent nonpartisan not for profit organisation and does not take specific positions. All views, positions, and conclusions expressed in our publications are solely those of the author(s).

Gilles Michel, Président, Charles Telfair Institute, Ex Directeur Général du Fonds Stratégiques d’Investissement Francais.

A l’instar de celle du Covid-19, beaucoup des crises économiques récentes ont été le résultat d’un choc externe (e.g. guerre, catastrophe naturelle) ou sectoriel (e.g. cours des matières premières, défaillance financière, défaut d’un pays) qui, en se propageant rapidement dans des économies très intégrées se sont amplifiés en occasionnant des dommages considérables. De nombreuses entreprises se sont en effet trouvées fragilisées, voire menacées, par une brutale chute de la demande, un système financier soudainement inopérant, ou la défaillance de pans entiers de l’économie, alors même qu’elles étaient saines, profitables et bien gérées. Des risques majeurs montaient en termes d’emploi, de pérennité du tissu économique ou de contrôle du capital des entreprises.

Intervention de L’Etat

Dans un tel contexte, et quelle que soit sa coloration politique ou sa philosophie économique, la puissance publique se trouve immanquablement confrontée à une très forte demande d’intervention au nom de la préservation de l’emploi et de la protection du tissu économique. Deux logiques auxquelles s’ajoute souvent une sorte d’argument moral : ni les entreprises, ni les personnes qui y travaillent ne sont « responsables » de ce qui leur arrive. Après tout, n’est-ce pas le rôle régalien ultime d’un Etat, que de mobiliser, en cas d’agression, sa puissance afin de protéger le pays et de donner à ses citoyens les moyens de se battre ? Mais quand c’est la « signature » de l’Etat qu’il s’agit de mobiliser, de nombreuses questions, dont certaines redoutables se posent : est-il légitime d’intervenir plutôt que de laisser agir le marché ; est-ce efficace ; quelle contrepartie exiger ; quelle nature d’intervention ; au travers de quel type d’instrument ; comment définir les secteurs ou entreprises à soutenir ; quelle influence sur celles-ci ; quelle rentabilité pour l’argent public ? Etc.

Cette problématique n’épargne pas l’île Maurice en 2020. L’effondrement des flux aériens et touristiques, la chute du commerce mondial et donc de la demande de produits et services exportés par le pays, la baisse des actifs mondiaux sont en effet autant de menaces sur des pans essentiels de l’économie du pays. Les secteurs hôteliers, textiles, de la construction ou financier sont tous aux premières loges de cette crise. Au moment où des réponses se mettent en place, en particulier avec l’annonce de la création d’un fonds d’investissement public (Mauritius Investment Corporation – MIC) il est utile de se pencher sur des expériences passées pour pouvoir bénéficier de leurs leçons.

Or, de ce point de vue, la création d’un « Fonds Stratégique d’Investissement » fin 2008 en France est une référence particulièrement intéressante. En effet, alors que le monde se trouvait encore dans la sidération de l’effondrement du système financier provoqué par la chute de la banque Lehman Brothers, la France choisissait très tôt de mettre en place un Fonds spécifique. Ce Fonds entièrement nouveau et massivement doté (20 Mrds€ de capitaux propres) avait pour vocation d’intervenir en fonds propres au sein des entreprises. Procédant de la volonté politique du Président de la République, le choix d’un nouvel outil ad hoc était la conséquence du parti pris délibéré de ne pas utiliser les dispositifs et instruments publics existants dans un pays qui, pourtant, n’en manquait pas. De ce Fonds on attendait qu’il renforce avec réactivité et agilité des entreprises, certes fragilisées par la crise, mais porteuses d’avenir en investissant de manière professionnelle et avisée. Il était, ainsi, un levier essentiel du dispositif anti crise mis en place par les autorités.

Le Fonds était, ainsi, un levier essentiel du dispositif anti crise mis en place par les autorités.

Le rapport d’information rédigé mi 2011 par le sénateur Fourcade pour la Commission des Finances du Sénat français analyse les premières années de fonctionnement du FSI, celles des premiers pas dans l’urgence de la crise. Et il en dresse le constat très largement positif d’un « nouvel acteur de politique industrielle à la doctrine originale ». En effet, le FSI  a fait des choix originaux et forts dans trois domaines essentiels – gouvernance, doctrine et professionnalisation – qui sont autant de clés de son bilan et des enseignements que l’on peut en tirer.

Gouvernance

Du fait de sa nature même comme du contexte dans lequel il était créé, la gouvernance du FSI allait devoir répondre à des défis dépassant largement les classiques missions de direction et de contrôle [1]. D’une part, le FSI allait immanquablement faire face à de nombreuses injonctions de la part d’une « sphère politique », qui se considérait comme l’ultime donneuse d’ordre et la propriétaire de l’institution. Et d’autre part, étant donnée l’ampleur des enjeux, il serait nécessairement l’objet de considérables pressions visant à orienter son intervention. La gouvernance fut donc organisée autour de trois « étages » se répartissant clairement les rôles de supervision, de responsabilité opérationnelle et d’orientation :

• un Conseil d’Administration resserré avec trois hauts représentants des actionnaires publics (Caisse des Dépôts et Consignations, Etat) et trois dirigeants reconnus du monde des affaires. Le conseil, décisionnaire ultime et exclusif des actions du FSI, disposait d’une forte autorité de compétence. Il pouvait alors non seulement « rendre compte » efficacement auprès de ses actionnaires ou de la sphère politique, mais aussi le « protéger » vis-à-vis de ceux-ci;
• un Directeur Général, issu du monde de l’entreprise privée, rapportant au seul Conseil d’administration. Il était l’unique responsable de la marche opérationnelle et des résultats du Fonds et la seule voix autorisée à s’exprimer à ce titre. Il avait ainsi les moyens de mener à bien sa mission sans interférence ou perturbation;
• un Conseil d’Orientation, organe consultatif composé d’une vingtaine de personnalités. Le parcours de ces dernières était représentatif de la diversité des parties prenantes du Fonds (syndicats, professionnels, politiques, société civile). Ce Conseil était chargé d’assurer la cohérence de la doctrine d’investissement du Fonds et de sa stratégie à long terme au travers d’un dialogue régulier.

