## 2050. The findings suggest that upfront green fiscal packages could help smooth the transition

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### Key findings and headline projections
- An initial green investment push combined with initially moderate and gradually rising carbon prices:
  - Raises output on average by about 0.7 percent of baseline global GDP each year for the initial 15 years.
  - Results in small net output losses of about 1 percent of baseline GDP by 2050.
- The estimated transitional GDP costs in this paper lie within the range "0.5–6.5 percent of GDP by 2050", on the lower side of existing estimates.
- The paper assumes net GHG emissions need to decline to zero by mid-century and focuses on reducing net carbon emissions to zero by 2050 in each country/region.
- Net-zero target adoption reported: "58 countries accounting for 53.3% of global GHG emissions have communicated a net-zero target."
- Projected macroeconomic context for assessment: "120 percent cumulative global GDP growth over the next 30 years."

### Modeling approach and scenario design
- Modeling framework:
  - Simulations implemented using the G-Cubed global macroeconomic model (GGG20v154).
  - Model features: ten countries/regions, detailed energy sectors, forward-looking agents, real and nominal rigidities, and fiscal and monetary policies.
  - Focuses on carbon emissions from fossil fuel consumption; forestry, agriculture, methane leaks, industrial process emissions, F-gases, and international aviation/maritime emissions are not covered.
- Scenario design:
  - Comprehensive policy package: carbon pricing complemented by upfront green supply policies—green public investment and subsidies to renewables production—partly financed through debt financing.
  - Comparison scenario: carbon-pricing-only (carbon tax only).
  - Each country/region sets an independent carbon price to reduce emissions to net-zero by 2050, except a selected group of oil-exporting and other economies (OPC) where policies target keeping emissions at current levels.
  - Negative emission technologies are assumed to contribute to reaching net-zero by offsetting remaining emissions in 2050 but are not explicitly modeled.

### Model structure, baseline assumptions, and caveats
- Regions: AUS, CHN, EUW, IND, JPN, OPC, OEC, ROW, RUS, USA.
- Sectors: 20 sectors including Electricity delivery; Gas extraction and utilities; Petroleum refining; Coal mining; Crude oil extraction; Construction; Agriculture and forestry; Durable goods; Nondurable goods; Transportation; Services; and eight electricity generation sectors (Coal, Natural gas, Petroleum, Nuclear, Wind, Solar, Hydroelectric, Other).
- Baseline assumptions:
  - Model solved from 2019; baseline abstracts from the 2020 pandemic fall and assumes rebound to near-2019 levels.
  - United States productivity growth assumed at 1.4 percent every year for all sectors except renewables; renewables assumed to grow at an additional 5 percent (6.4 percent in total).
  - Other economies follow a catchup approach with average catchup rate of 2% per year to the world frontier.
  - Autonomous energy efficiency increases at 1 percent every year for all economies except China and India (3 percent in total for China and India).
- Caveats:
  - Study examines CO2 from fossil energy use only; exclusion of non-CO2 and land-use emissions can alter effective target stringency and abatement costs.
  - Assumes a CO2 price applies to all fossil fuels with revenue used either to reduce the fiscal deficit or fund policies in the combined package (except carbon-tax-only scenario where revenue is lump-sum rebated to households).
  - Results depend on efficient use of carbon revenues and assumed technology availability.

### Baseline emissions projection and drivers
- Baseline global CO2 emissions grow at 1.7 percent and reach 57.5 gigatons by 2050.
- Global growth declines from 3.7 percent in 2021 to 2.1 percent in 2050.
- Population and economic growth are the dominant forces driving emissions; improvements in energy efficiency and some renewable penetration under current policies are insufficient to offset these forces.
- China and India are expected to account for growing shares of carbon emissions though per capita emissions remain relatively small compared with advanced economies.

### Net-zero emissions scenario design (operationalization and assumptions)
- Goal: achieve net-zero carbon emissions by 2050 operationalized as an 80 percent reduction in gross emissions from energy use in 2050 relative to 2018, with the remainder absorbed by expanded natural sinks and negative emission technologies.
- Carbon removal potentials in 2050 (Gt CO2) by technology (ranges preserved):
  - Afforestation and reforestation: 0.5–3.6
  - BECCS: 0.5–5
  - Biochar: 0.5–2
  - Enhanced weathering: 2–4
  - DACCS: 0.5–5
  - Soil carbon sequestration: up to 5
- Summed ranges yield 13.8 Gt CO2; conservative assumption: 80% achievable by mid-century = 11Gt CO2 per year (about 30% of global CO2 in 2018 or 20% of global baseline emissions in 2050).
- Model assumption: all regions reduce emissions by 80% by 2050 relative to 2018, except OPC where emissions remain at 2018 levels by 2050.

### Policy tools modeled and implementation details
- Two policy families:
  - Carbon pricing (carbon taxes or emissions trading).
  - Green supply policies (subsidies, price guarantees, direct public investment).
- Comprehensive policy package design:
  1. Green fiscal stimulus that boosts demand and supply.
  2. Preannounced and gradually phased-in carbon price increases.
  3. Compensatory transfers to households.
- Green supply policies specifics:
  - 80 percent subsidy rate on renewables (solar and wind) production.
  - 10-year green public investment program starting at 1 percent of GDP and linearly declining to zero over 10 years; after 10 years additional public investment maintains the green capital stock.
  - Public investment targeted to renewable and other low-carbon energy sectors, transport infrastructure, and services.
  - Productivity uplift calibration: every 10 percent increase in aggregate infrastructure capital raises private sector productivity by 0.8%; government sustains new infrastructure with 0.2% of GDP spending to offset depreciation.
- Carbon pricing specifics:
  - Carbon price annual growth rate assumed at 7 percent.
  - Needed carbon prices: start between $6 and $20 a ton of CO2 (depending on country), reach between $10 and $40 a ton of CO2 in 2030, and are between $40 and $150 a ton of CO2 in 2050.
  - In the carbon-tax-only scenario the same growth rate is assumed and the initial tax is solved to hit 2050 targets without additional policies.
- Compensatory transfers:
  - About 1/4 of carbon tax revenues are recycled as cash transfers to households.
- Supportive macro policy:
  - The package implies fiscal easing requiring debt financing for the first decade.

