How can EU policy drive the transition to net-zero?

Publishing date
06 March 2023
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 Transitioning away from a fossil fuels-powered economy will dominate the policy agenda for years and there is surprisingly little consensus on what this entails macroeconomically. Top-down analyses based on model simulations regard potential economic consequences as benign, if not positive. Bottom-up assessments are less sanguine.

First, simulations often fail to recognise that whilst the transition to a carbon-neutral economy will boost aggregate investment, it will not increase potential output. The core mechanism for the medium term is to substitute capital for fossil fuels. Investment will add to the demand side, while supply will remain unchanged or contract. Such a supply shock is inflationary.

Second, the transition will not be smooth. As all industrial revolutions, it will involve reallocation of labour and capital, shocks to sectoral profitability and a repricing of assets. Model simulations take away part of the corresponding economic cost, such as the assumption workers laid off by combustion engine manufacturers will easily transition to a new job. But those workers may not possess the required skills and if they do, lack of geographical mobility may hinder reallocation. 

Third, the transition is policy-driven rather than technology-driven. Policy is crucial to trigger the required massive investments. With the remaining distance between policy requirements and pledges (the ambition gap) and by that between pledges and actual policies (the implementation gap), policy action needs to catch up – and fast. 

The lesson from the fuss about globalisation is that potential costs of transformation should not be overlooked. It is high time to remember it.    

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About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

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