‘Répondre aux difficultés des entreprises, mais pas aux entreprises en difficulté’

Le mandat du FSI avait été résumé dans une habile formule – « répondre aux difficultés des entreprises, mais pas aux entreprises en difficulté » – pour signifier que sa vocation était celle du développement plutôt que du retournement. Cette voie étroite a rapidement été traduite dans une « doctrine » d’investissement, posant un cadre de référence public à l’action du FSI autour des principes suivants:

• l’intervention était réservée aux secteurs de l’industrie et des services;
• les investissements devaient se faire auprès d’entreprises porteuses du renforcement de la compétitivité de l’économie française : Petites et Moyennes Entreprises (PME) de croissance, Entreprises de Tailles Intermédiaires (ETI) au potentiel d’acteur de référence de leur secteur, ou plus grandes entreprises. Ils pouvaient être fait soit, de manière privilégiée, par la voie de fonds propres ou de quasi fonds propres, soit, le cas échéant, au travers de fonds spécialisés;
• la décision d’investir était basée sur le projet de l’entreprise, et associée à une perspective de rendement justifiant la qualité d’investisseur avisé du Fonds;
• l’investissement devait être minoritaire, en accompagnement d’autres investisseurs privés, pour ne pas créer un effet d’éviction et, au contraire, faciliter l’engagement du privé par effet de levier et d’entraînement;
• le FSI avait vocation à participer aux organes de gouvernance des sociétés. Il devait y adopter une posture d’investisseur « socialement responsable », non pour imposer son propre agenda mais pour le promouvoir en participant à l’élaboration et à la mise en œuvre de la stratégie;
• l’investissement était envisagé avec un terme. Le FSI avait en effet une mission d’accompagnement sur une période, et pas de construction d’un nouveau pôle d’entreprises à capitaux publics dans le pays.

La nécessité de mettre en œuvre le projet du FSI avec un professionnalisme rigoureux et irréprochable est vite apparue comme une condition de sa capacité à agir.

Professionnalisme

La nécessité de mettre en œuvre le projet du FSI avec un professionnalisme rigoureux et irréprochable est vite apparue comme une condition de sa capacité à agir. Toute lacune de ce point de vue aurait d’ailleurs présenté un angle de remise en cause facile et attractif à tous ceux qui avaient intérêts à ne pas le laisser prospérer. L’attention s’est tout particulièrement portée dans trois domaines :

• Le choix des équipes : Il fallait s’assurer de la bonne adéquation de leurs profils avec les besoins et missions du Fonds et une loyauté sans ambiguïté vis-à-vis de leur employeur. Ainsi, l’intégralité d’entre eux a fait l’objet d’un recrutement ad hoc, sur contrat de droit privé, via un process de sélection confié à un cabinet de recrutement externe. Avec cette approche la neutralité et l’équité des recrutements, et donc la crédibilité des collaborateurs a été établie dès l’origine du Fonds ;
• Le process de prise de décision : au-delà d’une exigence de rigueur et de qualité des projets d’investissements, la question de l’équité dans le traitement des dossiers était jugée existentielle pour le FSI. Porteur d’une mission d’intérêt général lui donnant obligation d’instruire tout dossier lui étant présenté, le FSI devait s’organiser pour pouvoir rendre compte de ses décisions. Une grande attention a donc été portée à jalonner les étapes d’instruction, à normer le contenu des dossiers, à définir les niveaux de délégation et responsabilité des différentes instances de décision. Le FSI a toujours pu rendre compte non seulement de ses investissements, mais aussi de ses non investissements malgré, parfois, polémiques et procès par médias interposés ;
• La présence dans les entreprises : une condition à l’investissement du FSI était sa participation à la gouvernance, partie intégrante de l’accord capitalistique négocié avec l’entreprise. Pour éviter de créer un puissant repoussoir avec la perception d’une intrusion politique ou administrative, le parti a été pris de recourir à des administrateurs indépendants acceptant de représenter le FSI au travers d’une « lettre de mission » partagée avec l’entreprise. Cette posture exigeante supposait l’identification de personnalités crédibles et reconnues du monde des affaires acceptant de jouer un délicat exercice d’équilibre. Elle a fortement contribué à crédibiliser le FSI auprès des entreprises.

  La Banque Centrale de Maurice a mis en place la Mauritius Investment Corporation

En quelques semaines, le FSI s’est construit comme une institution professionnelle, transparente et réactive, capable de mobiliser de considérables moyens publics et d’accomplir son ambitieuse mission en résistant aux jeux d’influence et en ne se substituant pas aux acteurs privés de l’investissement. En 24 mois, le Fonds aura investi 3,8 Mrds€ dans près de 800 entreprises au travers d’une vaste palette de modalités (investissements directs, fonds d’investissement sectoriels ad hoc ou abondement à des fonds préexistant), et en assurant un retour convenable aux capitaux investis. Ainsi que le résume le rapport Fourcade au Sénat, il aura « démontré son utilité » et passé le test de « la rationalité économique ».

Bien sûr, le contexte de l’île Maurice n’est pas le même que celui de la France en 2008. Mais le projet de la Mauritius Investment Corporation fera, à bien des égards, face à de nombreux défis analogues : agir vite, établir sa crédibilité par un bon équilibre dans ses choix et modalités d’investissement, bâtir la confiance avec le secteur privé, investir de manière équitable et transparente, assurer un bon usage des fonds publics, résister aux pressions et influences, rendre compte à la nation. S’il peut s’inspirer de l’expérience, il aura à cœur de le faire grâce à une gouvernance forte et cohérente, à une doctrine d’investissement claire, à des équipes et des processus internes d’un haut niveau de professionnalisme et à des administrateurs indépendants crédibles et loyaux.

[1] Missions visant à garantir un fonctionnement de l’entreprise conforme à la loi et aux règles de place, à sa mission et à ses valeurs, à l’intérêt de ses actionnaires et, plus généralement à celui de ses « parties prenantes »)

Charles Telfair Centre is an independent nonpartisan not for profit organisation and does not take specific positions. All views, positions, and conclusions expressed in our publications are solely those of the author(s).

Jun Du, Aston University; Agelos Delis, Aston University; Mustapha Douch, Aston University, and Oleksandr Shepotylo, Aston University

The COVID-19 pandemic is now expected to trigger the worst economic downturn since the Great Depression. Many argue it could unravel globalisation altogether.

Globalisation relies on complex links – global value chains (GVCs) – that connect producers across multiple countries. These producers often use highly specialised intermediate goods, or “inputs”, produced by only one distant, overseas supplier. COVID-19 has severely disrupted these links.

Although the global economy was fragile at the start of 2020, many hoped for increased international trade following the US-China Phase One trade deal. COVID-19 has scuppered those hopes, bringing the world’s factories to a standstill and severely disrupting global supply chains.

China plays a key role in this. According to Chinese customs statistics, the value of Chinese exports in the first two months of 2020 fell by 17.2% year on year, while imports slowed by 4%.

