Jean Pisani-Ferry published a paper within the Bruegel and Peterson Institute for International Economics emphasizing the need to rethink climate change policies as part of a structural reform. Evidence lies in the new industrial revolution which is about to come following the substitution of carbon-free energy sources for fossil fuels. There are three main mechanisms behind the green transformation: (1) major lifestyle changes induced by consumers who will adapt their habits to reduce carbon footprints, (2) the redirection of technical progress toward green technologies, currently impeded by a “path dependency” that favors fossil fuel technologies. (3) the substitution of capital for fossil fuels. Clean energy is more capital-intensive than fossil fuels, thus they require a significant initial investment which could potentially slow output growth at the beginning. Eventually, lower operational costs will ensure a more efficient energy system in the years to come.
A mixed policy strategy is essential as carbon pricing alone is insufficient to achieve climate change transition objectives. To ensure effective communication through the carbon market, the price should be set at an excessively high level, hence the need for green subsidies to alleviate this burden. In addition, investors will only start betting on the future of a green economy with more certainty surrounding future carbon prices, hence the need for more ambitious regulation.
The green transition is bound to be fiscally costly. Governments will face direct and indirect costs including infrastructure investments and worker retraining while filling the need to support lower-income households. Mooij and Gaspar (2024) even mention a trilemma between reducing greenhouse gas emissions, satisfying political constraints, and preserving public debt sustainability. Policy choices in different countries revealed policy preferences. Europe tends to rank the reduction in emissions above the two others while the United States favors addressing political constraints.
The transition to carbon neutrality: An unusual type of structural reform | PIIE