### Cost-benefit layers and co-benefits
- Avoided damages from climate change:
  - Simulated using an extension of Hassler et al. (2020) matched to G-Cubed, with medium climate sensitivity and Nordhaus (2010) damage function.
  - Economy-wide productivity improvements from avoided damages imposed equally across sectors except electricity generation.
  - GDP gains from avoided climate damages rise in the 2040s, reaching about 1 percent of baseline GDP.
- Co-benefits from mitigation:
  - Reduced mortality and improved health from less air pollution and reduced road congestion, accident risk, and road damage.
  - Applied Parry, Veung, and Heine (2015) estimates: nationally efficient CO2 price level on average $57.5 a ton (in 2010), ranging between $11 and $85 for countries/regions in the model.
  - Co-benefits per unit of abatement differ across countries and are largest for Russia and China.
  - Immediate co-benefits from better health outcomes and lower health costs on the order of 0.07 percent of global GDP immediately.

### Results of full participation (global outcomes)
- Emission and energy mix outcomes:
  - Global carbon emissions reduced by about 30% from current level to about 25 gigatons by 2030.
  - Global carbon emissions reduced by about 75 percent to about 10 gigatons by mid-century, bringing net emissions to zero around mid-century.
  - Green fiscal stimulus contributes meaningfully but is about 25% of the emission reductions achieved by carbon pricing.
  - Low-carbon share ramps to over 50 percent by 2030 and 80 percent by 2050; coal disappears; shares of natural gas and oil decline to 5 percent and 22 percent, respectively.
- Macroeconomic outcomes:
  - Green fiscal stimulus boosts GDP initially and indirectly by raising productivity in low-carbon sectors; carbon pricing lowers real GDP by increasing energy costs.
  - Green fiscal stimulus effects offset carbon-tax economic costs in initial years, delivering an average net output gain.
  - Later, as carbon prices rise, the drag from carbon taxation leads to small net output losses.
  - Overall simulated impacts on output:
    - Average net output gain of 0.7 percent of baseline GDP over the first 15 years (mostly from green fiscal stimulus).
    - Average net output losses of about 0.7 percent between 2036-2050 and 1 percent by 2050 relative to baseline.
  - GDP gains from avoided climate damages reach about 1 percent of baseline GDP in the 2040s.
- Co-benefits and net outcomes when included:
  - Combining real GDP effects and co-benefits yields net benefits throughout the transition and makes the policy package neutral for global output by 2050.
  - Net benefits: "1 percent of baseline GDP by 2050 and 0 when taking into account co-benefits" (headline transitional GDP costs reported as "1 percent of baseline GDP by 2050 and 0 when taking into account co-benefits").
  - Immediate global employment: "Global employment would be higher by a total of 12 million people on average each year between 2021 and 2027".
  - Employment reallocation: about "2 percent of jobs from high- to low-carbon sectors".
  - Consumption: "Global consumption increases by about 2.5% relative to the baseline over the first ten years, and then slowly declines to the baseline level by 2050."
  - Fiscal: "The debt-to-GDP ratio increases by about 3 percentage points over the first decade, and an additional 1 percentage point until 2050."
  - Co-benefit country estimates: China: "0.7 percent of GDP immediately and 3.5 percent of GDP by 2050"; India: "0.3 percent immediately and 1.4 percent by 2050".
  - Additional combined metric: "0.88 percent by 2035 and 1.24 percent by 2050. Combining real GDP effects and co-benefits" (excerpted aggregated figures).

### Cross-country differences and distributional effects
- Who bears costs:
  - Countries with fast economic and population growth (such as India, and to a lesser extent China), those heavily reliant on high-carbon energy (such as China), and most oil producers bear more significant transition costs.
  - For fast-growing countries, transition costs remain small relative to projected growth over the next 30 years (example: with the policy package India’s GDP would be "277 percent higher in 2050 than today" versus "287 percent" under unchanged policies).
  - Fossil-fuel exporters face the largest economic losses and difficult diversification challenges.
- Regional carbon-tax heterogeneity:
  - Regional carbon-tax range by 2050: from "$48.8 in China to $168.7 in OPC per ton of CO2".
  - Table of CO2 taxes by 2050 (Package / Tax only / Ratio):
    - USA: 129.0 / 137.4 / 1.06
    - JPN: 73.0 / 100.7 / 1.38
    - AUS: 79.0 / 95.4 / 1.21
    - EUW: 76.5 / 83.7 / 1.09
    - OEC: 154.8 / 188.0 / 1.21
    - CHN: 48.8 / 63.5 / 1.30
    - IND: 143.6 / 168.3 / 1.17
    - RUS: 57.8 / 73.6 / 1.27
    - OPC: 168.7 / 168.4 / 1.00
- Regional energy mix timing:
  - Coal disappears in most regions over 2025-2035 except China (around 2045) and Australia (around 2050).
  - Share of low-carbon energy increases significantly in the first ten years in most regions (except OPC).
- Distributional outcomes:
  - Advanced economies often experience smaller economic costs or gains (Europe gains) due to larger existing renewables and higher initial capital stocks.
  - Fossil fuel producers experience large losses; non-participating countries face leakage and spillovers.

### Policy package versus carbon-tax-only scenario
- Tax and abatement differences:
  - With all abatement falling on the carbon tax, required carbon taxes are on average 21 percent higher than in the comprehensive policy package scenario.
  - In the carbon-tax-only scenario global GDP effect is negative throughout the transition, reaching "5 percent of baseline GDP by 2050."
- Investment and sectoral differences:
  - Public investment in the package can boost private investment by "5-10% relative to the baseline over the entire period"; absence of public investment in tax-only scenario removes short-run demand and medium-run productivity gains.
  - Fossil fuels shrink less sharply in the tax-only scenario; renewables and other low-carbon sectors expand less than under the package.
- Model-specific notes:
  - G-Cubed produces larger GDP losses from carbon taxes than many CGE models due to investment adjustment costs and "putty-clay" features that capture stranded assets.
  - Channels not included that could reduce carbon-pricing costs: productive recycling of revenues, reduced informality boosting tax effectiveness, and induced technical change.