This drop in Chinese trade impacted some markets more than others. Comparative figures between the first two months of 2019 and the first two months of 2020 reveal a collapse in Chinese trade with the EU and US. Chinese exports to the EU fell by 29.9%, while imports from the EU declined by 18.9%. Exports to and imports from the US tumbled 27% and 8% respectively.

These substantial declines are likely related to the strong interdependence between European and US firms and Chinese ones.

The scale of the shock

To understand the magnitude of the supply shock in China and its global propagation, the Lloyds Banking Group Centre for Business Prosperity (LBGCBP) at Aston University has mapped China’s global trading networks using official Chinese data.

In 2019, the US had the highest trade dependence on China, followed by seven European countries and Japan. By 2020, European countries had moved even further up the rankings.

As the pandemic continues, the worst affected Chinese exports include capital goods such as nuclear reactors, intermediate goods like iron, and labour intensive final goods such as furniture.

The most disrupted Chinese imports include intermediate goods such as organic chemicals, a likely result of factory closures in China, and capital goods like electrical machinery. Hardest hit were precious stones and metals, highlighting the emergence of a sophisticated middle-class of Chinese shoppers and how COVID-19 has reduced their demand for luxury goods.

Interestingly, Chinese imports of meat and mineral fuels increased sharply in 2020. The first can be explained by China’s weakened domestic supply of food during lockdown. The second highlights China’s growing demand for crude oil.

Four product categories have been particularly hard hit as both imports and exports: nuclear reactors, electrical machinery and equipment, plastics, and organic chemicals. These categories include some commonly used intermediate goods (those that are used for producing other goods).

Under normal circumstances, such goods would be traded back and forth between China and other countries as part of the heavily interconnected global production system. This significant drop in their international trade highlights the devastating effect of COVID-19 on GVCs.

An uncertain future

But an unprecedented, synchronised and likely deep fall in demand is now developing. And China was again among the first to feel its impact.

Chinese workers returned to work in April but many no longer had jobs. Widespread cancellations of international orders and delayed payments have led to liquidity problems and mass closures of businesses reliant on global demand.

Investment also tumbled. During February and March 2020, official Chinese statistics report 24.4% fewer new foreign trade enterprises established in China compared to the same period last year. Meanwhile, 12,000 existing foreign trade enterprises closed down.

Agriculture, logistics and those producing raw materials, textiles and clothing have been hardest hit. But, on a more positive note, there has been a surge in demand for medical supplies.

Many are now highlighting the dangers of relying on global value chains – and in particular, those linked to China – leading to talk of “de-globalisation”.

The European Commission president, Ursula von der Leyen, for example, has called for the “shortening” of global supply chains because the EU is too dependent on a few foreign suppliers. Similarly, the French president, Emmanuel Macron, has argued for a strengthening of French and European “economic sovereignty” by investing at home in the high tech and medical sectors.

So is this the end of globalisation? No. But a reconfiguration of GVCs is inevitable.

A way forward

Global supply chains are extremely complex, and no sector or country is an island.

But GVCs follow the principle of efficiency. They are the result of businesses sourcing the best possible inputs to meet their production needs at the lowest cost – wherever those inputs come from.

This is good news for globalisation’s survival. While efficiency remains the main target, businesses will continue to shop globally.

Concerns about an overreliance on complex GVCs are justified in the case of products related to national security, such as medical supplies. Many countries will now ensure they can produce such goods without relying on imports.

Nobody can predict the next crisis. But the most reliable and efficient insurance by far is to build a strong international cooperation network. As yet, global political consensus on this remains elusive. But that doesn’t mean we should ever lose the ambition.

Jun Du, Professor of Economics, Centre Director of Lloyds Banking Group Centre for Business Prosperity (LBGCBP), Aston University; Agelos Delis, Lecturer in Economics, Aston University; Mustapha Douch, Research Fellow in Economics, Lloyds Banking Group Centre for Business Prosperity (LBGCBP), Aston University, and Oleksandr Shepotylo, Lecturer in Economics, Aston University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Charles Telfair Centre is an independent nonpartisan not for profit organisation and does not take specific positions. All views, positions, and conclusions expressed in our publications are solely those of the author(s).

Michael Kare, Five College professor emeritus of peace and world security studies.

Deadly, disruptive, and economically devastating as COVID-19 has proved to be, in retrospect it may turn out to have had at least this one silver lining.

Energy analysts have long assumed that, given time, growing international concern over climate change would result in a vast restructuring of the global energy enterprise.

The result: a greener, less climate-degrading system.

In this future, fossil fuels would be overtaken by renewables, while oil, gas, and coal would be relegated to an increasingly marginal role in the global energy equation. In its World Energy Outlook 2019, for example, the International Energy Agency (IEA) predicted that, by 2040, renewables would finally supersede petroleum as the planet’s number one source of energy and coal would largely disappear from the fuel mix.

As a result of COVID-19, however, we may no longer have to wait another 20 years for such a cosmic transition to occur — it’s happening right now.

So take a breath and, amid all the bad news pouring in about a deadly global pandemic, consider this: when it comes to energy, what was expected to take at least two decades in the IEA’s most optimistic scenario may now occur in just a few years. It turns out that the impact of COVID-19 is reshaping the world energy equation, along with so much else, in unexpected ways.

That energy would be strongly affected by the pandemic should come as no surprise. After all, fuel use is closely aligned with economic activity, and COVID-19 has shut down much of the world economy. With factories, offices, and other businesses closed or barely functioning, there’s naturally less demand for energy of all types. But the impacts of the pandemic go far beyond that, as our principal coping mechanisms — social distancing and stay-at-home requirements — have particular implications for energy consumption.

Among the first and most dramatic of these has been a shockingly deep decline in flying, automobile commuting, and leisure travel — activities that account for a large share of daily petroleum use. Airline travel in the United States, for example, is down by 95 percent from a year ago.

At the same time, the personal consumption of electricity for telework, distance learning, group conversations, and entertainment has soared. In hard-hit Italy, for instance, Microsoft reports that the use of its cloud services for team meetings — a voracious consumer of electricity — has increased by 775 percent.

These are all meant to be temporary responses to the pandemic. As government officials and their scientific advisers begin to talk about returning to some semblance of “normalcy,” however, it’s becoming increasingly clear that many such pandemic-related practices will persist in some fashion for a long time to come and, in some cases, may prove permanent.

Social distancing is likely to remain the norm in public spaces for many months, if not years, curtailing attendance at theme parks and major sports events that also typically involve lots of driving. Many of us are also becoming more accustomed to working from home and may be in no rush to resume a harried 30-, 60-, or 90-minute commute to work each day. Some colleges and universities, already under financial pressure of various sorts, may abandon in-person classes for many subjects and rely far more on distance learning.

