The world must cut greenhouse gas emissions by at least a quarter before
the end of this decade to achieve carbon neutrality by 2050. Progress
needed toward such a major shift will inevitably impose short-term economic
costs, though these are dwarfed by the innumerable
long-term benefits of slowing climate change.
In our latest World Economic Outlook, we estimate the near-term impact of
different climate mitigation policies on output and inflation. If the right
measures are implemented immediately and phased in over the next eight
years, the costs will be small. However, if the transition to renewables is
delayed, the costs will be much greater.
To assess the short-term impact of transitioning to renewables, we
developed a model that splits countries into four regions—China, the euro
area, the United States, and a block representing the rest of the world. We
assume that each region introduces budget-neutral policies that include
greenhouse gas taxes, which are increased gradually to achieve a
25 percent reduction in emissions by 2030, combined with transfers to
households, subsidies to low-emitting technologies, and labor tax cuts.
The results show that such a policy package could slow global economic
growth by 0.15 percentage point to 0.25 percentage point annually from now
until 2030, depending on how quickly regions can wean off fossil fuels for
electricity generation. The more difficult the transition to clean
electricity, the greater the greenhouse gas tax increase or equivalent regulations
needed to incentivize change—and the larger the macroeconomic costs in
terms of lost output and higher inflation.
For Europe, …