### Partial participation scenarios and global implications
- Advanced-economies-only scenario:
  - If only advanced economies implement the package and reduce gross emissions by 80 percent by 2050, global emissions still increase to "48 gigatons by 2050".
  - Advanced economies’ share of global emissions falls to "23 percent in 2050 from 32 percent" under unchanged policies.
  - Leakage: lower demand from advanced economies depresses fossil fuel prices, raising consumption elsewhere and relocating carbon-intensive activities.
- Top-5 participation (USA, EUW, CHN, IND, JPN):
  - These five acting together can reduce global emissions significantly but not enough: global emissions reduced "by about 55 percent from baseline levels and 25 percent from current levels by mid-century."
  - Worldwide participation is required to reach net-zero/Paris targets given projected emissions growth in the rest of the world.

### Policy implications and recommendations
- Combine upfront green fiscal packages with preannounced, gradually rising carbon prices to:
  - Smooth macroeconomic output costs in the short to medium term.
  - Support economic recovery (notably in the Covid-19 crisis context) while putting the global economy on a greener path.
  - Reduce required carbon price levels and associated transitional economic costs by scaling up low-carbon infrastructure and sectors.
- Design carbon pricing at the country/region level when global coordination is limited, while recognizing that broad global participation is necessary to achieve safe temperature outcomes.
- Finance green public investment partly through debt financing in the near term to offset carbon tax financial costs and to catalyze private investment in low-carbon sectors.
- Timing and affordability:
  - The next decade is the best time for governments to invest and borrow given persistently low interest rates for many large emitters; aggressive green investment early is affordable and desirable.
- Equity and adjustment:
  - Large reallocation of jobs (about "2 percent" of jobs) requires reskilling, government support, and careful sectoral targeting of public investment to mitigate social costs.
- Global cooperation:
  - Partial participation is inadequate to meet global targets; bringing emerging and developing economies into a global agreement, alongside technology transfer and significant funding mechanisms, is crucial.

### Conclusion
- An initial green fiscal stimulus paired with gradually rising carbon prices can achieve net-zero emissions by 2050 with moderate transitional GDP costs and short- to medium-run gains in global output and employment.
- Broad global participation remains critical to achieve climate objectives and avoid the worst predicted outcomes of climate change.

*Background paper prepared for the October 2020 IMF World Economic Outlook; JEL Classification Numbers: C51, C53, C54, C55, C68, F41, Q51, Q5; Keywords: Climate Change, Net-Zero Emissions, Green Infrastructure, Macroeconomics, DSGE, CGE, G-Cubed.*

### 2050. The findings suggest that upfront green fiscal packages could help smooth the transition

### 2050. The findings suggest that upfront green fiscal packages could help smooth the transition

### Key findings and headline projections
- An initial green investment push combined with initially moderate and gradually rising carbon prices:
  - Raises output on average by about 0.7 percent of baseline global GDP each year for the initial 15 years.
  - Results in small net output losses of about 1 percent of baseline GDP by 2050.
- The estimated transitional GDP costs in this paper lie within the range "0.5–6.5 percent of GDP by 2050", on the lower side of existing estimates.
- The paper assumes net GHG emissions need to decline to zero by mid-century and focuses on reducing net carbon emissions to zero by 2050 in each country/region.
- Net-zero target adoption reported: "58 countries accounting for 53.3% of global GHG emissions have communicated a net-zero target."
- Projected macroeconomic context: "120 percent cumulative global GDP growth over the next 30 years" is the frame in which the moderate output losses are assessed.

### Modeling approach and scenario design
- Modeling framework:
  - Simulations implemented using the G-Cubed global macroeconomic model.
  - Model features: ten countries/regions, detailed energy sectors, forward-looking agents, real and nominal rigidities, and fiscal and monetary policies.
  - Focus: carbon emissions from fossil fuel consumption; other GHG sources (forestry, agriculture, methane leaks, industrial process emissions, F-gases, international aviation/maritime emissions) are not covered.
- Scenario design:
  - Comprehensive policy package: carbon pricing complemented by upfront green supply policies—green public investment and subsidies to renewables production—partly financed through debt financing.
  - Comparison scenario: carbon-pricing-only (carbon tax only) to highlight differences with the comprehensive policy package.
  - Each country/region sets an independent carbon price to reduce emissions to net-zero by 2050, except a selected group of oil-exporting and other economies where policies target keeping emissions at current levels.
  - Negative emission technologies are assumed to contribute to reaching net-zero by offsetting remaining emissions in 2050 but are not explicitly modeled.

### Main analytical results and interpretation
- Short- and medium-run macroeconomic dynamics:
  - The policy package provides an initial lift to aggregate demand via green fiscal stimulus, supporting recovery in the Covid-19 crisis context and boosting productivity in low-carbon sectors.
  - Green fiscal intervention increases profitability and triggers more private investment in low-carbon sectors and creates more employment in low-carbon sectors, aiding labor reallocation from high-carbon sectors.
- Role of carbon pricing:
  - Preannounced and gradually rising carbon prices are essential to deliver rapid and substantial emissions reductions required for net-zero by 2050.
  - Most emissions reductions are driven by the carbon tax because it raises the cost of energy and strongly incentivizes energy efficiency.
- Comparison to carbon-tax-only scenario:
  - The comprehensive policy package yields more favorable output and employment outcomes than a carbon-tax-only approach.
  - Green supply policies alone (of plausible magnitude) are unlikely to be sufficient to curb emissions to net-zero; carbon pricing remains a critical element.