No matter how this pandemic finally plays out, the post-COVID-19 world is bound to have a very different look from the pre-pandemic one and energy use is likely to be among the areas most affected by the transformations underway. It would be distinctly premature to make sweeping predictions about the energy profile of a post-coronavirus planet, but one thing certainly seems possible: the grand transition, crucial for averting the worst outcomes of climate change and originally projected to occur decades from now, could end up happening significantly more swiftly, even if at the price of widespread bankruptcies and prolonged unemployment for millions.

Oil’s Dominance in Jeopardy

As 2019 drew to a close, most energy analysts assumed that petroleum would continue to dominate the global landscape through the 2020s, as it had in recent decades, resulting in ever greater amounts of carbon emissions being sent into the atmosphere.

For example, in its International Energy Outlook 2019, the Energy Information Administration (EIA) of the U.S. Department of Energy projected that global petroleum use in 2020 would amount to 102.2 million barrels per day. That would be up 1.1 million barrels from 2019 and represent the second year in a row in which global consumption would have exceeded the notable threshold of 100 million barrels per day. Grimly enough, the EIA further projected that world demand would continue to climb, reaching 104 million barrels per day by 2025 and 106 million barrels in 2030.

In arriving at such projections, energy analysts assumed that the factors responsible for driving petroleum use upward in recent years would persist well into the future: growing automobile ownership in China, India, and other developing nations; ever-increasing commutes as soaring real-estate prices forced people to live ever farther from city centers; and an exponential increase in airline travel, especially in Asia.

Such factors, it was widely assumed, would more than compensate for any drop in demand caused by a greater preference for electric cars in Europe and a few other places. As suggested by oil giant BP in its Energy Outlook for 2019, “All of the demand growth comes from developing economies, driven by the burgeoning middle class in developing Asian economies.”

Even in January, as the coronavirus began to spread from China to other countries, energy analysts imagined little change in such predictions. Reporting “continued strong momentum” in oil use among the major developing economies, the IEA typically reaffirmed its belief that global consumption would grow by more than one million barrels daily in 2020.

Only now has that agency begun to change its tune. In its most recent Oil Market Report, it projected that global petroleum consumption in April would fall by an astonishing 29 million barrels per day compared to the same month the previous year. That drop, by the way, is the equivalent of total 2019 oil usage by the United States, Canada, and Mexico.

Still, the IEA analysts assumed that all of this would just be a passing phenomenon. In that same report, it also predicted that global economic activity would rebound in the second half of this year and, by December, oil usage would already be within a few million barrels of pre-coronavirus consumption levels.

Other indicators, however, suggest that such rosy predictions will prove highly fanciful. The likelihood that oil consumption will approach 2018 or 2019 levels by year’s end or even in early 2021 now appears remarkably unrealistic. It is, in fact, doubtful that those earlier projections about sustained future growth in the demand for oil will ever materialize.

A Shattered World Economy

As a start, a return to pre-COVID-19 consumption levels assumes a reasonably rapid restoration of the world economy as it was, with Asia taking the lead. At this moment, however, there’s no evidence that such an outcome is likely.

In its April World Economic Outlook report, the International Monetary Fund predicted that global economic output would fall by 3 percent in 2020 (which may prove a distinct underestimate) and that the pandemic’s harsh impacts, including widespread unemployment and business failures, will persist well into 2021 or beyond. All told, it suggested, the cumulative loss to global gross domestic product in 2020 and 2021, thanks to the pandemic, will amount to some $9 trillion, a sum greater than the economies of Japan and Germany combined (and that assumes the coronavirus will not come back yet more fiercely in late 2020 or 2021, as the “Spanish Flu” did in 1918).

This and other recent data suggest that any notion China, India, and other developing nations will soon resume their upward oil-consumption trajectory and save the global petroleum industry appears wildly far-fetched.

Indeed, on April 17th, China’s National Bureau of Statistics reported that the country’s GDP shrank by 6.8 percent in the first three months of 2020, the first such decline in 40 years and a staggering blow to that country’s growth model. Even though government officials are slowly opening factories and other key businesses again, most observers believe that spurring significant growth will prove exceedingly difficult given that Chinese consumers, traumatized by the pandemic and accompanying lockdown measures, seem loath to make new purchases or engage in travel, tourism, and the like.

And keep in mind that a slowdown in China will have staggering consequences for the economies of numerous other developing nations that rely on that country’s tourism or its imports of their oil, copper, iron ore, and other raw materials. China, after all, is the leading destination for the exports of many Asian, African, and Latin American countries. With Chinese factories closed or operating at a reduced tempo, the demand for their products has already plummeted, causing widespread economic hardship for their populations.

Add all this up, along with a rising tide of unemployment in the United States and elsewhere, and it would appear that the possibility of global oil consumption returning to pre-pandemic levels any time soon — or even at all — is modest at best.

Indeed, the major oil-exporting nations have evidently reached this conclusion on their own, as demonstrated by the extraordinary April 12th agreement that the Saudis, the Russians, and other major exporting countries reached to cut global production by nearly 10 million barrels per day. It was a desperate bid to bolster oil prices, which had fallen by more than 50 percent since the beginning of the year. And keep in mind that even this reduction — unprecedented in scale — is unlikely to prevent a further decline in those prices, as oil purchases continue to fall and fall again.

Doing Things Differently

Energy analysts are likely to argue that, while the downturn will undoubtedly last longer than the IEA’s optimistic forecast, sooner or later petroleum use will return to its earlier patterns, once again cresting at the 100-million-barrels-per-day level. But this appears highly unlikely, given the way the pandemic is reshaping the global economy and everyday human behavior.

After all, IEA and oil-industry forecasts assume a fully interconnected world in which the sort of dynamic growth we’ve come to expect from Asia in the twenty-first century will sooner or later fuel economic vigor globally. Extended supply lines will once again carry raw materials and other inputs to China’s factories, while Chinese parts and finished products will be transported to markets on every continent.

But whether or not that country’s economy starts to grow again, such a globalized economic model is unlikely to remain the prevailing one in the post-pandemic era. Many countries and companies are, in fact, beginning to restructure their supply lines to avoid a full-scale reliance on foreign suppliers by seeking alternatives closer to home — a trend likely to persist after pandemic-related restrictions are lifted (especially in a world in which Trumpian-style “nationalism” still seems to be on the rise).

