Can the clean energy transition boost global growth?

“Without immediate and deep emissions reductions across all sectors, limiting global warming to 1.5°C [in line with the Paris Agreement] is beyond reach.” That was the unequivocal conclusion of the most recent report from the Intergovernmental Panel on Climate Change (IPCC 2020).

Reducing emissions will require a transformation, not only in the energy sector but also in transport, buildings, and agriculture. This will involve a substantial reduction in fossil fuel use, widespread electrification, improved energy efficiency, and the use of alternative fuels (such as hydrogen).

However, the macroeconomics of this clean energy transition is highly uncertain. Advocates of green development have argued the investment needed for the clean energy transition will boost jobs and growth, while other studies point to the risks of a negative supply shock if the transition results in an accelerated obsolescence of the existing capital stock and a significant reallocation of resources (Pisani-Ferry, 2021). In our analysis, the crux of this argument comes down to what is assumed in terms of innovation and technical progress – since the sizeable and persistent investment needed for the clean energy transition will most likely result in higher inflation unless matched by a corresponding shift in aggregate supply.

This article examines the macroeconomics of the clean energy transition by simulating two stringent mitigation scenarios, using a global structural model. In both scenarios, we use carbon prices to create an incentive to move away from fossil fuels and support the transition to net zero emissions by 2050 via a significant and persistent boost to global investment. However, in the first scenario we assume investment spending is largely financed by carbon tax revenues, while in the second, we relax this financing constraint and allow the increase in investment to stimulate innovation, leading to faster technological progress.