Long-term Growth Impact of Climate Change and Policies: The Advanced Climate Change Long-term (ACCL) Scenario Building Model

Abstract

This paper provides a tool to build climate change scenarios to forecast Gross Domestic Product (GDP), modelling both GDP damage due to climate change and the GDP impact of mitigating measures. It adopts a supply-side, long-term view, with 2060 and 2100 horizons. It is a global projection tool (30 countries / regions), with assumptions and results both at the world and the country / regional level. Five different types of energy inputs are taken into account according to their CO2 emission factors. Full calibration is possible at each stage, with estimated or literature-based default parameters. In particular, Total Factor Productivity (TFP), which is a major source of uncertainty on future growth and hence on CO2 emissions, is endogenously determined, with a rich modeling encompassing energy prices, investment prices, education, structural reforms and decreasing return to the employment rate. We present four scenarios: Business As Usual (BAU), with stable energy prices relative to GDP price; Decrease of Renewable Energy relative Price (DREP), with the relative price of non CO2 emitting electricity decreasing by 2% a year; Low Carbon Tax (LCT) scenario with CO2 emitting energy relative prices increasing by 1% per year; High Carbon Tax (HCT) scenario with CO2 emitting energy relative prices increasing by 3% per year. At the 2100 horizon, global GDP incurs a loss of 12% in the BAU, 10% in the DREP, 8% in the Low Carbon Tax scenario and 7% in the High Carbon Tax scenario. This scenario exercise illustrates both the "tragedy of the horizon", as gains from avoided climate change damage net of damage from mitigating policies are negative in the medium-term and positive in the long-term, and the "tragedy of the commons", as climate change damage is widely dispersed and particularly severe in developing economies, while mitigating policies should be implemented in all countries, especially in advanced countries modestly affected by climate change but with large CO2 emission contributions.

Climate Change and Monetary Policy in the Euro Area

“…The heterogenous impact of climate change at the country level poses additional challenges. Alestra et al (2020) also show that countries and regions that benefit the most from the implementation of an ambitious climate policy would be those which are most harmed under the BAU scenario. By contrast, the gain is insignificant for numerous developed countries.…”

“…Any transition scenario should therefore be compared with a "business-as-usual" (BAU) scenario, which includes the physical implications of no policy action. Alestra et al (2020) illustrate such a trade-off with a long-term growth model. At the 2060 horizon, the net GDP impact is more detrimental under the transition scenarios than under the BAU scenario, as losses from climate policies are higher than the avoided damage at this horizon.…”

“…In addition, semi-structural models are typically estimated using an error-correction framework, which isolates the short-run dynamics of each variable from their long-run equilibrium value or target. Transition risks and policies can generate large fluctuations in macro-financial volatility in the short run but can also cause structural changes that affect an economy's long-run growth path (Cambridge Institute for Sustainability Leadership (CISL), 2015; Alestra et al, 2020). Accordingly, the ability of semi-structural models to incorporate the differential temporal impact of different shocks is particularly useful when analysing climate change issues over different horizons.…”

“…The model also allows for different assumptions about how revenue from the tax is recycled. The cross-country dimension is particularly important in long-horizon models, such as the Advanced Climate Change Long-term (ACCL) model, which incorporate a damage function (Alestra et al, 2020). As it is global emissions that matter for mitigating rising temperatures, it is the joint impact of transition policies on reducing those emissions that will determine their feedback to higher, long-term economic growth and welfare in each country.…”

Climate-Related Scenarios for Financial Stability Assessment: An Application to France

“…Results from macroeconomic studies show that this scenario would trigger larger economic losses in the long run. For instance, Alestra et al (2020) show that net GDP losses induced by climate policies in the medium term turn into favourable net impacts in the long term, thanks to the avoidance of greater climate damage. By contrast, in a 'no transition' or 'business-as-usual' scenario, global GDP would incur a loss of 12% at the 2100 horizon due to physical damages, which would be larger at such a horizon than any costs related to transition policies.…”