“There will be a rethink of how much any country wants to be reliant on any other country,” suggests the aptly named Elizabeth Economy, a senior fellow at the Council on Foreign Relations. “I don’t think fundamentally this is the end of globalization. But this does accelerate the type of thinking that has been going on in the Trump administration, that there are critical technologies, critical resources, reserve manufacturing capacity that we want here in the U.S. in case of crisis.”

Other countries are bound to begin planning along similar lines, leading to a significant decline in transcontinental commerce. Local and regional trade will, of course, have to increase to make up for this decline, but the net impact on petroleum demand is likely to be negative as long-distance trade and travel diminishes. For China and other rising Asian powers, this could also mean a slower growth rate, squeezing those “burgeoning middle classes” that were, in turn, expected to be the major local drivers (quite literally, in the case of the car cultures in those countries) of petroleum consumption.

A Shift toward Electricity — and a Greater Reliance on Renewables

Another trend the coronavirus is likely to accelerate: greater reliance on telework by corporations, governments, universities, and other institutions. Even before the pandemic broke out, many companies and organizations were beginning to rely more on teleconferencing and work-from-home operations to reduce travel costs, commuting headaches, and even, in some cases, greenhouse gas emissions. In our new world, the use of these techniques is likely to become far more common.

“The COVID-19 pandemic is, among other things, a massive experiment in telecommuting,” observed Katherine Guyot and Isabel Sawhill of the Brookings Institution in a recent report. “Up to half of American workers are currently working from home, more than double the fraction who worked from home (at least occasionally) in 2017-2018.”

Many such workers, they also noted, had been largely unfamiliar with telecommuting technology when this grand experiment began, but have quickly mastered the necessary skills. Given little choice in the matter, high school and college students are also becoming more adept at telework as their schools shift to remote learning. Meanwhile, companies and colleges are investing massively in the necessary hardware and software for such communications and teaching. As a result, Guyot and Sawhill suggest, “The outbreak is accelerating the trend toward telecommuting, possibly for the long term.”

Any large increase in teleworking is bound to have a dramatic dual impact on energy use: people will drive less, reducing their oil consumption, while relying more on teleconferencing and cloud computing, and so increasing their use of electricity. “The coronavirus reminds us that electricity is more indispensable than ever,” says Fatih Birol, executive director of the IEA. “Millions of people are now confined to their homes, resorting to teleworking to do their jobs.”

Increased reliance on electricity, in turn, will have a significant impact on the very nature of primary fuel consumption, as coal begins to lose its dominant role in the generation of electrical power and is replaced at an ever-accelerating pace by renewables.

In 2018, according to the IEA’s World Energy Outlook 2019, a distressing 38 percent of world electricity generation was still provided by coal, another 26 percent by oil and natural gas, and only 26 percent by renewables; the remaining 10 percent came from nuclear and other sources of energy. This was expected to change dramatically over time as climate-conscious policies began to have a significant impact — but, even in the IEA’s most hopeful scenarios, it was only after 2030 that renewables would reach the 50 percent level in electricity generation. With COVID-19, however, that process is now likely to speed up, as power utilities adjust to the global economic slowdown and seek to minimize their costs.

With many businesses shut down, net electricity use in the United States has actually declined somewhat in these months — although not nearly as much as the drop in petroleum use, given the way home electricity consumption has compensated for a plunge in business demand. As utilities adapt to this challenging environment, they are finding that wind and solar power are often the least costly sources of primary energy, with natural gas just behind them and coal the most expensive of all. Insofar as they are investing in the future, then, they appear to be favoring large solar and wind projects, which can, in fact, be brought online relatively quickly, assuring needed revenue. New natural gas plants take longer to install and coal offers no advantages whatsoever.

In the depths of global disaster, it’s way too early to make detailed predictions about the energy landscape of future decades. Nonetheless, it does appear that the present still-raging pandemic is forcing dramatic shifts in the way we consume energy and that many of these changes are likely to persist in some fashion long after the virus has been tamed. Given the already extreme nature of the heating of this planet, such shifts are likely to prove catastrophic for the oil and coal industries but beneficial for the environment —- nd so for the rest of us.

Deadly, disruptive, and economically devastating as COVID-19 has proved to be, in retrospect it may turn out to have had at least this one silver lining.

Dr. Michael T. Klare is a professor of Peace and World Security Studies. He teaches courses on international peace and security issues at Hampshire College and, in rotation, at Amherst College, Mount Holyoke College, Smith College, and the University of Massachusetts at Amherst.

This article was first published in Foreign Policy in Focus on 29 April 2020.

Charles Telfair Centre is an independent nonpartisan not for profit organisation and does not take specific positions. All views, positions, and conclusions expressed in our publications are solely those of the author(s).

Darren Ellis, Cranfield University, Jorge Guira, University of Reading, and Roger Tyers, University of Southampton

Airlines face an unprecedented international crisis in the wake of the coronavirus pandemic. The International Air Transport Association (IATA) estimates that the global industry will lose US$252 billion in 2020. Many airlines are cutting up to 90% of their flight capacity. On March 1, more than two million people in the US were flying per day. A month on, fewer than 100,000 people are going through airport security daily.

Some climate activists have welcomed the emptied skies, pointing to the dramatic fall in carbon emissions. But others worry that the bounce back and attempts to take back some of the losses might mean that an opportunity for fundamental, sustained change may be missed.

In the US, a federal government US$50 billion bailout fund – part of which will fund cash grants going towards airline workers, and the other part loans for the airlines themselves – was rolled out piecemeal in March, with revisions announced on April 14.

More than 200 airlines applied. American Airlines will get US$5.8 billion, Delta US$5.4 billion, and Southwest US$3.2 billion, among others. Donald Trump, the US president, stated that the airline bailout was needed to return the industry to “good shape” and was “not caused by them”. Another US$4 billion is available for cargo airlines and US$3 for contractors.

In the UK, it was initially announced that no industry-wide bailout would be offered. Instead, the industry would have to rely on broader aid packages covering 80% of salaries (below a cap) for furloughed employees. But subsequently, the government quickly gave easyJet a £600 million loan (US$740 million). Flybe, a smaller regional or “secondary” airline with pre-crisis financial issues, was not bailed out and collapsed. Many money-making routes Flybe ran have since been picked up by others.

Continental Europe is in worse shape. Italy has re-nationalised Alitalia, forming a new state-owned entity and investing €600 million (US$650 million). France has indicated it will do whatever it takes to bailout Air France/KLM (France owns 15% and the Dutch 13%), with a possible €6 billion bailout package (US$6.5 billion).

