While green government spending should lift GDP, higher carbon prices--high enough to meet 2030 climate targets--could prove to be an economic shock for some countries, said S&P Global Ratings in a new report.

While environmental policies tend to have a small overall economic impact, the costs of the transition to green growth may become more material if countries start implementing the required policies to reach their ambitious climate pledges, added the report titled "Green Spending Or Carbon Taxes (Or Both): How To Reach Climate Targets, And Grow Too, By 2030?"

So far, the US and EU have added green spending of about 1.4% and 3.9% of 2019 GDP to their Covid-19 recovery plans. With fiscal multipliers of 1.4-1.6, this could add up to 2 percentage points to US GDP and 6.6 points to EU GDP by 2030.

"Our carbon tax scenario shows that a sharp rise in the price of carbon to $100 by 2030, as recommended by the High-Level Commission on Carbon Prices, would represent a more negative shock for economies with low carbon prices and reliance on carbon-intensive energy sources," said S&P Global Ratings' Senior Economist Marion Amiot.

The impact on GDP, without offsetting measures, could be over 8% for China by 2030, and closer to 5% if tax revenues were reinvested by the government. It's less for the US at 3% and Europe at 2%, and about 1% or less after reinvestment for both.

Less productive and smaller firms, higher emitters, and lower-income households are more vulnerable to these environmental policies, raising questions about the "Just Transition".

A carbon border adjustment mechanism may make sense for countries that have high domestic carbon prices but is likely to be viewed as a protectionist move otherwise.

"The European experience of low carbon prices between 2005 and 2011 also suggests no evidence of carbon leakage, so a CBAM would mainly make sense for energy-intensive and trade-exposed industries," said Amiot.

That said, this might change as the carbon price has recently increased to €60 a ton in the EU.

Global private-sector investment in renewable energy has tripled to $2.6 trillion in the last decade, with the US, EU, and China accounting for about two-thirds. Yet, green innovation and R&D intensities have stalled since 2012. That said, the recent rise in ESG interest among investors could buck this trend, but may not be enough to reach 2030 targets on its own. – TradeArabia News Service