To achieve the internationally agreed temperature targets, increasingly stringent climate policies are of utmost importance. This column argues that theory-based scenarios, termed ‘economic pathways’, are a powerful tool to induce efficient policies. Calibrating a dynamic economic climate model to calculate different economic pathways reveals that deep decarbonisation only moderately delays economic development, while population growth does not strongly interact with climate policy. If the adoption of more stringent climate policies becomes more likely as the phase-out of fossil fuels accelerates, timely decarbonisation is not only feasible but also attractive and realistic.
Worldwide, carbon emissions remain on a high level; a global downward trend has not been observed so far. While significant advances in renewable energy technologies widen the scope for climate change abatement, political decisions on climate protection often lack consistency and determination. A specific challenge for economists is that their advice is not always well received by policymakers and the public. In particular, the use of carbon pricing as the prime instrument faces serious headwinds in many debates. After giving an excellent summary of the economists’ input and impact on the climate debate, Withagen (2022: 477) concludes that it may be advisable “for the design of policy to confront policy makers with a set of scenarios” because “if the policymaker does not understand what the ingredients of the model are, then it is better to confront her with entire time paths of all relevant variables, such as consumption, emissions, temperature, rather than with just optimal long run growth rates, discount rates or the social cost of carbon”. This new approach to policy advice can be implemented using the concept of ‘economic pathways’, which are theory-based scenarios for an economy striving for decarbonisation by mid-century (Bretschger 2024). The economic pathways differ depending on the underlying assumptions about the adopted policies and take account of uncertainty. They are designed to show policymakers the consequences of their actions and inactions, which is a key basis for public decision-making.
The economic pathways apply a different methodology than the well-known ‘shared socioeconomic pathways’ (SSPs), which are narratives describing the possible long-term future evolution and are based on expert opinion (O’Neill et al. 2014, Dellink et al. 2017). To derive the economic pathways, economic key performance indicators are treated as endogenous variables; economic development, demographics, innovations, and resource use are predicted using state-of-the-art economic theory. All the links between economic development, population, and emissions are included, which is key to understanding the effects of climate policy. Indeed, a consistent analysis of climate policy should focus on how emissions reduction affects the economy and society in order to provide clear guidance for improving policy design. Considering resource scarcity and innovation incentives, extreme cases of the SSPs can be dismissed when using the EPs, which significantly narrow the scope of likely future developments.
The theoretical model underlying the economic pathways (for the details, see Bretschger 2024) has a production block where final output is assembled from heterogenous intermediate goods, which are produced with labour, capital, and energy as inputs. The number of goods varieties is raised by innovations achieved in the research sector, leading to positive knowledge growth (Romer 1990). Households derive utility from consumption and birth flow; the costs of child rearing feature both scale and congestion effects. In the energy sector, renewable energies profit from learning and scale effects, which improve their relative cost position, but this also depends on carbon pricing by the government. The model provides closed-form solutions for per capita consumption, innovation, population, and carbon emissions. Calibration of the parameters allows to calculate future pathways of these central variables.
Each carbon price profile defines a separate economic pathway. This column discusses three possible policies and the associated economic pathways for the time period 2022-2050. The first is the business-as-usual case (“BAU”) characterised by a constant price of fossil energies. The other two pathways assume growing end-user price of the fossil resource. Such ‘escalators’ for carbon pricing have been implemented in Sweden, Switzerland, and the UK in the past. The second pathway, labelled “STANDARD,” assumes a moderate escalator with a 3% annual growth rate of the fossil price. The third pathway (“SUPER” accelerator) features the most stringent climate policy using an escalator that starts at 3% and increases by 1% in each following year (Bretschger 2024).