Meanwhile, Australia’s Qantas secured a A$1 billion loan (US$660 million). Debt-laden Virgin Australia, meanwhile, was denied a A$1.4 billion loan (US$880 million) and has subsequently plunged into voluntary administration. Singapore Airlines, however, got a US$13 billion aid package.

The airline industry has faced many crises before – 9/11 and the 2010 Icelandic volcano eruption, for example. But these pale in comparison to the economic hit that airlines are currently facing. Some are asking: can it recover? Is this an economic crisis that could reshape how we travel and live? Or will it turn out to be more of a pause, before returning to business as usual? And what role does the climate crisis play in all this – how will sustainability figure in any rebooting of the industry going forward?

We are all experts in the airline industry. Darren Ellis (Lecturer in Air Transport Management) considers these questions first, looking at the industry’s structure and response. Jorge Guira (Associate Professor in Law and Finance) then explores bailout options and likely future scenarios for the industry. Finally, Roger Tyers (Research Fellow in Environmental Sociology) considers how the industry might just be at a turning point in terms of how it tackles climate change.

A global problem

Darren Ellis, Lecturer in Air Transport Management

Most of the global airline industry is currently grounded. Although some routes are still managing to operate, and there is evidence of a gradual domestic air market rebound in China, 2020 will certainly not see the 4.6 billion annual passengers of 2019. The long-term trend of ever-rising air passenger numbers year on year has been brought to a dramatic and rapid halt.

What this means for the global airline industry is vividly on display at airports around the globe as terminals remain empty and aircraft occupy any available parking space.

Like the predominately national response to the virus, so the airline industry is also seeing a wide range of policies and practices tailored and implemented almost exclusively at the national level. This means that some airlines, thanks to well-chosen national policies, will fare better, while others will flounder.

This is because beyond the multilateral single air market of Europe, the global industry remains firmly structured on a bilateral system. This web of country to country air service agreements (ASAs) is basically made up of trade treaties which governments sign with one another to determine the level of air access each is willing to permit. Even in Europe, the single air market essentially acts as one nation internally, while externally, individual European countries continue to deal with many countries on a bilateral basis.

The bilateral system is based on a bundle of rules and restrictions, including airline ownership (typically, a minimum of 51% of an airline must be owned by people from the country where the airline is based), national control, single airline citizenship and home base requirements. This effectively locks airlines into a single country or jurisdiction.

Despite this structure, global cooperation in aviation is strong, particularly across safety standardisation, but less so on the economic front. A lot of this cooperation happens via the International Civil Aviation Organization (ICAO), the industry’s specialised UN agency. Meanwhile, the IATA supports and lobbies on behalf of member airlines.

Likewise, international mergers and acquisitions are rare – aside from in Europe, where partial mergers have created dual and multiple brands like Air France/KLM. Where single airline brands have been created with cross border mergers – such as LATAM Airlines in South America – national aircraft registration and other restrictions remain in place, thereby reflecting multiple airlines in these respects.

Consequently, national responses will be front and centre as the industry responds to the current pandemic. In countries where a single flag carrier is based, such as Thailand and Singapore, governments are unlikely to let their airlines fail. While in others, where multiple airlines operate, a level playing field of assistance and support is more likely, even if outcomes differ widely. This is not to say that all airlines will necessarily survive what is likely to be an extended U-shaped crisis, unlike the more V-shaped crises of the past, such as 9/11 and the 2008 global financial crisis.

The national structure of the industry also highlights why major airlines failing is relatively rare. Yes, airlines have merged in domestic air markets like the US, and individual brands have disappeared as a result, but few major airlines have gone out of business because they failed. Even Swissair, which was famously bankrupt and defunct in late 2001, soon reappeared as Swiss International Airlines.

And so, although airline brands have come and gone, the industry had remained on a growth path for decades. It will take time to recover from the pandemic. Some airlines will fail. But widespread changes to the industry’s structure are unlikely to occur. People will, of course, need and want to travel by air again when this pandemic is over. Which airlines survive – and which go on to thrive – will largely depend on how successful individual countries’ economic support packages turn out to be.

Bailout essentials

Jorge Guira, Associate Professor in Law and Finance

The global outcomes of the crisis, then, are firmly anchored in national responses. The airline industry is cyclical: it is used to peaks and valleys. Bailouts have repeatedly been vital for airlines, so many countries have some sort of precedent to go by.

In any bailout, the key question is whether this is a solvency or liquidity crisis. Solvency means that the airline will be very unlikely to ever remain financially viable. Liquidity means that the airline has a high risk of running out of cash flow but should be solvent soon, if supported. Assessing this is sometimes complex.

Cash is king. “Streamlining” – a fancy word for cost cutting – can help. Unencumbered assets such as aeroplanes can be sold, or used as collateral for loans. But many planes are often leased, so this may be problematic.

Existing contracts must be reviewed. Breach of covenants, which are legally binding promises to do (or to refrain from doing) things in a certain way, may need to be waived. For instance, lease agreements for the planes often require flights to carry on, and business as usual is suspended at present. Other agreements require flights to maintain landing spaces in airports – leading to the “ghost planes” many were appalled by earlier on in the crisis, and that still continue.

Certain financial tests may not be met, such as how much debt there is compared to earnings. These can alarm creditors. And this can lead to deterioration in bond credit ratings, reflecting increased financial distress. Other triggers may also arise. Defaulting on one financial contract usually requires informing other creditors. This can trigger defaults on other agreements, creating a domino effect.

So renegotiating operating and financial contracts is crucial. Airlines may have to pick and choose who to pay first. Unions must be kept happy, and other stakeholders must focus on recovery.

All this means that state bailouts, help and other guarantees are crucial for the industry to survive. In the US, for example, net operating losses are carried forward and used to shield revenues and offset these from tax for when things return to normal.

If liquidity is the problem, the real issue is time: how long will it take for the airline to get back on its feet and resume flying more normally? If solvency is the problem, the company cannot survive the demand collapse it is facing. The COVID-19 pandemic is such a fraught time for airlines because of the difficulty in predicting when the crisis will end. This can complicate determining whether it is a more temporary liquidity crisis or a deeper solvency concern.

After 9/11, the airline industry completely shut down in the US. People witnessing the horrifying scenes of the Twin Towers’ collapse were hardly eager to board a plane. So, the government chose to step in to restore confidence. And it did so, successfully, by offering aid including loans and used warrants, which involves investing in airlines when the stock is at a reduced or rock bottom price and waiting for it to go up again. The US government’s COVID-19 financial rescue package parallels this approach.

The US approach is noteworthy because of its size and scale, and the fact that it is built on the 9/11 case and has been modified for the unique present circumstances. It is also an interesting counterpoint to the strategy of the strongly free market-oriented UK, and Australia, which has been more restrained in its approach.

