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Reducing the Fault Lines of the European Economy through the Low Carbon Transition

Jean-Charles Hourcade, Ruben Bibas, Christophe Cassen

par Arancha Sánchez - publié le


The study analyses how the European Union can resist the temptation of postponing ambitious climate action after the end of the current economic uncertainty and social alarms that fuel self- isolation reflexes. It tries and demonstrates that not engaging ambitious climate policies now would deprive Europe of a lever for a new growth regime, socially and geographically inclusive.

This demonstration retrieves many well-known advocacy elements in favor of ‘green growth’ (negative cost options, deployment of carbon free innovation, or the double dividends of carbon taxes) and resets them within a new mental map of the economics of climate change that incorporates a surprising absentee of the prevailing mental map, finance. In this mental map new opportunities of co-dividend of climate policies can primarily be explored to fill the gap between the propensity to save and the propensity to invest which is one of the major fault lines of the current economic growth engine.
A set of numerical simulations based on a general equilibrium model for 2nd best economies shows why Europe, starting from a stagnation scenario ‘a ? la japonaise’, cannot recover a high and sustainable growth trajectory even by mobilizing optimistic technological assumptions about low carbon options, a redirection of transportation investments and climate friendly fiscal reforms. These simulations demonstrate that the main deadlock comes from the technical and behavioral inertia that slow down the deployment of the benefits of such measures.

It then shows how this deadlock can be overcome by financial instruments apt to reduce the risk weighted capital cost of low carbon investments and to indicate where the savings should go instead of seeking refuge in liquid financial products or real estates. It concludes suggesting some avenues for reframing the European climate policies and their alignment with overall policies aiming at calming down internal tensions in Europe and at fostering a new growth regime.

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