Global Green Transition

Climate change and the green transition, that is moving from a carbon-based economy to a more sustainable one, has been a really hot (sorry for this play on words) topic for researchers for the past couple of decades. And this concerns not just Earth sciences, but also social sciences and economics, in particular.?

At NES, it is among the major research interests of a few faculty members, including Professor Gerhard Toews who has recently discussed NBER research papers The Macroeconomic Impact of Climate Change: Global vs. Local Temperature and Climate Change Economics over Time and Space published earlier in 2024. The former estimates that the macroeconomic damages from climate change. Its authors found that 1°C warming reduces world GDP by 12%, while business-as-usual warming implies a 29% present welfare loss. The latter argues that the economic cost of climate change is intimately connected to such spatial frictions as barriers for migrants, high cost of trade and transportation, physical infrastructure being not footloose, and imperfect diffusion of knowledge embedded in clusters of economic activity.??

NES graduates also work on the issues directly linked to climate change. For instance, Oleg Demidov (MAE'2008) is a co-founder of CarbonSpace, a tech company that has developed a platform for carbon footprint tracking. In an episode of the GURU Podcast, he recalled that a 2023 study estimated the cost of the extreme weather damages from 2000 to 2019 to average around $143 billion, which breaks down to around $16.3 million per hour. And by 2050 the global economy will lose from $1.5 trillion to 3 trillion annually, including the cost of maintaining infrastructure, agriculture, and human health. The authors of this study agree with other experts that human activity is the main cause of global warming: approximately 53% of the total damage from extreme climate events is caused by human influence.?

Meanwhile, Igor Kadach (MAE'2010) has become a co-author of a research The Big Three and Corporate Carbon Emissions Around the World. It has found that firms like BlackRock, Vanguard, and State Street Global Advisors try to influence CEOs of companies in their portfolio to reduce their CO2 emissions via interactions other than voting. The higher the ownership by the Big Three in a company, the greater the reduction of its carbon emissions, Kadach and his co-authors argue.

The state of things?

There is a general consensus in academia about the cause of the rising global temperature especially over the past decades: more than 99% of climate scientists attribute it to greenhouse gases that humans have been adding to the atmosphere since the beginning of the Industrial Revolution in the 1700s. And the great majority of these scientists agree that if this warming continues, it presents significant risks to humankind and all life on Earth.?

Dani Rodrik, Professor of International Political Economy at Harvard Kennedy School and the President of the International Economic Association, calls climate change an existential threat. At the same time, he is worried that it will not be possible to simultaneously fight climate change, expand the middle class in developed countries and reduce global poverty. In any combination, two of these goals in the current political situation can only be achieved by abandoning the third. Rodrik believes that workers without a college or vocational education will face increased competition, which will reduce their wages, while budget funds needed for investment in human capital and physical infrastructure will be reduced.

Meanwhile, poor countries suffer from climate change more due to scarce resources and technologies. For the same reason they are expected to be the laggards in the green transition. But the side effects and consequences of this process are also dubious. A recent research by the Central Banks and Supervisors Network for Greening the Financial System (NGFS, an association of central banks and supervisors aiming to help strengthening the global response required to meet the goals of the Paris agreement and to enhance the role of the financial system to manage risks and to mobilize capital for green and low-carbon investments in the broader context of environmentally sustainable development) The green transition and the macroeconomy: a monetary policy perspective studies the impacts of climate change mitigation policies.?

Its authors argue that so far, government actions to reduce the negative economic consequences of unmitigated climate change over the long term have resulted in fairly modest macroeconomic impacts, but they are likely to grow if countries are to achieve the goals of the Paris Agreement. Still, some of these actions may lead to near-term trade-offs for monetary policymakers to manage by increasing inflation and reducing output in the short run. Moreover, they may cause profound and prolonged structural changes.

Table 1. Potential transition impacts on inflation and output over the monetary policy horizon

Table 2. Propagation of effects from transition drivers to the macroeconomy

The authors of the research argue that the green transition will affect the behaviour of all agents, sectors and countries, but with large differences across agents and time horizons. The associated changes in consumer and asset prices, as well as wages will affect household income, wealth and saving patterns. For firms, investment decisions will be influenced by transition policies aimed at shifting production and investment towards low-carbon activities, as well as by changes to costs, productivity and profits and the financing conditions they face. For governments, carbon pricing will generate revenue whereas subsidising green technology, to the extent that it is financed by debt issuance or taxes, has fiscal implications. Fossil-fuel exporters may face a more challenging transition, while economies endowed with minerals critical for the green transition could benefit from new opportunities.

Overall impacts of the transition will depend on its design, credibility, and pace of implementation, on the resulting balance between the impacts on aggregate supply and demand, and on the monetary policy response. These impacts will require certain actions from all stakeholders because without mitigation global climate change will create unprecedented challenges for humanity.?