This is part of a series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists
For decades, macroeconomists tended to tread warily around the topic of climate change, taking the same view that too many of us did — namely that it’s a relatively far-off concern — and focusing instead on the comfortable terrain of GDP growth, neutral interest rates and trade balances.
In recent years the mood has shifted, as macroeconomists attempt to quantify the enormous economic impact stemming from the dash to drive down emissions.
Jean Pisani-Ferry, a leading French economist, called on his profession to focus on the problem back in 2021, when he wrote a paper for the Washington-based Peterson Institute think-tank declaring that “climate policy is macroeconomic policy, and the implications will be significant”.
Polluting equipment will lose value, factories will have to close, jobs will be lost and huge new investments will be needed, he said. More recently, he and his co-authors weighed some of the costs and benefits of the transition in The Green Frontier: Assessing the Economic Implications of Climate Action.
Pisani-Ferry, a non-resident senior fellow at the Peterson Institute and founding director of the Bruegel think-tank, was a top adviser to Emmanuel Macron back in 2017 when the latter was making his bid for the French presidency.
Accordingly, we discussed not only the economics of climate change but Europe’s economic struggles and the outlook for France as the end of the Macron era looms in three years’ time.
Sam Fleming: The economic costs of the green transition are going to be high. How well are we navigating this macroeconomically significant event?
Jean Pisani-Ferry: A few years ago the prevailing view was essentially “good for people and the planet”, as the European Commission said. The commission’s president, Ursula von der Leyen, called it a growth strategy under another name.
The reality is that it’s a combination of supply and demand shocks. The demand shocks caused by the additional investment are obviously positive. The supply shocks are mostly negative, at least in the short term. And the reason for that is that one way or another, you’re basically paying for a resource — a stable climate — you used not to have to pay for.
It is the same if the investment is triggered by regulations instead of the pricing of carbon: economic agents are compelled to spend significant amounts for capital expenditures that do not improve the efficiency of capital and labour.
If I go back to my initial article, I took a very simple approach that said the overall magnitude is equivalent to the first oil shock of 1973-74. And the first oil shock isn’t remembered as something very positive.
That’s the reason why I tried to start this conversation. I think we’ve made progress collectively in understanding the macroeconomics of climate change mitigation. We don’t agree on everything. There are still different views on the output implications, on the fiscal implications, on the price of carbon that would be needed.
By the way, I was struck when I saw new estimates of the cost of climate damage by [Adrien] Bilal and [Diego] Känzig. It’s a recent paper that says the cost of climate change, if properly assessed, is six times higher than was assumed before. If true, this is obviously major.
SF: What is the net impact in terms of GDP on a 10-year horizon?
JPF: I fail to see why it could be positive. So essentially, we are going to invest 2 to 3 per cent of GDP for 10, perhaps 25 years. Burning fossil fuels is significantly less capital intensive than investing in clean energy. And we’re substituting that with a system in which upfront investment is required to transform the energy system and to ensure it does not rely on fossil fuels.
It means investment that’s normally devoted to improving overall efficiency, improving total factor productivity or saving labour, has to be diverted to saving on fossil fuels. And that’s not going to improve your economic performance.
That is, unless — and it’s possible in the long term — the new technology proves to be much more efficient than the old technology. So that’s what makes me hopeful that in the long run, I mean at the 20- to 25-year horizon, it may be that the use of such technologies proves to be more efficient overall. But that does not eliminate the transition cost.
SF: Is this another reason to expect structurally higher inflation during this period?
JPF: At least it implies more volatile inflation. It depends on the availability of critical materials and those kinds of things. There are geopolitical issues around concentration of refining capacities and so on, but overall they are abundant with the exception, perhaps, of copper, because so much of it has been mined already.
The global supply curve used to be flat and was made flat by the availability of the US shale gas, and that has served considerably in taming inflation. This will go away. So, this implies that there will be higher volatility in the supply of energy and therefore in inflation.
SF: Ultimately, hopefully, this progress after the enormous upfront costs will pay for itself. But there is the risk that businesses and workers will be negatively affected in some regions, in some countries, more than others. There could be job displacement, which could be politically disruptive. It brings the mind back to the era of globalisation, which was seen in the longer term as good, but which also led to some people really suffering.
