Economic impacts of the green transition

Written by Gregor Erbach and Martin Höflmayr, with Nela Foukalová.

The aim of the European Green Deal is to make Europe the first climate-neutral continent, by 2050, while maintaining economic growth and prosperity. It is Europe’s growth strategy. The transition to a climate-neutral economy with net zero greenhouse gas emissions (GHG) over the course of just 28 years represents an industrial revolution at unprecedented speed, with significant impacts on gross domestic product (GDP), investment, employment, competitiveness, distribution, public finances and monetary stability.

Outlining the expected impact of transition to a climate-neutral economy on economic indicators on the basis of analysis by academics and think-tanks and the Commission’s impact assessment (IA) of the climate target plan, this briefing focuses in particular on economic output (GDP), public debt, competitiveness, labour markets, energy prices, inflation and distributional effects.

Climate mitigation policies affect economic output. According to the IA, transition towards net zero
is expected to have only limited impacts on aggregate output (GDP), but its composition will shift
from consumption towards investment . Moreover, the impacts on sectoral output, investment and
the labour market are likely to be significant, creating a need for policy measures to ensure a just
transition. There is a risk of negative short -term impacts if consumption and production decrease,
e.g. as a result of carbon pricing. However, increased investment, for example in low-carbon technologies, would potentially boost productivity and economic growth in the long term.

Transition to climate neutrality demands solid economic governance to manage the risk to macroeconomic and financial stability. The Commission’s sustainable growth strategy in the European Semester framework is built around four aspects of competitive sustainability. Parliament has called for the addition of a climate indicator and coordinated efforts to implement the digital and environmental transitions, alongside the current approach to fiscal and budgetary policies.

Read the complete briefing on ‘Economic impacts of the green transition‘ in the Think Tank pages of the European Parliament.