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Climate change mitigation policies that achieve the Paris Agreement pledge cause only small changes in GDP

19.03.2021

Economics in a picture: Climate change mitigation policies that achieve the Paris Agreement pledge cause only small changes in GDP

As greenhouse gas emissions reach alarming levels, there is increasing pressure on countries to adopt more aggressive environmental policies. Much of the hindrance facing countries in implementing climate change mitigation policies, however, are the concerns regarding their economic effects. Using an economic model with multiple sectors and heterogeneous workers, it is possible to evaluate the impacts of climate change mitigation policies. After a policy is implemented, workers may choose to settle to work in different sectors and a new equilibrium for the macroeconomy materializes.

According to the model, for the United States, its Paris Agreement pledge to decrease carbon emissions in 26% is achieved with a carbon tax of 32%. This tax implies a decline in GDP of only 0.6%. Workers with a comparative advantage to work in polluting energy sectors bear most of the brunt of the policy but they correspond to a small fraction of the labor force; less than 1% in the United States. The effect of a similar policy applied to different countries depends on the sectoral structure of each economy. In a more polluting country like China, for example, the same 32% carbon tax yields a fall in GDP of 2.1%.

 
 

For more details see Cavalcanti, Hasna and Santos (2020), “Climate Change Mitigation Policies: Aggregate and Distributional Effects”, Banco de Portugal Working Paper 17.

 

Prepared by Cezar Santos and Zeina Hasna. 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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