### Cross-country differences, distributional effects, and co-benefits
- Distribution of transition costs:
  - Countries with fast economic and population growth (such as India, and to a lesser extent China), those with heavy reliance on high-carbon energy (such as China), and most oil producers bear more significant transition costs.
  - For fast-growing countries, transition costs remain small relative to projected growth over the next 30 years.
  - Fossil fuel producers face difficult diversification challenges but may also benefit from global mitigation.
- Co-benefits and avoided damages:
  - Transition benefits include reduced local pollution and mortality rates, and substantial avoided damage from climate change in the second half of the century.
- Global participation constraint:
  - Limiting temperature increases to safe levels requires net-zero strategies by most countries: neither advanced economies nor the largest five economies (US, EU, China, India, and Japan) acting alone would bring global emissions close to net-zero.

### Policy implications and recommendations
- Combine upfront green fiscal packages with preannounced, gradually rising carbon prices to:
  - Smooth macroeconomic output costs in the short to medium term.
  - Support economic recovery (notably in the Covid-19 crisis context) while putting the global economy on a greener, more sustainable path.
  - Reduce required carbon price levels and associated transitional economic costs by scaling up low-carbon infrastructure and sectors.
- Design carbon pricing at the country/region level when global coordination is limited, while recognizing that broad global participation is necessary to achieve safe temperature outcomes.
- Finance green public investment partly through debt financing in the near term to offset carbon tax financial costs and to catalyze private investment in low-carbon sectors.

### Conclusion
- An initial green fiscal stimulus paired with gradually rising carbon prices can achieve net-zero emissions by 2050 with moderate transitional GDP costs and short- to medium-run gains in global output and employment. Broad global participation remains critical to achieve climate objectives and avoid the worst predicted outcomes of climate change.

*Background paper prepared for the October 2020 IMF World Economic Outlook; JEL Classification Numbers: C51, C53, C54, C55, C68, F41, Q51, Q5; Keywords: Climate Change, Net-Zero Emissions, Green Infrastructure, Macroeconomics, DSGE, CGE, G-Cubed.*

### Section V for the complete participation scenario and Section VI for the partial participation

### Section V (complete participation) and Section VI (partial participation) — Extracts from Sections II–III

### II. Achieving Net-Zero Emissions by 2050 — Evidence from existing studies
- At the time of writing, no published economic studies explicitly model worldwide net-zero emissions by mid-century; many studies examine emissions transformation pathways that can be implicitly linked to net-zero around mid-century.
- Clarke et al. (2014) multi-model analysis (31 models, almost 1,200 scenarios) organizes pathways by cumulative CO2-eq concentration (ppm) in 2100: 430-480, 480-530, 530-580, 580-650, 650-720, 720-1000, and above 1000.
  - 430-480 ppm corresponds to an increase of 1.5-1.7°C relative to preindustrial levels.
  - 480-530 ppm corresponds to an increase of 1.7-2.1°C.
- Rogelj et al. (2018) findings referenced:
  - All 1.5°C pathways see global carbon emissions embark on a steady decline to reach (near) net-zero levels around 2050.
  - 1.5°C-low-overshoot pathways achieve net-zero carbon emissions around 2045-2055.
  - 1.5°C-high-overshoot pathways achieve net-zero carbon emissions around 2049-2059.
- Thus available numerical results for achieving 430-480 and 480-530 ppm CO2-eq goals by 2100 can be broadly interpreted as impacts of net-zero emissions around mid-century.

Key takeaways from Clarke et al. (2014):
- Carbon price dynamics:
  - Carbon prices in 2050 (2010 USD per ton of CO2) required to reach 480-530 ppm range from about $40 to $800 across 60 studies (median slightly below $200).
  - For 430-480 ppm, carbon prices vary from about $75 to $950 among 34 studies (median slightly above $200).
- Aggregate mitigation cost ranges:
  - Global GDP loss in 2050 (relative to the baseline) for reaching 480-530 ppm varies from about 0.5 to 6.5% across 44 studies (median about 2.5%).
  - For reaching 430-480 ppm, GDP losses vary from about 1.5-10% among 17 studies (median about 3.5%).
  - Global consumption losses in 2050 for 480-530 ppm vary from about 0.5 to 5.5% across 40 studies (median about 3%).
  - For achieving 430-480 ppm, global consumption losses range from about 1.5 to 10% across 14 studies (median about 3.5%).
  - Majority of studies report 1.5 to 3 times higher global consumption and GDP losses and 2 to 4 times higher abatement costs for scenarios reaching 430-530 ppm compared to the 530-650 ppm range.
- Technology influence:
  - Mitigation costs are heavily influenced by availability, cost, and performance of mitigation technologies; influence increases with mitigation stringency.
  - Most models can produce 550 ppm CO2-eq by 2100 even under limited technology assumptions.
  - Many models cannot solve for 450 ppm CO2-eq by 2100 with limited technology portfolios, particularly when assumptions limit bioenergy with carbon capture and storage.
- Timing and delays:
  - Delaying near-term global mitigation can significantly increase aggregate mitigation costs.
  - If near-term mitigation is limited, costs are lower in the near term but increase more rapidly during the subsequent transition and are higher in the longer term.
  - Reasons: delayed mitigation requires deeper long-run reductions and leads to larger lock-in in carbon infrastructure.
- Fragmentation:
  - Fragmented action can increase global mitigation costs via misallocation, emissions leakage, and trade-related spillovers.
  - Adverse effects depend on policy type and mitigation stringency; smaller proportion of global emissions included raises costs and difficulty of meeting long-term goals.
  - When some countries act earlier, increased costs of fragmented action fall on early actors; aggregate costs can also increase for late entrants.

### III. Modeling Approach and Baseline Projections — G-Cubed model specification and baseline assumptions

H3: A. The Modeling Approach — G-Cubed model and modifications
- Core model: G-Cubed model (McKibbin and Wilcoxen 1999, 2013).
- Key changes implemented for this project compared to Liu et al (2020):
  1. Database significantly updated to include data from GTAP10 and the latest data from the IMF International Financial Statistics, the World Bank World Development Indicators, the OECD Economic Outlook, the United Nations World Population Prospects 2019, and the US Energy Information Administration.
  2. The gas extraction and gas utilities sectors were merged into one gas sector.
  3. A new sector for construction was added to the model.
  4. A capacity for modeling government infrastructure investment following Calderon et al. (2015) was implemented; in particular green infrastructure projects were incorporated.
- Model version: GGG20v154 with 10 regions and 20 sectors (regions listed in Table 1; sectors listed in Table 2).

