The global economy is facing a double challenge.
On the one hand, governments are striving to re-ignite growth in a world of slowing productivity growth and rising inequality. Economic growth has been at best modest in the last decade in most G20 economies. The OECD projects a moderate pick-up of world GDP of around 3.5% in 2017 and 2018. But this will not suffice to maintain good levels of pensions, health and education, nor to create sufficient jobs for the young.
On the other hand, we are faced with the threat of dangerous climate change and need development pathways that minimise that threat. Left unchecked, the scale of potential damage from climate change poses a major systemic risk to our future well-being and the ecosystems on which we depend. Most countries have proposed national action plans under the 2015 Paris Agreement, but collectively these plans are insufficient to achieve the long-term objective of limiting the global temperature rise to well below 2 degrees above pre-industrial levels. Reasons for insufficient ambition to date vary across countries, but there is a common concern over perceived high costs of policies to reduce emissions. Yet stepping up action is urgent, as on current trajectories the Paris goals will soon be out of reach.
So can we achieve sustainable economic growth while seeing off the worst of the climate threat? New OECD analysis makes the economic case for an integrated approach to growth and climate in both advanced and emerging-market countries. This would see governments achieve strong and inclusive economic growth in the short and long term, while reorienting economies towards low-emissions, resilient development pathways.
The OECD report Investing in Climate, Investing in Growth released today shows that there need not be a trade-off: combining climate change and pro-growth measures, and in some countries a judicious recycling of carbon tax revenues, can lead to long-term inclusive growth as part of a “decisive transition” to decarbonisation. The report shows that well-managed structural reforms and proactive fiscal policies can more than outweigh the negative growth impact of ambitious climate policies and boost output by nearly 3% by 2050 on average across the G20 relative to a continuation of current policies.
Delaying climate action will be costly. Our results show that if nothing is done until 2025, rear-guard action after that time would lead to average losses of 2% of GDP, relative to acting now. Waiting will mean that more stringent climate policies will need to be introduced more rapidly, leading to an abrupt transition. The added burden of decommissioning high-carbon infrastructure built in the intervening years would lead to rapidly rising carbon prices and would likely result in high levels of stranded assets across the economy, especially in net fossil-fuel exporters. Those losses could also be aggravated by some financial instability in the short term depending on firms' exposure to the energy sectors that would need restructuring. Lastly, while the costs from damages will depend on the geographical locale of countries, if action is delayed, they will be even more pronounced and widespread, perhaps 10-12% of GDP by 2100 – enhancing the benefits of decarbonisation policies undertaken today.
So what are the policies needed to trigger a transition to a low-carbon higher-growth path? We need a policy package that combines well-chosen structural reforms with more specific climate policies such as carbon pricing. Public and private investment in low-emission infrastructure should be supported by pro-growth structural reforms supportive of the transition, such as reforming product and labour markets to foster long-term growth, fostering knowledge-based capital and increased R&D, and facilitating firm entry and exit.
The transition will not succeed unless the low-carbon economy is inclusive and achieved through collective actions. Divergent interests of a range of stakeholders in advanced and emerging-market economies, from central and local governments to the private sector, will come into play. Engagement of all the relevant actors will help gain political and social support for policy measures. Targeted measures can compensate for potentially regressive impacts of climate policy on poor households, ensuring that other pressing policy priorities such as poverty alleviation and inclusiveness are not compromised.
A unique opportunity presents itself. Current economic conditions – including low real interest rates – afford many governments the opportunity to invest in the right infrastructure now to re-ignite growth at the same time as paving the way to achieve the Paris Agreement outcomes. The mix of the policy interventions required will very much depend on countries’ different developmental imperatives and exposure to climatic risks. But, the time is right now for governments to bring together fiscal initiatives, structural policy reforms, effective climate policies, and the progressive alignment of regulatory frameworks to ensure effective and inclusive actions to meet the decarbonisation challenge. What’s good for the climate can also be good for growth.
Catherine L. Mann is OECD Chief Economist and Head of the Economics Department.
The OECD report “Investing in Climate, Investing in Growth” released on 23 May provides an analysis of how low-emission and climate-resilient development can be achieved without compromising economic growth, competitiveness or well-being. To read the publication, synthesis report and related material visit: http://oe.cd/g20climate.