The results for the three pathways are provided in Figures 1-3; the blue lines represent consumption per capita, the orange lines population, and the grey lines emissions; the coloured areas show the likely and very likely developments. Figure 1 shows for the “EP1: BAU” that (expected) consumption per capita is steadily growing to a level in 2050, which is more than the double of 2022. Mean world population increases at a declining growth rate to 10.6bn. Over the whole period, emissions are increasing by 58 percent, a result of economic growth at constant fossil fuel prices. Emissions accumulate to a carbon budget of 1653 GtCO2. There is a weak relative decoupling from emission and consumption growth due to technical progress in regenerative energies in the 2040s, but development is in no way compatible with the internationally agreed climate targets.
Figure 1 Business as usual (BAU)
Note: Per capita consumption (dashed, blue), population (solid, orange), emissions (dotted, grey)
Results for the “EP3: STANDARD” escalator are shown in Figure 2. Here, emissions are shrinking in all periods and reach a value of 31.5% of the initial value in 2050, used carbon budget amounts to 789.8 Gt, which is still too high to meet the temperature targets. Hence, a more radical escalator may be indicated. Results for the “EP6: SUPER” escalator in Figure 3 show that the decarbonisation becomes very successful: emissions develop in a reverted S-curve towards zero; decarbonisation is achieved in 2040; and the used carbon budget is 343.9 GtCO2, which would allow achieving the 1.5 °C target for global warming with a probability exceeding 67 % (IPCC 2021). The pervasive success in climate policy comes at the cost of a somewhat lower consumption level in 2050, which is predicted to be 1.4 % lower than in the BAU.
Figure 2 Standard accelerator (STANDARD)
Note: Per capita consumption (dashed, blue), population (solid, orange), emissions (dotted, grey)
Figure 3 Super accelerator (SUPER)
Note: Per capita consumption (dashed, blue), population (solid, orange), emissions (dotted, grey)
Comparing the economic pathways, it is found that stricter policies slightly delay economic development but actually promote the growth rate in the medium and long run. Population growth turns out not to interfere significantly with the development of income and resource use. Emissions can be reduced when implementing a carbon price escalator, but only an increasing rate of the escalator is forceful enough to bring about full decarbonisation by mid-century. Is the super escalator realistic? A parallel can be drawn with cigarette taxes, which have become increasingly accepted by voters as the proportion of non-smokers in the population has risen. Once green technologies are utilised by a large portion of the economy, there may be a political tipping point that supports the escalator. Moreover, pricing is the only policy involved in this approach. Bans and standards, which are widely used in practice, become more stringent over time; they affect the implicit carbon price that users pay. Finally, the use of economic pathways as a means of policy advice may have a favourable effect on applying a price escalator in climate policy.
Based on the analysis using economic pathways, three overarching conclusions can be drawn. First, the impact of stringent decarbonisation on economic development is limited, resulting in only a modest delay in consumption levels compared to laissez-faire approaches. This result compares to Voigts and Paret (2024), who find for the US that the Inflation Reduction Act induces significant emissions reduction, while the macroeconomic impact is minor. A rigorous climate policy accelerates the adoption of renewable energy sources, ultimately leading to higher consumption growth rates in the medium and long term compared to the business-as-usual scenario; Hasna et al. (2024) highlight the role of green innovation for decarbonisation and economic growth. Second, global population growth, while significant, is not the central concern in the context of climate change. It is an endogenous variable within the current framework and does not directly drive energy consumption, which primarily depends on energy prices (for the impacts of the transition on labour markets, see Causa et al. 2024). Third, the size and timing of the carbon price escalator are pivotal for the success of climate policy. Gradually increasing policy stringency over time can expedite the reduction of emissions, a critical component of effective climate policy. This acceleration can be further enhanced by advances in renewable energy technologies, particularly through research, capital investment, and associated policy measures.
The economic pathway setup underscores the primacy of climate policies, i.e. the fact that the primary factor leading to adverse climate change outcomes is the absence of robust climate policies. It complements economic contributions on optimal carbon pricing. Policies that have been found optimal in other models, such as the introduction of a higher entry level for the carbon tax, can be easily implemented in the present framework.
Source : VOXeu