Regions (Region Code — Region Description)
- AUS — Australia
- CHN — China
- EUW — Europe
- IND — India
- JPN — Japan
- OPC — Oil-Exporting Developing Countries
- OEC — Rest of the OECD
- ROW — Rest of the World
- RUS — Russian Federation
- USA — United States

Regional coverage details:
- (a) Europe: Germany, France, Italy, Spain, Netherlands, Belgium, Bulgaria, Croatia, Czech Republic, Estonia, Cyprus, Lithuania, Latvia, Hungary, Malta, Poland, Romania, Slovenia, Slovakia, Luxemburg, Ireland, Greece, Austria, Portugal, Finland, United Kingdom, Norway, Sweden, Switzerland, Denmark
- (b) Rest of the OECD: Canada, New Zealand, Iceland, Liechtenstein
- (c) Oil-Exporting Developing Countries: Ecuador, Nigeria, Angola, Congo, Iran, Venezuela, Algeria, Libya, Bahrain, Iraq, Israel, Jordan, Kuwait, Lebanon, Palestinian Territory, Oman, Qatar, Saudi Arabia, Syrian Arab Republic, United Arab Emirates, Yemen
- (d) Rest of the World: All countries not included in other groups.

Sectors in the model (Number — Sector Name — Note where present)
1. Electricity delivery — Energy Sectors Other than Generation
2. Gas extraction and utilities
3. Petroleum refining
4. Coal mining
5. Crude oil extraction
6. Construction — Goods and Services
7. Other mining
8. Agriculture and forestry
9. Durable goods
10. Nondurable goods
11. Transportation
12. Services
13. Coal generation — Electricity Generation Sectors
14. Natural gas generation
15. Petroleum generation
16. Nuclear generation
17. Wind generation
18. Solar generation
19. Hydroelectric generation
20. Other generation

- The G-Cubed sectors 1-12 are aggregated from the 65 sectors of GTAP 10; electricity is disaggregated into delivery (sector 1) and 8 generation sectors (13-20).
- CO2 emissions are measured through the burning of fossil fuels in energy generation.
- Production structure illustrated in Figure 1 (referenced in source).

Key features of the standard G-Cubed model highlighted:
1. Full accounting for stocks and flows of physical and financial assets; intertemporal budget constraints for households, firms, government, and countries; long-run stock equilibrium adjustments via asset prices; long adjustment periods possible (over much of a century).
2. Use of money issued by central banks for all transactions; central banks set short term nominal interest rates via Henderson-McKibbin-Taylor monetary rules approximating actual regimes; these rules tie down long-run inflation and allow short-term policy adjustments.
3. Nominal wage stickiness with adjustment over time based on country-specific labor contracting; firms hire until marginal product equals real wage in sector output price terms; excess labor enters unemployment pool; unemployment or excess demand causes nominal wage adjustments in the long run; short-run unemployment can arise from structural supply shocks or aggregate demand changes.
4. Rigidities slow movement between equilibria, including nominal stickiness, lack of complete foresight, sector-specific investment adjustment costs, and monetary/fiscal rule constraints; short-term adjustment can differ substantially from long-run equilibrium outcomes; focus on short-run rigidities important for initial decades of demographic change.
5. Heterogeneous households and firms: within each sector and country there is a mixture of two types of consumers and two types of firms—one group uses forward-looking expectations and the other follows rules of thumb optimal in the long run but not necessarily short run.
6. Fiscal rule specifics in this paper's model version:
  - Assumed an exogeneous budget deficit (budget deficits exogenously changed according to revenue from carbon taxes or lost through subsidies or infrastructure spending changes).
  - Lump sum taxes on households adjusted to ensure fiscal sustainability.
  - In the long run changes in interest servicing costs from exogenously imposed revenue or expenditure changes are offset through lump sum taxes on households.
  - Level of government debt can permanently change in the long run with change in debt to GDP equal to the ratio of the long run fiscal deficit to the long run real growth rate.

Caveats noted:
- Study examines impact of reducing CO2 from fossil energy use only; countries with significant baseline shifts in land-use emissions, non-CO2 GHGs, etc., could face different effective target stringency and abatement costs.
- Assumes countries achieve net-zero mainly with a stylized policy: a CO2 price that applies to all fossil fuels with revenue either used to reduce the fiscal deficit or to fund other policies in the combined policy package.
  - Footnote: The exception is the carbon tax only scenario where tax revenue is lump sum rebated to households.
- If countries adopt much less efficient policies or use carbon revenue differently, macroeconomic outcomes would differ.

H3: B. The Baseline Scenario — key assumptions and projections inputs
- Baseline does not assume Paris commitments are necessarily implemented; relies on projections of population, sectoral productivity growth rates by sector and country, and energy efficiency improvements based on historical experience.
- Key inputs: initial dynamics from 2018 to 2019 and subsequent projections from 2019 onwards for sectoral productivity growth rates by sector and country.
- Model solved from 2019 with constants adjusted to replicate the 2019 database.
- Sectoral output growth from 2019 onwards driven by labor force growth and labor productivity growth.

Labor force and productivity assumptions:
- Labor force: working-age population projections from the UN Population Prospects 2019 used to calculate economy-wide labor growth rates for each region.
- Labor productivity:
  - United States assumed as world frontier in productivity in each sector, with productivity increasing at a constant rate of 1.4 percent every year for all sectors (the average for US productivity growth) except renewable sectors.
  - Renewable sectors assumed to grow more quickly at an additional rate of 5 percent (6.4 percent in total).
  - For all other economies, sectoral productivity projections follow the Barro approach with average catchup rate of individual countries to the worldwide productivity frontier of 2% per year.
  - Groningen Growth and Development database used to estimate initial productivity levels; ratios to US equivalent used to generate catchup-based long-term sectoral productivity growth rates.
  - Catchup rates vary over time to reflect expected faster or slower convergence and are calibrated to replicate recent growth experiences.

