A new study has suggested that a decarbonisation strategy built around a mix of green industrial policies, targeted subsidies and a moderate sector-specific carbon tax is the most effective route to achieving the Paris Agreement goals while also driving economic growth.
According to the study, published in Nature Sustainability and coordinated by the Institute of Economics of the Sant’Anna School of Advanced Studies in Pisa, alongside Utrecht University, an alternative decarbonisation policy based solely on a carbon tax risks being either ‘ineffective for the climate or destabilising for the economic system’.
‘Central challenge’
The study addresses what it describes as a ‘central challenge’ of decarbonisation – how to reduce emissions while avoiding a transition that is either too slow to avoid climate risks, or too abrupt, impacting economic systems.
It suggests that a ‘carefully calibrated’ package of green industrial policies can accelerate emissions reductions, stimulate innovation and increase employment, while also maintaining macro-financial stability.
“Our work clearly shows that there is no trade-off between a fast transition and economic growth,” commented Francesco Lamperti, professor of economics at the Sant’Anna School and co-author of the study.
“When accompanied by a coherent set of industrial policies, decarbonisation can generate investment, employment and innovation instead of triggering negative economic shocks.”
Moderate, sector-specific carbon taxes have a role to play – provided they enable governments to support public finances without creating sharp increases in energy costs – while regulatory measures, such as banning the construction of new fossil fuel power plants, and mandating the electrification of key sectors, are described as ‘essential tools’ to guide the transition.
“Regulatory policies work because they set clear, time-bound targets,” Lamperti added. “They show firms the technological direction to follow, lowering uncertainty and accelerating innovation.”
‘Tangible benefits’
According to the study, once such a structure is in place, the economic system ‘spontaneously realigns’ with a rapid decarbonisation pathway.
“Clear standards and targeted bans do not hinder the economy – they guide it,” added Andrea Roventini, professor and director of the Institute of Economics at the Sant’Anna School. “They boost green investment, make the transition more orderly, foster innovation and reduce macro-financial risks, with tangible benefits for firms and workers.”
If carbon taxes are too high, however, this can “destabilise the economy”, Roventini, while taxes that are too low “have negligible effects and fall far short of driving the structural change needed to decarbonise the economy rapidly”. Read more here.
