Shifting to green energy will have significant short-term economic costs, but the longer countries take to make the transition the larger the costs and the more severe the impact on economic growth.
This is according to an update on the International Monetary Fund (IMF) website.
Climate mitigation policies have notable impacts on output and inflation. To this end, the costs will be small if the right climate measures are adopted promptly and organized in structured phases. However, a delay in cutting carbon emissions and transitioning to renewables will be of greater cost.
What the IMF is saying
IMF thinks there is an urgency for countries to work together more on the funding and expertise needed to reduce costs, particularly for low-income economies. It said:
“To assess the short-term impact of transitioning to renewables, we developed a model that splits countries into four regions—China, the euro area, the United States, and a block representing the rest of the world. We assume that each region introduces budget-neutral policies that include greenhouse gas taxes, which are increased gradually to achieve a 25 percent reduction in emissions by 2030, combined with transfers to households, subsidies to low-emitting technologies, and labor tax cuts.”
“The results show that such a policy package could slow global economic growth by 0.15 percentage point to 0.25 percentage point annually from now until 2030, depending on how quickly regions can wean off fossil fuels for electricity generation. The more difficult the transition to clean electricity, the greater the greenhouse gas tax increase or equivalent regulations needed to incentivize change—and the larger the macroeconomic costs in terms of lost output and higher inflation.”
“For Europe, the United States, and China, the costs will likely be lower, ranging between 0.05 percentage points and 0.20 percentage points on average over eight years. Not surprisingly, the costs will be highest for fossil-fuel exporters and energy-intensive emerging market economies, which on balance drive the results for the rest of the world. That means countries must cooperate more on finance and technology needed to reduce costs—and share more of the required know-how—especially when it comes to low-income countries. In all cases, however, policymakers should consider potential long-term output losses from unchecked climate change, which could be orders of magnitude larger according to some estimates.”
“In most regions, inflation increases moderately, from 0.1 percentage point to 0.4 percentage point. To curb the costs, climate policies must be gradual. But to be most effective, they also need to be credible. If climate policies are only partially credible, firms and households will not consider future tax increases when planning investment decisions.”
According to the international lender, moderately and credibly implemented climate mitigation policies make for a smooth transition toward a carbon-neutral economy. When climate policies are moderate and reliable output-inflation trade-off will be small. A deviation from reliable and credible climate implementation policies could raise Inflation and lower gross domestic product growth by the end of the decade, according to the IMF.