Airline norms suggest that 25% of revenues should be kept in case of any emergency, but this has tended not to happen recently. Corporate earnings have generally not been held for a rainy day, and now that rainy day has arrived. This creates a classic moral hazard problem: many airlines seem to act as if they are too important to fail, because in the end, they believe they will be bailed out. And regulation does not otherwise hold any excesses in check.

Compounding this, some US airlines have recently been accumulating cheap debt, due to low interest rates and lots of credit availability. The five big US carriers, instead of paying off debt, have been spending 96% of available cash on stock buybacks. Many question whether airlines should be bailed out in these circumstances. Limits on paying dividends, buyback of stock, and other terms would logically apply here, as in the earlier US bailout measures announced in March.

While the US case may provide a helpful initial focus, the UK approach is likely to be highly influential, perhaps more so given the reduced resource level – and greater level of climate awareness – there. As Darren pointed out earlier, one model does not fit all but this may offer a useful comparative framework for other approaches that favour national champions or nationalisations.

The UK is reportedly considering partial nationalisation, such as in the case of British Airways. British Airways has furloughed 35,000 employees, with many pay packets supported by the government – for now. British Airways appears better placed to cherry pick key routes, assets and companies as it ranks in the top group for liquidity.

If Virgin Atlantic were to collapse, its size means it may fit in the too important to fail category. It appears that bailout talks are ongoing but Richard Branson’s life as an offshore UK resident, and Delta’s ownership of a 49% stake, present potential political clouds. Questions about whether it should get state aid given current crisis conditions also arise. This is generally forbidden, although the EU has temporarily indicated a COVID-19 relaxation of the rules. No environmental strings have apparently been attached, as former EU officials and others have suggested should be the case.

Overall, the survival of the global industry therefore depends on bailouts, not only to keep airlines afloat but also for the wider travel and leisure ecosystem.

The lack of of sustainability conditions in UK and indeed US bailouts appears to be mirrored globally. But a Green New Deal in a second recovery phase of aid could provide this. And greater awareness of the issue thanks to the likes of Greta Thunberg, an increased culture of working from home, and ongoing measures to increase accountability and reporting of emissions means this aspect may well play a vital role in the repackaging of airlines going into the future. Much of it begins with how emissions targeting interacts with the COVID-19 crisis.

Aviation and climate change

Roger Tyers, Research Fellow in Environmental Sociology

As Jorge says, for the growing number of people concerned by aviation’s rising carbon emissions, this pandemic may be a rare chance to do things differently. When air travel is eventually unpaused, can we set it on a more sustainable trajectory?

Even before this pandemic hit, aviation faced increasing pressure in the fight against climate change. While other sectors are slowly decarbonising, international aviation is forecast to double passenger numbers by 2037, meaning its share of global emissions may increase tenfold to 22% by 2050.

Most flights are taken by a relatively well-off minority, often for leisure reasons, and of questionable necessity. We might wonder whether it is wise to devote so much of our remaining carbon “allowance” to aviation over sectors like energy or food which – as we are now being reminded – are fundamental to human life.

Regulators at the UN’s ICAO have responded to calls for climate action with their Carbon Offset and Reduction Scheme for International Aviation (CORSIA) scheme. Under this, international aviation can continue to expand, as long as growth above a 2020 baseline is “net-neutral” in terms of emissions.

While critics cite numerous problems with it, the idea is to reduce emissions above the 2020 baseline through a combination of fuel efficiencies, improvements in air traffic management and biofuels. The remaining, huge shortfall in emissions will be covered by large-scale carbon offsetting. Last year, IATA estimated that about 2.5 billion tonnes of offsets will be required by CORSIA between 2021 and 2035.

This plan has been thrown into disarray by the COVID-19 crisis. The emissions baseline for CORSIA was supposed to be calculated based on 2019-20 flight figures. But given that the industry has come to a standstill – demand may take a 38% hit in 2020 – that baseline will be much lower than expected. So once flights resume, emissions growth post-2020 will be much higher than anyone predicted. Airlines will need to purchase many more carbon offset credits, raising operating costs and passing these onto customers.

Airlines trying to get back on their feet will be hostile to any such additional burdens, and will probably seek methods to recalculate the baseline in their favour. But for environmentalists, this might be an opportunity to strengthen CORSIA, which despite its flaws is the only current framework for tackling aviation emissions globally.

Some still consider CORSIA to be an elaborate sideshow. The real game-changer for sustainable aviation would be fuel tax reform, which might receive more scrutiny when attention shifts onto how to repay the eye-watering levels of public debt incurred during lockdown.

Since the 1944 Chicago Convention, which gave birth to ICAO and the modern aviation industry, putting VAT on flight tickets and tax on kerosene jet fuel has been effectively illegal. This is the primary reason why flying is relatively cheap compared to other transport modes, and arguably why the industry has under-invested in research into cleaner fuels.

With the most-polluting form of transport enjoying the lowest taxes, this regime has long been questionable in terms of emissions. It may soon become untenable in terms of tax justice, too. In 2018, France’s Gilets Jaunes movement was partly motivated by anger at increased fuel tax for cars and vans, while air travel continued to benefit from historic tax exemptions. This anger may return when governments inevitably raise taxes to repay their multi-billion-dollar COVID-19-related debts.

Campaigners are already demanding that any airline bailout be linked to tax reform, and there is huge potential there. Leaked EU papers in 2019 suggest that ending kerosene tax exemptions in Europe could raise €27 billion (US$29 billion) in revenues every year. Such sources of revenue may soon become irresistible, and national governments might seek to collect them unilaterally, with or without a coordinated ICAO response.

Tony Blair, the former UK prime minister, once said that no politician facing election would ever vote to end cheap air travel. But – to state the obvious – these are unprecedented times, and public attitudes to flying may well change.

On the demand side, once borders reopen, there could be a short-term travel boom as postponed flights are rebooked and stranded people fly home. But even after an official virus “all-clear”, those considering holidays may think twice before sharing cramped plane cabins with strangers. Business travellers, crucial to airline profits, may find that they’ve got so used to using Zoom, they don’t need always to fly to meetings in person.

As members of the industry admit, by the time passengers return to air travel in significant numbers, the airlines, routes and prices they find may look very different. Governments will face huge industry pressure to safeguard jobs and return to business as usual as soon as possible. But managed properly, this could be the start of a just and sustainable transition for aviation.

The future’s up in the air

All three of us feel the airline industry is at a key turning point. The size and scale of bailouts will vary. Government political will and philosophy, access to capital, and the viability of the industry itself are key factors that will inform whether a company is worth saving.

