MNI: Growth Drag From Net Zero Carbon Goal Can Be Offset-OECD

Net zero carbon emissions can be reached without slowing global economic growth if carbon tax revenue is used to improve labor markets or similar actions taken to boost productivity, the OECD said Thursday in its first-ever long-term projections to include climate action.

Global trend GDP growth is seen slowing in a business-as-usual projection to 2060 as the population ages and labor productivity slows in emerging markets, according to the Paris-based group's report. Across the OECD and G20 trend growth fades to 1.7% from 3% before the pandemic according to the projection, and the typical OECD government faces a fiscal squeeze equal to more than 6 percentage points of GDP.

The “Energy transition scenario” where net zero carbon emissions growth is reached by 2050 would slow global growth by another 0.2pp at first and by 0.6pp by the end of the projection. The OECD also said the goal of preventing further climate change could be reached with carbon taxes around 200 euros by 2026 in all regions, rising to EUR 600 by 2050. That's a big jump from, say, Germany's current levy of 30 euros, whereas in the United States there's still little appetite for such a tax.

Such carbon tax levels would bring in revenue worth more than 3% of GDP through 2030, according to the OECD, which added that using this money to reduce payroll taxes could be a way of winning political support and boosting economies.

"Through positive effects on employment, this tax shift strategy could more than completely offset the decline in output otherwise associated with the first 10 years of the energy transition, leaving living standards in 2035 higher than in the baseline scenario in the euro area and most individual OECD countries," the report said. "Deploying the extra revenue into a combination of higher R&D expenditure and support for childcare would have similar effects."

The projections were also made without estimating likely savings from avoiding further environmental damage.

The burden of tackling climate change could also be eased through 2050 across the OECD through boosting free trade while emerging markets could make up the gap by improving governance to match advanced economies. Experts say the cost of fighting climate change could drive neutral interest rates higher across the globe. (See: MNI INTERVIEW: Era of Shortages To Force Rates Up - Bill White)

Source: OECD