JPF: I think you describe the risks very well. The big difference is that the China shock basically took manufacturing jobs away and moved them to China. That is not going to happen with the transition. In part at least, it’s going to be domestic jobs substituting for other domestic jobs in other regions. But nevertheless the relocation of labour is significant enough to be taken seriously by policy.
For political economy reasons people may not accept — people in brown industries, who build engines, and all the subcontractors — that they may be seriously hurt. So, yes, the political economy of the transition is a stumbling block.
The EU has a strong specialisation in internal combustion engine vehicles — obviously in Germany, significantly, but in other countries, too. Even if it is job-neutral globally — which I don’t think it will be, because the labour intensity of an EV [electric vehicle] is much lower — there is inevitably going to be significant labour relocation.
SF: How significant is the risk that this whole process just gets stalled because the political costs are too high? I mean, we saw the German rebellion against the ban on gas boilers, we’ve seen the rollback, or at least a slow-walking, of green policies on an EU level. We could foresee similar things happening if Donald Trump wins the election in the US.
JPF: I think the risk is of a slowdown of the pace of transformation. But the risk of a reversal at least in Europe, and globally, is limited. Because manufacturers have made their choice. When it was suggested that there could be a change to the 2035 date at which, some of those manufacturers that were far from enthusiastic about the changeover to EVs said we’ve made our plans so don’t change the policy.
And these new green technologies are very promising. I’m struck by the data published by the International Energy Agency. Each time they revise their forecast for solar and wind, the uptake of green technologies at a given horizon increases. Those technologies are passing the test of time. And the transformation is going faster than assumed.
What has happened in China is very telling in this regard. China basically leapfrogged and established a dominant position for EVs after having established a dominant position for solar panels. So the question now is do we want to go ahead and try to find a comparative advantage in the green economy, or just wait and backtrack.
If Trump decides to reverse the IRA [Inflation Reduction Act] and to exit the Paris Agreement again — which is very possible — it would be a very bad signal and it could leave the US economy in a difficult situation. It’s an industrial revolution we are speaking of.
At the time of the Industrial Revolution, there were agrarian interests versus manufacturing interests: there was a fight between those two strands of capitalism. And I think it’s a bit the same. There is a green capitalism that has developed and has gained strength. It’s a war between two strands of capitalism — green and brown.
SF: If we think about this internationally, there’s obviously a real risk of heterogeneity in terms of national climate policies, which could further exacerbate this fragmentation that we’re talking about in the time of rising protectionism. How do we navigate the fact that different countries will be using very different mechanisms, and that will create significant trade tensions?
JPF: I think you’re absolutely right. We lack a functional World Trade Organization. The WTO in principle is the place where those issues would have been discussed and sorted out. It’s largely unable to fulfil this role.
I agree that the heterogeneity of climate policies is a structural difficulty that could result in a trade conflict at some point. There are various dimensions to that. The US- EU dimension on the IRA, I think assuming continuity, is manageable.
The north-south divide is much more serious because there is a lot of resentment in the south vis-à-vis the [EU’s carbon border adjustment mechanism]. They see the CBAM as a protectionist device that would prevent them from exporting.
The European Commission is cautious with the [implementation] of the CBAM but the possibility of a trade conflict remains. The CBAM is in a test period until 2026 during which companies and countries will be asked to contribute information so you can define how it’s going to work.
By the time the CBAM begins to bite there is a risk that it degenerates into a trade conflict. Especially as the cost of the transition is way higher in the south, in countries like India, Indonesia, Brazil, etc, which depend fundamentally on fossil fuels. They don’t have enough savings to finance upfront investment, and the cost of capital is much, much higher.
So essentially, if we are telling them we’re going to put a price on your exports if the carbon content of your exports is above the European level, and we are telling them that without providing support for the transition, it’s not going to go down well.
I’m struck by the degree to which the future of the transition will depend a lot on those countries. Not in China, actually. China has sort of passed the threshold. But those countries are increasingly big emitters, and the required investments by them are absolutely massive.
We have estimates that the investment level that’s required is about twice the level of investment in Europe and the US as a proportion of GDP. And the real cost of capital is twice as high in India or Indonesia in comparison with Europe, the US and China.
SF: Donald Trump has appointed a running mate who is expressly isolationist, and protectionist — [JD Vance]. He believes that the dollar needs to be lower so the US can export more readily, and that US policy should be driven by increasing exports and creating more manufacturing jobs. How concerned should Europe be by what’s happening in the Republican party?
