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Climate Change and Productivity: Exploring the Links

Executive summary

Productivity measurement and analysis needs to be broadened

Climate change is already having impacts on economic performance, including on GDP, labour and multi-factor productivity (MFP), and will have even greater impacts in the future. But while many studies have explored the economy-wide impacts of climate change on growth and productivity, there has been less focus on the nature and size of the various – current and future – impacts of climate change on a range of other productivity measures.

The analysis of climate change requires a wider set of measures than standard productivity analysis, i.e., not just measures of labour productivity and MFP. It is important to consider impacts of climate change on productivity measures that are closely associated with economic performance (e.g., labour and multi-factor productivity, either adjusted or not adjusted for the costs of environmental pollution, or environmental externalities). However, it is crucial to also explore productivity measures that are associated with the physical and natural processes linked to climate change. This includes the productivity of materials use (i.e. the use of fossil fuels, metals, biomass and non-metallic minerals), the efficiency of energy use, the carbon intensity of economies, and the productivity of natural capital, including subsoil assets, non-agricultural land, forests, freshwater resources, etc. While much of the debate on productivity and climate change has focused on economic performance, improving productivity in the use of materials, energy and natural capital is central to achieving net zero and requires much greater emphasis in the debate on climate change and in work on productivity.

This will require improvements in the current – incomplete and inadequate – state of productivity measurement, and its use in analysis and policy. While credible alternatives and complements to GDP and standard measures of productivity have been available for some time, including productivity measures adjusted for environmental pollution, as well as measures of natural capital, these have not yet been sufficiently developed and integrated to become the default for work in this area. Particularly important are the development of statistics on natural capital and their integration in the policy making process; the use of productivity measures that adjust for environmental pollution; greater attention for the full range of productivity measures, including materials, energy and CO2 emissions productivity, rather than only measures of labour and multi-factor productivity; and a greater focus on wellbeing, rather than just GDP. Some of these areas still require further methodological development. However, not integrating them in the current policy debate on climate change risks biased and incomplete evidence for decision makers.

Productivity growth in using greenhouse gases and natural resources needs to accelerate

While the past decades have seen substantial productivity growth in the use of certain natural resources in advanced economies, including energy, materials and CO2 emissions, the current pace of decoupling of GDP from the use of materials and CO2 emissions is much below of what is required to meet net zero climate goals by 2050. Productivity growth in countries that have already achieved high productivity levels in CO2 emissions and the use of materials will still need to double or treble compared to growth rates achieved over the past decades, whereas countries with lower productivity levels will need to achieve even higher growth rates in the future. Improving carbon emissions and materials productivity will therefore require much greater emphasis in policy strategies aiming for net zero.

Better understanding the drivers of such productivity growth could benefit from more productivity research focused on resources, materials and natural capital and greater engagement of productivity analysts in such research. Standard measures of productivity also do not yet demonstrate a transition to more sustainable growth, as multi-factor productivity – the combined efficiency of factors inputs – has been falling at the global level, and as the transition to net zero will likely require considerable investment in fixed capital, and not just intangible and human capital. With global material use continuing to grow, growth is clearly not yet becoming green or “weightless”.

The costs of climate change have been underestimated and the costs of policy overestimated

Mainstream economic modelling studies have long suggested that the long-term impacts of climate change on growth and productivity would be relatively small. However, other studies question those findings and their underlying assumptions and point to much larger, potentially devastating, impacts on growth and productivity, including impacts linked to the risk of the climate passing so-called “tipping points”, e.g. the disintegration of the Greenland ice sheet or the saturation of the oceans as a carbon sink.

There are also considerable uncertainties about the impact of policies to address climate change on productivity. Many mainstream economic studies suggest that policies to address climate change could have a relatively high cost and a negative impact on growth and productivity, in particular in the context of scenarios aimed at limited warming to 1.5°C. However, such studies may well overestimate the long-term costs of policy action to address climate change on growth and productivity, in ignoring the dynamic effects of global policy action on innovation, including the impacts of economies of scale and learning-by-doing, as illustrated by the rapidly falling costs of key green technologies such as solar energy, batteries and electric vehicles. Policies that encourage investments in innovation and technology to address climate change could support, rather than hold back, productivity and growth.

