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The adoption of optimal environmental economic policies will keep the increase in global temperature below 2 °C

05.11.2021

Economics in a picture: The adoption of optimal environmental economic policies will keep the increase in global temperature below 2 °C

Among the economic issues with greater environmental relevance are the underinvestment in the adoption of technology in the renewable sector and the excess energy production in the fossil fuel sector. These inefficiencies can be corrected with appropriate economic policies that increase renewable energy production and reduce fossil energy production. The effectiveness of these policies can be studied through a quantitative model incorporating environmental elements. Four scenarios are considered. In the first, called the status quo, there is no change in current policies. The other three consist of (i) the imposition of a tax on carbon emissions without an optimal technology adoption policy in the renewable sector; (ii) implementing the policy of optimal adoption of technology in the renewable sector without imposing a tax on carbon emissions; and (iii) the simultaneous implementation of both policies. The chart shows the trajectories for the rise in global temperature in each of the four scenarios.

In the status quo, the global temperature rises significantly, reaching about 2.8 °C above the pre-industrial level in 2120. In contrast, when the tax on carbon emissions and technology adoption are set at their optimal level, the global temperature reaches about 2 °C above the pre-industrial level. In this case, the economy turns to using only renewable energy in 2070, and more fossil fuel is left unused relative to the other scenarios. Finally, the tax on carbon emissions is more effective in mitigating the increase in temperature than the policy that promotes the optimal adoption of technology.

 

For further details see Special Issue “Climate change and the economy”, October 2021 Economic Bulletin, Banco de Portugal.

 

Prepared by Bernardino Adão, António Antunes, Nuno Lourenço and João Valle e Azevedo. The analyses, opinions and findings expressed above represent the views of the authors and not necessarily those of Banco de Portugal or the Eurosystem.

 

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