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Challenges to and rationale for carbon pricing due to COVID-19 4.1. Additional challenges to carbon pricing related to COVID-19 COVID-19 has brought new challenges for countries to implement new or strengthen existing carbon prices. The pandemic added to already existing challenges as it led i.a. to a global recession, increased inequality and it increased the number of vulnerable households and businesses. However, the benefits of carbon pricing mean that it can still play a significant role in countries’ economic recovery by generating revenue for national deficits as seen during the Global Financial Crisis (GFC), it can shape investment decisions in the short and medium-term which can impact GHG emissions prospectively, and it can contribute to addressing increasing inequalities. This section displays the potential economic effects of carbon pricing, outline its challenges but also the potential solutions and the increased impetus for carbon pricing.
Potentially negative short-term economic effects of carbon pricing COVID-19 lockdown measures restricted the movement of people as well as goods and services across the globe. These restrictions – whose duration varied by country - have led to decreased income for many businesses resulting in a spike in unemployment rates and reduced global economic activity. GDP contracted by 3.1% in G20 economies, 4.8% in OECD economies, while world GDP shrank by 3.5% in 2020 as compared to 2019 (OECD, 2021[143]). The contraction of global GDP after the GFC in 2007-09 was approximately just below 0.1% for 2009, yet no negative GDP on a global level was observed for 2007 or 2008 (IMF, 2020[144]). The pandemic also impacted unemployment levels which for OECD countries increased 2.7 pp in 2020, compared to 2019 levels (5.4%) (OECD, 2021[143]) and increased 2.6 pp in 2009 during the GFC compared to 2007 levels (5.6%) (OECD, 2010[145]) (OECD, 2011[146]). The pandemic, furthermore, had differentiated impacts on different countries, sectors, and income groups (see Exacerbated inequality, increased vulnerability, and energy poverty). The economic impact of the pandemic in 2020 on countries have been shaped by the number of COVID19 outbreaks, the composition of country sectors, and the COVID-19 policy response measures. Countries who had more extensive COVID-19 impacts, have mostly seen more frequent and longer lockdowns leading to extended periods of decreased economic activity (IMF, 2021[147]). This has for instance been seen in the UK which experienced three extensive lockdown periods (Brown and Kirk-Wade, 2021[148]), that impacted supply and demand contributing to a 9.8% GDP contraction in 2020 compared to 2019 (OECD, 2021[149]) (Stephens, Wright and Luckwell, 2021[150]). Italy also experienced extensive COVID-19 lockdowns in 2020, impacting the Italian GDP which fell by 8.9% in 2020 compared to 2019 (OECD, 2021[149]). In countries heavily reliant on tourism and the service sector, economic impacts have also been severe. Spain, for instance, received 72.4% fewer tourists from January to July 2020 as compared to 2019 (Moreno-Luna et al., 2021[151]), and the economy, therefore, contracted by 10.8% (OECD, 2021[152]). Lastly, countries’ COVID-19 policy response measures, being their ability to implement
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