JPF: If it were only the idea that the US has to export more and that it has to create manufacturing jobs and that requires a weaker currency, that wouldn’t be a fundamental difference with the Biden administration.
What is completely different is the view that there will be tariffs across the board. They will be extremely high against China. So the Trump administration would use tariffs to decouple from China. And there would furthermore be tariffs across the board with the aim of substituting income tax and corporate income tax with tariff revenues. Which is ridiculous because then the tax base is so much lower.
That’s indicative of an attitude that is really isolationist. That is something we would find difficult to cope with. With the Biden administration there are frictions but also areas of joint action. Climate is one. You shouldn’t forget that Joe Biden brought the US back into the Paris Agreement. Obviously the Europeans made the mistake of believing that once the US joined the Paris Agreement, they would essentially converge in the European model, which obviously has not been the case.
So there are frictions. But with Trump it would be more than friction. It would be sort of a complete disconnect of perspectives. So I’m worried for that reason. Europe tends to hope, instead of preparing for a new Trump administration.
SF: The EU thinks of itself as an exemplar of a rules-based order and free trade — the commission still prides itself on this stance. But how is the EU going to deal with a US administration that doesn’t even pretend to care about the future of the WTO and the global trading system? You said that they tend to hope rather than prepare, so what should they be doing?
JFP: Assuming the US went for an isolationist strategy, Europe should go even more in the direction of forming trade agreements with partners. I mean there is no hope the WTO can be effective with a Trump administration. So the right strategy would be to form regional trade agreements, including in Asia and with Latin America.
The difficulty is trade agreements are not very popular in Europe, especially in my country. But the benefits of having a broad enough range of countries and broad enough economic mass is still there. If Trump puts 10 per cent tariffs across the board it’s not going to kill trade with the US, but it’s going to kill the momentum of trade with the US.
SF: You advised Macron in the past. He was a big champion of France’s role in Europe, but do you see France playing such a big role in driving the European project forward once he’s left?
JPF: It depends on who his successor is, obviously. But, for the next two years I would not give up and assume nothing can happen. There might be a silver lining in this very complex, very difficult result: a sort of coalition government could be formed. So too early to say.
SF: On the fiscal side, France’s Court of Auditors report is quite a serious report talking about the exposure of the French public sector to any kind of economic shock, given the scale of the public debt and the deficit. But it also talked about unfunded commitments to efforts to reduce global warming. How should France be tackling this concern that it’s not making its sums add up with its climate change commitments?
JPF: With respect to the fiscal consequences of climate action, France is more advanced than several other countries. I mean, in several other countries this question doesn’t even exist. Go back to the example in Germany of solving the problem by regulation, without considering the fiscal cost of getting rid of the gas boilers.
I would commend the report of the Court of Auditors: it was right to say there is a fiscal dimension to this climate action and it has to be taken into account in the medium-term fiscal plan.
The cost of climate action comes from the public investment that’s needed, from the need to support investment by private agents who don’t have the resources needed to pay. And it comes from both the direct impact of having less consumption of fossil fuels, because this is as part of the tax base, and from the growth impact.
I can claim some paternity there, because they said basically what I said in the report that I handed to the prime minister about a year ago. I’m happy that it’s been taken seriously by the Court of Auditors.
SF: Do you share the concern about the broader fiscal risks France faces? Does it face a kind of Liz Truss-style situation?
JPF: It’s true that the French situation is quite different from the situation in a number of other European countries. If you look at the evolution of public debt between 2019 and 2023, we’ve gone by 10 percentage points or even more, while a number of countries have gone up by less than 5 percentage points of GDP. So the gap has widened. We are starting from a fairly different situation.
The first implication is the new government that comes in will have to take this issue extremely seriously.
Hopefully the new government won’t have the taboo of Macron as regards tax revenues. At least the left doesn’t have this taboo.
The left dangerously overestimates the margin of manoeuvre for raising taxes. There is a margin of manoeuvre but it is not that big and it certainly cannot finance additional spending to the tune of 5 per cent of GDP, as envisaged in the programme of the New Popular Front. Maybe there is a margin of manoeuvre of 1 to 2 per cent of GDP, not more.
In the medium term the question is how to restructure public spending. That diagnosis has been made for a very long time and action has not followed. So the question is, who will have the political energy to tackle this problem?
The above transcript has been edited for brevity and clarity
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