The study addresses a specific question: what consequences for employment and economic growth are to be expected if Europe increases its CO2 reduction target from 20% to 30%?
The idea of green growth is to spur economic growth by tackling environmental challenges. Attractive as the idea is, it runs against the findings of the economic models that have been developed in the past decades in order to assess the economic consequences of various policies. These models have been tested and used in situations where key variables experienced relatively small changes. However, they have been found wanting in the face of the global financial crisis that brought the world economy to the brink of disaster in 2007-2008. Clearly, there is a need to improve existing models in order to deal with large-scale economic change. This matters for climate policy, because the transition to a low-carbon economy will certainly be a large-scale change.
It is essential to understand that traditional economic models rule out green growth by construction. These models represent the economy as a comprehensive optimisation problem with a single solution. Reducing emissions tightens a constraint for the optimisation problem, leading to lower GDP in the short run. Of course the idea is to avoid damages later on, but according to these models climate policy is faced with the need to orchestrate a reduction in incomes in the present.
It is equally essential, however, to understand that those models can be enhanced by introducing three well-documented effects: learning-by-doing, the variability of the so-called natural rate of unemployment, and the role of expectations for economic dynamics. Once this is done, it turns out that the economy has multiple possible equilibria, and that it can be trapped into inferior equilibria with unnecessarily high unemployment and low growth. Such is the case of the European economy. A well-designed climate policy can help to trigger the transition to a new growth path with smaller emissions, more jobs and higher growth.
Source: A study commissioned by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety Authors: Carlo C. Jaeger, Leonidas Paroussos, Diana Mangalagiu, Roland Kupers, Antoine Mandel, Joan David Tàbara, Frank Meißner, Wiebke Lass