The transition towards net zero carbon emissions: A method for assessing the macroeconomic impact

Under construction 

I present a method for assessing the macroeconomic impact of climate change motivated investments. To this end, I use the long-term economic costs of climate change and calculate the macroeconomic effect of investments done in accordance with the implicit pledges made in the Paris Agreement. More specifically, I utilize the pledges made by each participating country together with estimates on the global long run economic costs of climate change and derive a country specific rational investment amount. By defining the time frame on which these investments are to be made (the transition period) together with the share of investments that is made by the public sector, the share of effectively done investments and the growth impact of an increase in public debt country specific economic growth estimates are derived. The method is tested by calculating the macroeconomic growth effect during a 30-year transition period for the worlds three largest greenhouse gas emitting economies (China, the US and the Euro area). The results clearly show that the economic benefits of an orderly transition is positive and that the economies, in general, are robust to that some investments made could be done ineffectively in a way that crowds out otherwise done private investments. However, it is also found that the negative economic impact can be substantial if the transition away from carbon intense production is done disorderly and if the investments are done in a way that deprives the private sector from participating in the transition. As such, the method can be used for understanding the macroeconomic impact a transition towards net zero emissions which in turn can be used for assessing the transition risk (and opportunities) of climate change.