Autonomous energy efficiency assumptions:
- Autonomous energy efficiency increases at a constant rate of 1 percent every year for all economies except China and India.
- For China and India, an additional rate of 2 percent is assumed (3 percent in total), reflecting faster energy efficiency gains due to technological catchup.

Pandemic and baseline simplifications:
- Baseline abstracts from the 2020 pandemic-related fall in output and emissions, assuming subsequent rebound brings 2021 output and emissions close to 2019 levels (latest calibration year).
- This simplification expected to be of minor significance for medium- and long-run results.
- Note: Covid-19 could cause behavioral changes affecting emissions (examples given: reduced use of public transportation and greater reliance on individual vehicles; greater use of digital communication reducing commuting and travel).
- In line with this, baseline assumes (somewhat above) trend increases in energy efficiency.

- The baseline projects global carbon emissions to continue rising at an average annual pace of

*Excerpted from the source document: wpiea2021195-print-pdf — Sections II–III (Section V complete participation and Section VI partial participation referenced).*

### 1.7 percent and reach 57.5 gigatons by 2050 (Figure 2).  Improvements in energy efficiency

### wpiea2021195-print-pdf - 1.7 percent and reach 57.5 gigatons by 2050 (Figure 2). Improvements in energy efficiency

### Baseline projections and drivers of emissions
- Baseline global CO2 emissions grow at 1.7 percent and reach 57.5 gigatons by 2050 (Figure 2).
- Global growth declines from 3.7 percent in 2021 to 2.1 percent in 2050.
- Population and economic growth are the dominant forces driving emissions; improvements in energy efficiency and some renewable penetration under current policies are insufficient to offset these forces.
- China and India are expected to account for growing shares of carbon emissions, although their per capita emissions remain relatively small compared with advanced economies.
- The baseline is consistent with IPCC (IPCC 2014, 2018a) projections that, under unchanged policies, carbon emissions will continue growing strongly and lead to temperature increases well above Paris Agreement targets.

### Net-zero emissions scenario design (Goal and assumptions)
- Goal: achieve net-zero carbon emissions by 2050 operationalized as an 80 percent reduction in gross emissions from energy use in 2050 relative to 2018, with the remainder absorbed by expanded natural sinks and negative emission technologies.
- G-Cubed model limitations: includes fossil fuels and renewable sectors but no carbon removal technologies.
- Carbon removal potentials in 2050 (Gt CO2) by technology (ranges preserved):
  - Afforestation and reforestation: 0.5–3.6
  - BECCS: 0.5–5
  - Biochar: 0.5–2
  - Enhanced weathering: 2–4
  - DACCS: 0.5–5
  - Soil carbon sequestration: up to 5
- Averaging ranges and summing yields 13.8 Gt CO2; conservative assumption: 80% achievable by mid-century = 11Gt CO2 per year (about 30% of global CO2 in 2018 or 20% of global baseline emissions in 2050).
- Model assumption: all regions reduce emissions by 80% by 2050 relative to 2018, except OPC (selected oil-exporting and other economies) where emissions remain at 2018 levels by 2050.

### Policy tools modeled
- Two policy families:
  - Carbon pricing (carbon taxes or emissions trading) to internalize the emission externality.
  - Green supply policies (subsidies, price guarantees, direct public investment) to expand low-carbon energy supply.
- Interactions:
  - Carbon pricing raises relative price of high-carbon energy and incentivizes energy efficiency.
  - Green supply policies reduce low-carbon costs and reallocate activity but may not incentivize energy efficiency and can increase energy consumption due to intermittency.
- Main comprehensive policy package (designed to support Covid-19 recovery and inclusive transition):
  1. Green fiscal stimulus that boosts demand and supply.
  2. Preannounced and gradually phased-in carbon price increases.
  3. Compensatory transfers to households.
- Comparison scenario: benchmark using solely country-specific carbon pricing to achieve net zero by 2050.

### Implementation details of policy layers
- Green supply policies:
  - 80 percent subsidy rate on renewables (solar and wind) production.
  - 10-year green public investment program starting at 1 percent of GDP and linearly declining to zero over 10 years; after 10 years additional public investment maintains the green capital stock.
  - Public investment targeted to renewable and other low-carbon energy sectors, transport infrastructure, and services (to capture higher energy efficiency of buildings).
  - Productivity uplift calibrated to Calderon, Moral-Benito and Serven (2015): every 10 percent increase in aggregate infrastructure capital raises private sector productivity by 0.8%; government sustains new infrastructure with 0.2% of GDP spending to offset depreciation.
  - Sectoral allocation of productivity gains is specified so aggregate gains match Calderon et al. (2015); Table 4 lists share of total productivity gains by sector and country (values preserved in model).
- Carbon pricing:
  - Carbon prices calibrated to achieve the 80 percent emissions reduction by 2050 after accounting for green stimulus and other policies.
  - Assumed carbon price annual growth rate: 7 percent.
  - Needed carbon prices: start between $6 and $20 a ton of CO2 (depending on country), reach between $10 and $40 a ton of CO2 in 2030, and are between $40 and $150 a ton of CO2 in 2050.
  - In the carbon-tax-only scenario, the same growth rate is assumed and the initial tax is solved to hit 2050 targets without additional policies.
- Compensatory transfers:
  - About 1/4 of carbon tax revenues are recycled as cash transfers to households to protect purchasing power.
- Supportive macroeconomic policy:
  - The package implies fiscal easing requiring debt financing for the first decade.