If there is no long-term trade-off between growth and climate, economic studies that have underestimated the costs of climate change and overestimated the costs of policy action may have held back the case for economically and socially positive policy action to address climate change. Statements that climate change policies will have a negative impact on economic productivity measures also have little meaning unless they are compared with the counterfactual of no policy action, and the devastating effects on economy and society that would result.

However, it is clear that there are challenges in the timing of long-term benefits versus short-term costs, with some important costs being incurred before the emergence of tangible benefits. Addressing this will require much attention for the distributional impacts of climate policy and a strong focus on ensuring potential short-term benefits for consumers and businesses involved in the transition, e.g. through support for the roll-out of cost-reducing energy technologies, such as renewables, heat pumps, insulation and energy efficient applications. This is also why cost-reducing innovation policies are such a crucial part of the policy mix, requiring greater attention. Moreover, achieving the benefits of climate policy action will require a global effort to reduce the damages of climate change and maximise the opportunities linked to rapid innovation.

Policy making needs to look beyond GDP at a wider range of measures

A key question is also whether addressing climate change is compatible with further economic growth, e.g., in the context of so-called “green growth” or whether “degrowth” is the way forward. Proposals for degrowth, that suggest a significant reduction in GDP in advanced economies, do not provide an effective or efficient way of dealing with climate change, however. This is because most of the growth in greenhouse gas emissions is occurring in emerging economies and as cuts in GDP are a less efficient way of reducing emissions than already available technologies. However, policies and approaches that address demand and reduce consumption and waste are of great importance in an overall strategy for climate change.

At the same time, continuing to focus economic policies primarily on standard measures of GDP, labour and multifactor productivity growth is no longer appropriate. In the presence of large environmental externalities and the rapid depletion of natural capital, it is essential to pay much more attention to environmentally adjusted measures of GDP and productivity, as well as measures of natural capital and wellbeing, in policy discussions related to climate change and productivity.

Policy action should aim at meeting net zero while supporting productivity and wellbeing

The main policy challenge is how to design climate change policies to meet the global objective of net zero – where it will be essential to meet this goal in the shortest possible timeframe to reduce the overall volume of greenhouse gas emissions – while also supporting productivity and wellbeing. To meet this challenge, governments will need to shape markets for low-carbon products and services, e.g., through regulation and standards, and give direction to technological change to accelerate low-carbon innovation and foster the uptake and diffusion of low-carbon technologies. Innovation policies are particularly important, as they can help bring down the cost of climate policy action, and simultaneously support productivity growth.

Climate change policies that use market mechanisms and the forces of competition, where possible, are also important, e.g., in adjusting for environmental externalities by carbon taxation, emissions trading and the removal of fossil fuel subsidies. Climate change policies will also need to facilitate the necessary structural change, and provide for a fair transition, both for social groups that may be most affected in the process, and for developing countries that will be most affected by climate change and that will require further economic development.

Economists and productivity analysts need to engage more with climate change

A final conclusion of this paper is that economists in general, and those working on productivity in particular, should engage much more with the debate on climate change. A 2019 study found that only 57 of some 77,000 published articles in top general interest economics journals involved the subject of climate change. Economists are also insufficiently engaged with the Intergovernmental Panel on Climate Change (IPCC), partly because not many economists focus on climate change. Recent studies have argued that it is time for economics and economists to engage and that economics must change to respond to the challenge of climate change, including in going beyond their basic economic message on the importance of carbon pricing. Such engagement would require much greater cooperation with other disciplines, including climate science. National productivity commissions and other analysts focusing on productivity growth may also want to broaden their monitoring, reporting and analysis to a wider set of productivity measures.



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D. Pilat (2024) Climate Change and Productivity: Exploring the Links, Productivity Insights Paper No. 032, The Productivity Institute.