July 18, 2022 | News

To maintain the average temperature increase “well below 2°C”, one instrument has been presented as highly efficient and absolutely unavoidable by researchers: the carbon tax. However, with its important cost for carbon-intensive companies, comes a necessary downside: “such a policy may lead to large GDP and employment losses” say researchers Eric Jondeau, Gregory Levieuge, Jean-Guillaume Sahuc, and Gauthier Vermandel, authors of a new study on environmental subsidies. This problem is known as “the transition risk”.

The researchers, some of whom are part of the E4S platform “Systemic Risks and Sustainability”, have just published a new report which offers a very concrete tool to oppose this transition risk: environmental subsidies.

Indeed, in order to reach a net-zero emissions target by 2060, the world economy needs green products and technologies on a large scale, such as carbon dioxide removal, sustainable mobility solutions, and many others. But these technologies and companies are currently too expensive, not yet scalable, or even don’t exist yet. “Public subsidies, financed by a carbon tax, are an efficient instrument to promote firm entry into the abatement goods sector by fostering competition and lowering the selling price of such products” write the authors. 

Thanks to their economic projections, they found that redistributing the carbon tax revenues through lump-sum transfers to households would lead to a cumulative GDP loss of $258 trillion from 2019 to 2060. On the contrary, a subsidy policy would be much more efficient, as it would quickly lower the cost of adopting green production technologies, therefore considerably lowering the GDP loss. 

“Allocating 60% of the revenues of the carbon tax to subsidize new firms and 40% to existing firms in the abatement goods sector would lead to a cumulated GDP loss of $138 trillion from 2019 to 2060” concludes the paper, submitted in SSRN in June. This means a right subsidy policy would reduce the GDP loss by nearly $120 trillion, or approximately $2.9 trillion each year from 2019 to 2060.

“Our intention through this paper is to send a clear message to policy-makers: with the right measures, we can lower the transition risks and accelerate the necessary deployment of green products and technologies” said Eric Jondeau, co-author of the study, E4S researcher, and professor of finance at the University of Lausanne.