The Road to Decarbonization – Economic News, Analysis and Discussions

First appearance at Policy Center for the New South, September 8, 2021

The report of the United Nations Intergovernmental Panel on Climate Change (IPCC), released in early August, left no room for doubt. He estimates that accelerating the pace of global containment of carbon emissions will be necessary if expected increases in global average temperatures are to be kept below 2 or 1.5 degrees Celsius. Even if greenhouse gas emissions are reduced over the next few decades, global warming will continue for at least another century.

To give an idea of ​​what is at stake, look at the numbers in an article by Jean Pisani-Ferry at the Peterson Institute for International Economics. From pre-pandemic emission levels (emissions decreased during lockdowns, but rebounded), the stock of greenhouse gases in the atmosphere compatible with limiting the increase in global temperature at 2 degrees Celsius would be reached in less than 25 years. The period is shortened to seven years in the event that the limit is to be reduced to 1.5 degrees.

Figure 1 shows the projections of global CO2 emissions from fossil fuels, according to calculations by the staff of the International Energy Agency and the IMF. After dropping during the pandemic, they are expected to increase by about 20% by 2030. This contrasts with the 25-50% drop in line with the 1.5-2 degree warming limit. Limiting temperature rises will require less regularity and escalation of emissions than expected until recently.

Figure 1: Global CO2 emissions from fossil fuels, 1990-2030 (billion tonnes)

From: IMF (2021). Fiscal policies to tackle climate change in Asia and the Pacific, March 24.

Recognition of the urgency appears in the commitments of countries responsible for around 70% of global carbon emissions and global GDP to achieve “zero emissions” by 2050 or 2060 (IEA, 2021). Figure 2 shows the baseline projection of CO2 emissions in 2030, showing China and the United States as the world’s largest emitters.

Figure 2: Large transmitters

From: IMF Gaspar, V. and Perry, I. (2021).  A proposal to increase global carbon pricing, June 18.

From: IMF Gaspar, V. and Perry, I. (2021). A proposal to increase global carbon pricing, June 18.

However, decarbonization will be a bumpy road (Pisany-Ferry, 2021):

First, a significant change in the relative prices of goods and services, with prices starting to reflect the intensity of carbon emissions, the price of which will have to rise from zero to significant levels. Gaspar and Parry (2021) have proposed that at the international level, action be taken to achieve a carbon price of US $ 75 or more per metric tonne by 2030.

Such a carbon price can be established and charged explicitly and / or indirectly through the effects of regulations or limits on uses. Decarbonization will be negligible if the price of carbon remains that of a “free good” provided by nature. Carbon prices will also have to be among the factors influencing people’s behavior and lifestyles.

In addition, workers will need to be moved from carbon intensive activities to greener substitutes. There will not only be the challenge of retraining the workforce, but also ensuring that new jobs are sufficiently created in dynamic activities. It is known, for example, that the manufacture of electric cars requires less labor than that of vehicles with thermal engines.

Third, there will be an accelerated obsolescence of existing stocks of physical assets (machinery and equipment, buildings, vehicles) and intangibles associated with carbon-intensive activities. The counterpart to this will have to be an accelerated investment in new assets to replace what is being phased out.

The good news about this replacement is that the move towards cleaner technologies with falling costs is underway. The bad news is the presence of barriers to such investments, especially in the case of green infrastructure in non-developed countries (Canuto, 2021).

The decarbonization transition may have regressive impacts on incomes. For example, real estate to be rebuilt or renovated corresponds to the largest share of the assets of people in the lower half of the income pyramid. Direct carbon taxation will have different impacts on different urban groups. Likewise, it is important not to lose sight of the re-qualification and employment needs of the workers directly concerned. It will be important to ensure revenue transfer mechanisms within countries and internationally associated with carbon pricing, in order to mitigate the regressive impacts of the fight against climate change.

The decarbonization trajectory will also have implications for public budgets and debt; see Zenios (2021) in the case of Europe. In addition to offsetting spending for the regressive carbon pricing impacts mentioned above, public infrastructure spending to enable the transition will be required. Except in the unlikely event that spending is fully covered with a certain carbon tax, the trend will be for public debt to increase. In this case, without intertemporal injustice, because future generations will be grateful not to have to live permanently with an even more unfavorable climate.

What about GDP and its growth during the transition? Here, the duality of impacts discussed above is repeated. On the one hand, there will be destruction of capital, in addition to a relative price shock which, as Jean Pisani-Ferry observes, has similarities with the “supply shock” this happened when oil prices suddenly and dramatically increased in the 1970s, notably by temporarily reducing potential growth. But while oil prices have subsequently been reversed, the price of carbon cannot be allowed to do so if the world is to be carbon free. If the need for a greater investment as a percentage of GDP to support decarbonisation runs up against the limits of supply capacities, consumption will have to adapt to the decline throughout the transition.

On the other hand, cleaner technologies will also generate opportunities for increased productivity. In any case, the socio-economic return of decarbonization must include preventing heat waves, floods, hurricanes, droughts, floods and storms like those of this year from becoming even more intense and frequent. The cost of this would mean even higher GDP losses for nations.

Washington, DC-based Otaviano Canuto is a Senior Fellow at the Policy Center for the New South, senior non-resident researcher at the Brookings Institution, professor of international affairs at the Elliott School of International Affairs at George Washington University and director of the Center for Macroeconomics and Development. He is a former vice-president and former executive director of the World Bank, former executive director of the International Monetary Fund and former vice-president of the Inter-American Development Bank. He is also a former Deputy Minister of International Affairs at the Brazilian Ministry of Finance and a former Professor of Economics at the University of São Paulo and the University of Campinas, Brazil.

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