Can a Low-Carbon Economy Grow GDP?

In the face of climate change, the most effective way to ensure that greenhouse gas (GHG) emissions are slowed or stopped is by transitioning to a low-carbon economy. From an economic standpoint, however, this switch is no easy feat. A recently published study from the World Bank focuses on two developing countries, Georgia and Armenia, and assesses the feasibility of a clean energy transition that would not cause economic harm. Ultimately, researchers find that these countries do see GDP growth after investing in low-carbon energy sources.

This study acknowledges the fact that policy makers must be able to pinpoint certain energy technologies that have long-term savings that outweigh high introductory prices. The market potential and GHG emissions savings of these technologies are also key factors when considering which of them can be viable in a productive low-carbon economy. To address these questions, the researchers perform three stages of analysis and construct a theoretical framework for transitioning from a carbon-intensive to a low-carbon economy.

The first stage of the analysis covers the development of marginal abatement cost curves, which measure the cost of reducing one unit of pollution for a given energy source. With these curves, the authors are able to compare the net costs of a wide array of energy technologies across residential, commercial and industrial sectors, as well as the potential avoidance of GHG emissions. The second stage involves the use of activity analysis models that consolidate data on cost and energy use characteristics of various technologies. These models then indicate the minimum cost associated with specific mitigation activities and their emissions reductions in at least one economic sector. In the third stage, the costs of GHG mitigation policies are the focus, with the authors using computable general equilibrium (CGE) simulations.

After linking these three stages of analysis into one framework, the study uses the framework to assess technologies that improve energy efficiency in Georgia and Armenia. The approach of combining the three stages of analyses is unique because it allows the researchers to estimate costs across the economy, in addition to GHG mitigation benefits, of certain energy technologies. Both Georgia and Armenia rely on importing energy sources like petroleum and natural gas to meet domestic energy needs. These imports not only account for a full two-thirds of their energy supply but also substantially contribute to total GHG emissions and local air pollution. Due to this dependence on imported energy sources, the researchers see significant room for domestic growth in developing efficient low-carbon energy technologies.

The researchers conclude that GDP growth is indeed possible even when investing in more efficient, low-carbon energy sources. To realize these potential economic benefits, a number of specific technologies were identified as providing abatement potential and improved responses to technology deployment mandates. The authors project that Armenia’s GDP could grow as much as one percent and Georgia’s as much as 0.2 percent while cutting carbon by four percent by 2050. Though the growth in GDP is not large, it is still growth rather than decline, so the study suggests that developing nations would not suffer from such efforts to decrease carbon emissions. Additionally, the reduction in carbon sources could ultimately be more beneficial to these countries than GDP growth because of the increased domestic energy capacity and the global benefits of the emissions reductions in terms of fighting climate change. The findings of this study suggest that a similar framework model could be used to effectively analyze strategies for, and potential benefits of, low-carbon economic growth in many more countries.

Article source: Sue Wing, Ian and Timilsina, Govinda. “Technology Strategies for Low-Carbon Economic Growth: A General Equilibrium Assessment.” Policy Research Working Paper, World Bank Group (2016).

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