### Cost-benefit analysis layers
- Two additional benefit channels included:
  - Avoided damages from climate change:
    - Simulated with an extension of Hassler et al. (2020) integrated assessment model matched to G-Cubed, using medium climate sensitivity and Nordhaus (2010) damage function.
    - Economy-wide productivity improvements from avoided damages imposed equally across sectors except electricity generation in G-Cubed.
  - Co-benefits from mitigation policies:
    - Reduced mortality and improved health from less air pollution and reduced road congestion, accident risk, and road damage.
    - Applied Parry, Veung, and Heine (2015) estimates of nationally efficient CO2 price levels to internalize domestic non-climate external costs.
    - Nationally efficient CO2 price level: on average $57.5 a ton (in 2010), ranging between $11 and $85 for countries/regions in the G-Cubed model.
    - Co-benefits per unit of abatement differ across countries and are largest for Russia and China.

### Results of full participation scenarios — Global results
- Emission reductions under the comprehensive policy package:
  - Global carbon emissions reduced by about 30% from current level to about 25 gigatons by 2030.
  - Global carbon emissions reduced by about 75 percent to about 10 gigatons by mid-century, bringing net emissions to zero around mid-century.
  - The green fiscal stimulus contributes meaningfully but is about 25% of the emission reductions achieved by carbon pricing.
  - Energy mix shifts: low-carbon share ramps to over 50 percent by 2030 and 80 percent by 2050; coal disappears; shares of natural gas and oil decline to 5 percent and 22 percent, respectively.
- Economic costs and gains:
  - Green fiscal stimulus boosts GDP initially and indirectly by raising productivity in low-carbon sectors; carbon pricing lowers real GDP by increasing energy costs.
  - Green fiscal stimulus effects offset carbon-tax economic costs in initial years, delivering an average net output gain.
  - Later, as carbon prices rise, the drag from carbon taxation leads to small net output losses.
  - GDP gains from avoided climate damages are relatively small over most of the horizon but rise in the 2040s, reaching about 1 percent of baseline GDP.
  - Overall simulated impacts on output:
    - Average net output gain of 0.7 percent of baseline GDP over the first 15 years (mostly from green fiscal stimulus).
    - Average net output losses of about 0.7 percent between 2036-2050 and 1 percent by 2050 relative to baseline.
    - Note: a transitional output cost of 1 percent of GDP is moderate compared with an expected cumulative increase in real GDP of 120 percent over the same period in the baseline.
- Co-benefits magnitude:
  - Immediate co-benefits from better health outcomes and lower health costs on the order of 0.07 percent of global GDP immediately.

*Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021195-print-pdf.pdf*

### 0.88 percent by 2035 and 1.24 percent by 2050. Combining real GDP effects and co-benefits

### wpiea2021195-print-pdf - 0.88 percent by 2035 and 1.24 percent by 2050. Combining real GDP effects and co-benefits

### Key findings and headline results
- Net benefits: Combining real GDP effects and co-benefits yields net benefits throughout the transition and makes the policy package neutral for global output by 2050.
- Short-run transitional costs: The estimated transitional GDP costs are "1 percent of baseline GDP by 2050 and 0 when taking into account co-benefits".
- Comparison with literature: These transitional costs are within the range "0.5-6.5percent of GDP by 2050", on the lower side.
- Co-benefit estimates (selected countries): China: "0.7 percent of GDP immediately and 3.5 percent of GDP by 2050"; India: "0.3 percent immediately and 1.4 percent by 2050".
- Emissions and carbon prices: Carbon tax rates differ across regions, ranging from "$48.8 in China to $168.7 in OPC per ton of CO2 by 2050".
- Policy mix advantage: A preannounced and gradually phased-in carbon pricing combined with an initial green fiscal stimulus can be growth-friendly in the short term and reduce transitional output costs.

### Macroeconomic impacts — GDP, investment, employment, consumption, fiscal
- GDP and transition:
  - The policy package boosts output over more than a decade and becomes neutral for global output by 2050 when co-benefits are included.
  - The policy package reduces transitional output costs relative to a carbon-tax-only approach by combining carbon pricing with green infrastructure stimulus.
- Private investment:
  - Reallocation of investment from high-carbon sectors (fossil fuel energy, manufacturing) to low-carbon sectors (renewables, other low-carbon energy, services).
  - Global private investment contracts sharply because the carbon tax acts as a negative wealth shock, reduces long-term desired capital stock, and expanding low-carbon sectors are less capital intensive.
  - Renewable sector expansion is constrained by capital adjustment costs and the renewable sector’s smaller size relative to fossil fuels.
  - Green infrastructure investment and subsidies play a key role in boosting private investment in low-carbon sectors; the carbon tax more effectively reduces private investment in high-carbon sectors.
- Employment:
  - Initial employment boost due to higher output and greater labor intensity in expanding low-carbon activities.
  - "Global employment would be higher by a total of 12 million people on average each year between 2021 and 2027", followed by a small decline relative to baseline during the transition; employment keeps growing strongly throughout the period.
  - Policy entails reallocation of about "2 percent of jobs from high- to low-carbon sectors", requiring reskilling and support.
  - Long run: full employment is restored by assumption through real wage adjustment, but sectoral employment distribution is permanently changed.
- Private consumption:
  - "Global consumption increases by about 2.5% relative to the baseline over the first ten years, and then slowly declines to the baseline level by 2050."
  - Most regions gain higher consumption; fossil fuel exporters experience consumption losses due to export revenue declines.
  - Forward-looking consumers raise consumption because long-run real interest rates decline below baseline (after an initial rise); backward-looking consumers increase consumption in the first ten years due to higher real wages, firm dividends, and government transfers, then consumption starts to decrease after ten years.
- Fiscal costs and public debt:
  - Initial worsening of the fiscal balance requiring debt financing because carbon revenues are smaller than initial spending on infrastructure, subsidies, and transfers.
  - "The debt-to-GDP ratio increases by about 3 percentage points over the first decade, and an additional 1 percentage point until 2050."
  - Thereafter carbon tax revenues broadly finance additional green infrastructure and transfers; higher productivity later helps reduce debt relative to no-action scenarios.
  - Long-run projected net output gains (IMF (2020) using Barrett’s (2021) IAM): range between "4.7 percent of global GDP with the Nordhaus damage function and 13.2 percent of global GDP with a more severe damage function from Burke Hsiang Miguel (2015) by 2100."

