Financial impacts of climate change mitigation policies and their macroeconomic implications: a stock-flow consistent approach

Article published in Climate Policy (Dec 2019)

To what extent can worldwide carbon pricing foster the transition towards a low-carbon economy and mitigate the effects of global warming? We address this question by assessing the financial impacts and macroeconomic implications of carbon pricing and public subsidies. More specifically, we evaluate the extent to which such policies are sustainable by computing the probability of remaining below two thresholds that we argue to be indicative of the stability of our current economy and climate: (1) a temperature anomaly above +2°C (a commonly acknowledged target, including in the 2015 Paris Agreement, to potentially avoid nonlinearities in the climate system) and (2) a large global debt-to-output ratio of 270%.

Key policy insights

  • The upper-bound of the carbon pricing corridor advocated in the High-Level Commission on Carbon Prices (2017. Report of the high-level commission on carbon prices. Washington, DC: World Bank), when implemented together with additional public subsidies on abatement costs in the private sector, is likely to successfully ensure sustainable economic growth by the end of the century.

  • The probability that these climate policies will allow us to cap the average Earth temperature deviation at below +2.5°C by the end of this century is about 50%.

  • Without a strong public commitment, the impact of climate change on gross output and capital, which captures nonlinear effects such as tipping points, appears to be powerful enough to pull the world economy towards a debt-deflationary field, potentially leading to forced degrowth in the second half of the twenty-first century.

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