PETERSON INSTITUTE FORINTERNATIONAL ECONOMICSWORKING PAPER24-4 Energy transition:The racebetween technology and politicalbacklashPierre-Olivier Gourinchas,Gregor Schwerhoff,and Antonio SpilimbergoMarch 2024ABSTRACTThe green transition faces old and new challenges.Old challenges includePierre-Olivier Gourinchasis the economic counselorinsufficient domestic action and challenging international coordination.Newand director of researchchallenges include the quest for energy security and the rising threat ofof the Internationalgeoeconomic fragmentation,the political backlash against climate policies,andMonetary Fund (IMF).Gregor Schwerhoff isa slowing growth prospect.At the same time,techhological progress has beenan economist in the IMFfaster than expected.The success of the green transition depends on the outcomeResearch Department.Antonio Spilimbergo isof the race between technological progress and rising inward-looking policies.deputy director in theEnergy security and green transition are mutually reinforcing provided clearResearch Departmentpolicy directions are given.The challenge is to pursue collaboration to exploitat the IMF and researchfellow of CEPR.technological progress in a world at risk of fragmentation.JEL Codes:038,Q43,Q54Keywords:climate policy,energy security,innovationAuthors'Note:This paper was prepared for a conference on Macroeconomic.Implications of Climate Action on June 5-6,2023,at the Peterson Institute forInternational Economics (PllE).The authors thank Jean Pisani-Ferry,Alain de SerresJames Stock,Florence Jaumotte,and the participants to the PllE conference forhelpful comments and suggestions.The views expressed in this paper are those of theauthor(s)and do not necessarily represent the views of the IMF,its Executive Board,orIMF management.1750 Massachusetts Avenue,NW Washington,DC 20036-1903 USA +1.202.328.9000 www.piie.com1.IntroductionThe 2015 Paris Agreement provided both a shared mitigation goal to keep the rise in meanglobal temperature to less than 1.5C compared to the preindustrial level and a frameworkcentered on voluntary nationally determined contributions (NDCs).The agreement was historicbecause it was signed by almost all countries and provided a clear and monitorable target.However,it also raised domestic and international implementation challenges.The domestic challenges include the need for deep structural change to achieve climateobjectives.Such challenges include the handling of stranded assets in the carbon-intensivesectors as well as sectoral and regional labor market dislocations.The mechanisms by whichstructural changes would be effected-an increase in the relative price of carbon-intensiveenergy and regulatory policies-present challenges of their own,including the impacts of greenpolicies on the macroeconomy,potentially large distributional effects and strong politicalopposition,or effects on the competitiveness of carbon-intensive industries.Macroeconomic estimates of the costs of the green transition vary widely.Someanalysts,such as Jean Pisani-Ferry(2021),warn that the macroeconomic costs of the climatetransition might be quite high.The speed of the needed transformation required to limitcatastrophic climate change,they argue,is bound to have serious and immediate negativeeconomic implications.Others,such as Nicholas Stern(2016),argue that the transition to low-carbon growth will unleash wider economic benefits.In an empirical study of Europe,GilbertMetcalf and James Stock(2023)find that carbon taxation has negligible effects on GDP whilebeing very effective for emission reductions.There are thus economic upside and downsiderisks to modeling estimates:On the upside,future technological breakthroughs might reducemitigation cost.An additional benefit may arise from the reduction in local air pollution,expectedto improve health and increase labor productivity (Graff Zivin and Neidell 2012).Downside risksinclude stranded fossil fuel assets,difficult reallocation of labor across sectors,scarcity of somekey metals and material necessary for the transition,the scale and speed of the requiredinvestments in the transition,increased production costs,and inflation.Focusing more narrowly on the near-term macroeconomic impact of feasibledecarbonization policies,an IMF study using the new Global Macroeconomic Model for theEnergy Transition(GMMET)estimated global annual costs of between 0.15 and 0.25percentage point of global GDP growth and an additional 0.1 to 0.4 percentage point of inflationwhen carbon prices are introduced to reduce emissions by 25 percent by 2030(IMF 2022b).1Because of decreasing international demand for fossil fuels,GDP losses among fossil fuelexporters are higher than the global average.A study using the Climate Policy Assessment Tooland IMF-ENV model estimates global GDP losses of 0.4 percent by 2030 in a scenario that isconsistent with 2C(Black et al.2022).2These relatively modest macroeconomic costs arise in part because most climate policyscenarios are assumed to rely on carbon pricing.Carbon pricing is a first-best policy thataddresses directly the underlying fundamental climate externality:the gap between the privateand social cost of carbon-based economic activity.Carbon pricing helps close that gap while1 The cost is largely borne by the"rest of the world"region in the model.Costs for the United StatesChina,and the European Union are significantly lower.2 Other studies find similarly low cost of climate policy:In a model comparison six different modelsintroduced an economywide carbon tax for the United States of $25 a ton in 2020 and increased it by 5percent annually.In 2030,average cost is 0.3 percent of GDP when the revenue is recycled through labortax cuts and there is an average GDP gain of 0.3 percent when the revenue is recycled through capitalincome tax cuts (IMF 2022b,box 3.1).It is important to keep in mind that the benefits of climate policy faroutweigh these costs (Aldy et al.2021).