Analyzing the Macro-Economic and Employment Implications of Ambitious Mitigation Pathways and Carbon Pricing

Abstract

The recent EU Green Deal puts forward ambition climate targets aiming to make the EU the first climate neutral continent by mid-century while ensuring a just transition. This requires a large-scale transformation of the EU and global energy and economic systems induced by both regulatory and market-based policies, in particular carbon pricing. Macro-economic models currently used for the analysis of climate policy impacts need improvements to consistently capture the transition dynamics and challenges. The study presents the methodological enhancements realized in general equilibrium model GEM-E3-FIT (including enhanced energy system representation, low-carbon innovation, clean energy markets, technology progress, policy instruments) to improve the simulation of the impacts of ambitious climate policies. The model-based analysis shows that high carbon pricing has limited negative impacts on the EU GDP and consumption, while leading to an economy transformation toward a capital-intensive structure triggered by increased investment in low-carbon technologies and energy efficient equipment. Global decarbonization to achieve the well-below 2°C goal of the Paris Agreement will modestly impact total employment, but its effects are pronounced on specific sectors which are impacted either negatively (e.g., supply of fossil fuels, energy intensive industries) or positively by creating additional jobs (e.g., low-carbon manufacturing, electricity sector).

COVID-19 recovery packages can benefit climate targets and clean energy jobs, but scale of impacts and optimal investment portfolios differ among major economies

“…60 Also, renewables-driven net job gains in the energy sector can be offset by job losses in other sectors if gross domestic product (GDP) is negatively affected. 61 Logically, in a full-employment economy model that does not consider voluntary and involuntary unemployment, net job gains in one sector need to be drawn from other sectors, but full employment is not a very realistic assumption for both developed as well as developing countries. Nevertheless, we opted to use employment factors as we analyze economic recovery packages, of which the explicit purpose is to create employment in a non-fullemployment market.…”

Emissions trading system: bridging the gap between environmental targets and fair competition

“…To model individual heterogeneity, one often assumes that the error term has two separate components, one specific to the individual and not changing over time. This is called the unobserved effects model shown in equation (3).…”

“…There is a broad consensus on the importance of carbon pricing programs, especially cap-and-trade mechanisms, for economically efficient climate policies [1][2][3]. A well-known European carbon pricing instrument is the emission trading system (ETS), a pillar of European environmental policy [4].…”

Economic Impact of Energy Efficiency Policies: A Scenario Analysis

“…Specifically, there is a need for more macroeconomic analyses based on theory and modeling (Rezai et al, 2013). The existing macroeconomic models that are often used to analyze the potential impacts of climate policy need to be improved such that they better capture the dynamics and challenges of the transition period (Fragkos & Fragkiadakis, 2022).…”