Any future must be based on the premise of preserving economic vibrancy while reducing climate risk. But not all governments will factor this in.

Events are moving fast, with Emirates in Dubai starting to test passengers for COVID-19 before boarding. Meanwhile, easyJet is considering social distancing on planes as part of a “de-densification” policy, with fewer passengers and higher prices, albeit across more routes.

Longer term, there are various ways this could play out. All depend upon the duration of the crisis and the confluence of political, legal and economic factors.

It is possible that market structure remains unchanged, with ownership of airlines staying relatively stable, supported by bailouts. Under this business-as-usual scenario, sustainability would incrementally be enhanced through airlines retiring older, less carbon efficient planes and replacing them with better ones. But this scenario is subject to tremendous uncertainty.

Or, sustainability might become more important after the crisis, thanks to increased environmental awareness, demand loss, and new green investment. This would take place at different speeds, with Europe perhaps being more proactive through government incentives and serious emissions targeting. The US would lag behind, but making some advances due to increased stakeholder concerns. In this scenario, there is some scaling down of travel to meet demand, which is reduced. Increased sustainable investment emerges. Due to partial recovery, a new normal emerges.

It is also possible that prolonged, severe shortage of capital and an awareness of the climate crisis could, hypothetically, lead to massive change. But governments’ concern for jobs is likely to crowd out environmental concerns. Political forces on the left and right would have to mend fences and agree that, in a depression-like scenario, a new world is needed, not just a new normal.

Darren Ellis, Lecturer in Air Transport Management, Cranfield University; Jorge Guira, Associate Professor of Law and Finance, University of Reading, and Roger Tyers, Teaching and Research Fellow in Sociology, University of Southampton

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Charles Telfair Centre is an independent nonpartisan not for profit organisation and does not take specific positions. All views, positions, and conclusions expressed in our publications are solely those of the author(s).

Zania Stamataki, University of Birmingham

The first coronaviruses known to infect humans were discovered more than half a century ago – so why are there no vaccines against these viruses? Should we be optimistic that an effective vaccine will be developed now?

SARS-CoV-2, the recently discovered coronavirus that causes COVID-19, is similar enough to other coronaviruses, so scientists make predictions about how our immune system might deal with it. But its novelty warrants its own careful study. Similar to Sars and Mers that cause severe acute respiratory syndrome, the novel coronavirus has emerged from animals and can cause damage to the lungs and sometimes other organs.

Why don’t we have a vaccine against other human coronaviruses? The emergence of Sars and Mers, in 2002 and 2012 respectively, were either quashed relatively quickly or affected small numbers of people. Despite the interest from keen virologists, there was no economic incentive to develop a vaccine for these diseases as they posed a small threat at the time. Virologists with an interest in coronaviruses were struggling to secure funding for their research.

In contrast, COVID-19 has caused huge disruption around the world. As a result, at least 90 vaccines are under development, with some already in human trials.

How a vaccine works

A vaccine gives our body a harmless flavour of the virus, alerting the immune response to generate antibodies and/or cellular immunity (T cells) ready to fight the infection. The idea is that we can then deploy a ready-made defence system next time we encounter the virus, and this spares us from severe symptoms. We know that most people who have recovered from COVID-19 have detectable antibodies in their blood.

We don’t know if these antibodies are fully protective, but a vaccine still has the potential to elicit powerful neutralising antibodies and scientists will evaluate these following vaccination. Researchers will also look for potent T cell responses in the blood of vaccinated people. These measurements will help scientists predict the efficacy of the vaccine, and will be available before a vaccine is approved.

The best way to evaluate a vaccine, of course, is to judge how well it protects people from infection. But exposing vulnerable groups to the virus is far too risky, so most vaccines will be tested in younger people with no underlying health problems. There are ethical considerations for deliberately infecting a healthy person with a potentially dangerous virus for a vaccine trial, and these need to be considered carefully.

In the course of a pandemic, a vaccinated volunteer may become infected with the novel coronavirus, especially if they are a healthcare worker. It will take time to gather data on protection following infection and compare them to people that received a placebo vaccine.

Vaccine challenges

The ideal vaccine should protect everyone and cause lifelong defences with a single dose. It would be quick to produce, affordable, easy to administer (nasal or oral administration) and wouldn’t need refrigeration, so non-specialists can distribute it to hard-to-reach parts of the world. In reality, we don’t fully understand how to produce a vaccine that induces long-lived protective immunity for different viruses. For some infections, we need to administer booster vaccinations.

Ageing comes with a tired immune system that struggles to respond to vaccination, and this is also the case for people with weakened immune systems, so it is difficult to protect the most vulnerable. Therefore, vaccination programmes that protect over 80% of the population can reduce the incidence of virus spreading and protect the vulnerable by proxy, through herd immunity. Currently, the percentage of people who may have had COVID-19 in different parts of the world varies, but this is hard to estimate because of test availability.

Scientists test and confirm a vaccine’s safety before it is approved. We appreciate that in some viral infections, existing antibodies from an earlier infection with the same type of virus can cause more severe disease. However, there is no strong evidence for any adverse effects of antibodies for SARS-CoV-2 infection.

Within reach

Here are some reasons to be optimistic. One, this virus can be cured. Unlike some viruses such as HIV that embed their genome in our own and make fresh copies of themselves after immune elimination, we know that SARS-CoV-2 is unable to persist in this way.

Two, most infected patients develop antibodies and there is evidence of virus-specific T cell responses. Although we don’t know if these responses are protective yet, these are precisely the responses that can lead to immunological memory, the cornerstone of vaccination. Vaccine products will be refined and enriched to induce more potent immune responses than natural infection.

Three, coronaviruses mutate slower than viruses such as influenza, and we know from Sars and Mers that antibodies can persist for at least one to two years following recovery. This is good news for an effective vaccine that may not require updating for quite some time.

There are more reasons to be upbeat. Scientists are testing several approaches so there is a higher probability of success, and pharmaceutical companies have been engaged early, scaling up production and working out logistics for distribution even before there is evidence the vaccine will work. This is worth the investment because resources can be quickly repurposed for the most promising vaccines following the first clinical trials.

A coronavirus vaccine is within our reach, and it is our best hope to stem transmission and generate herd immunity to protect the most vulnerable. Taking away its hosts for replication, we can eradicate this virus from the human population just as vaccination previously eradicated smallpox.

Zania Stamataki, Senior Lecturer in Viral Immunology, University of Birmingham

This article is republished from The Conversation under a Creative Commons license. Read the original article.

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