### Cross-country differences and distributional effects
- Carbon tax heterogeneity:
  - Regional carbon-tax range by 2050: from "$48.8 in China to $168.7 in OPC per ton of CO2".
  - Reasons for differences: varying baselines, differing shares of coal, energy structure, carbon intensity, baseline fossil fuel prices, sectoral production/consumption patterns, and timing of coal depletion.
  - Example: China’s tax rate is low because China runs out of coal around 2045 and emissions fall quickly.
- Energy mix and timing:
  - Share of low-carbon energy significantly increases in the first ten years in most regions (except OPC); coal disappears in most regions over 2025-2035 except China (around 2045) and Australia (around 2050).
- Regional GDP impacts:
  - Green investment impact by 2030 ranges "from 1-6% across regions (excluding OPC) relative to the baseline".
  - Carbon tax impact ranges "from -0.8% to -7.8% by 2030, and from -1.5 to -18% by 2050".
  - Advanced economies often experience smaller economic costs or gains (Europe gains) due to larger existing renewables and higher initial capital stocks.
  - Fast-growth countries and many oil producers (India, China, oil exporters) experience larger costs from forgoing cheap energy; example: with the policy package India’s GDP would be "277 percent higher in 2050 than today" versus "287 percent" under unchanged policies.
- Co-benefits and net outcomes:
  - Combining real GDP effects and co-benefits yields net benefits throughout the transition for China and smaller transitional costs for India, Russia, and others.
  - Some countries with higher transitional costs (e.g., India) also stand to gain substantial avoided damages later in the century; IMF (2020) simulations show that for India net gains from mitigation relative to inaction could be "up to 60–80 percent of GDP by 2100."
- Fossil-fuel exporters:
  - Face the largest economic losses from global low-carbon transition due to falling global demand and fiscal revenue losses; require difficult restructuring and diversification.

### Policy package versus carbon-tax-only scenario
- Tax levels and abatement:
  - With all abatement falling on the carbon tax, required carbon taxes are higher; reducing gross emissions by 80 percent by mid-century requires carbon taxes "on average 21 percent higher than in the comprehensive policy package scenario."
  - Table of CO2 taxes by 2050 (Package / Tax only / Ratio):
    - USA: 129.0 / 137.4 / 1.06
    - JPN: 73.0 / 100.7 / 1.38
    - AUS: 79.0 / 95.4 / 1.21
    - EUW: 76.5 / 83.7 / 1.09
    - OEC: 154.8 / 188.0 / 1.21
    - CHN: 48.8 / 63.5 / 1.30
    - IND: 143.6 / 168.3 / 1.17
    - RUS: 57.8 / 73.6 / 1.27
    - OPC: 168.7 / 168.4 / 1.00
- Macroeconomic outcomes:
  - Global GDP: in the carbon-tax-only scenario, effect on global GDP is negative throughout the transition, reaching "5 percent of baseline GDP by 2050."
  - Investment: public investment in the package can boost private investment by "5-10% relative to the baseline over the entire period"; absence of public investment in tax-only scenario removes short-run demand and medium-run productivity gains.
  - Sectoral effects: huge differences in renewables, other low-carbon, and services between scenarios; fossil fuels shrink less sharply in the tax-only scenario.
- Model-specific mechanisms and caveats:
  - G-Cubed produces larger GDP losses from carbon taxes than many CGE models due to modeling of investment with quadratic adjustment costs and "putty-clay" features that capture stranded physical assets.
  - G-Cubed also implies relatively small carbon prices to achieve abatement because of investment-induced GDP reductions and estimated elasticities of substitution that reflect historical ease of substitution.
  - Channels not included in G-Cubed that could reduce carbon-pricing costs: productive recycling of revenues, reduced informality boosting tax effectiveness, and induced technical change.

### Partial participation scenarios and global implications
- Advanced-economies-only scenario:
  - If only advanced economies implement the package and reduce gross emissions by 80 percent by 2050, global emissions still increase to "48 gigatons by 2050", well above current levels.
  - Advanced economies’ share of global emissions falls to "23 percent in 2050 from 32 percent" under unchanged policies.
  - Leakage effects: lower demand from advanced economies depresses fossil fuel prices, raising consumption elsewhere; carbon-intensive activities may relocate to non-participating countries.
  - Non-participating countries: fossil-fuel exporters suffer GDP losses; non-participating non-fossil-exporters may experience mixed outcomes due to capital flows; overall spillovers can cause GDP losses for many non-participants.
- Top-5 participation (USA, EUW, CHN, IND, JPN):
  - These five acting together can reduce global emissions significantly but not enough to meet Paris-level targets: global emissions reduced "by about 55 percent from baseline levels and 25 percent from current levels by mid-century."
  - Worldwide participation is required to reach net-zero/Paris targets given projected emissions growth in the rest of the world.

### Policy implications and recommendations
- Policy mix matters: Combining phased-in carbon pricing with an initial green fiscal stimulus minimizes transitional output costs and can boost growth and employment in the short run.
- Timing and affordability: The next decade is the best time for governments to invest and borrow given persistently low interest rates for many large emitters; aggressive green investment early is affordable and desirable.
- Phasing carbon prices: As recovery takes hold, it is important to start phasing-in increases in carbon prices because net zero is unlikely without carbon pricing.
- Equity and adjustment policies: Large reallocation of jobs (about "2 percent" of jobs) requires reskilling, government support, and careful sectoral targeting of public investment to mitigate social costs.
- Global cooperation: Partial participation is inadequate to meet global targets; bringing emerging and developing economies into a global agreement, alongside technology transfer and significant funding mechanisms, is crucial.

*Source: G-Cubed model simulations version GGG20v154 and IMF staff calculations, as presented in the supplied content.*

### REFERENCES

### wpiea2021195-print-pdf - REFERENCES

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*Source: wpiea2021195-print-pdf - REFERENCES*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021195-print-pdf.pdf_