Accelerated climate action can drive economic growth while delivering significant environmental and social benefits. This chapter presents an OECD economic modelling assessment which shows that, over the next 15 years, ambitious climate policies can be implemented without compromising global and regional economic growth. Investments in low‑emissions technologies and energy efficiency will not only support economic expansion, but also enhance productivity and resilience. Accelerated climate action will also bring benefits in the long run, thanks to reduced climate damages. Additional benefits can be felt in the short run thanks to climate co-benefits, such as air quality improvements and better public health outcomes. Conversely, insufficient climate action could lead to high costs from climate damages and economic instability.
Investing in Climate for Growth and Development
Abstract
This chapter presents a modelling analysis focused on the economic consequences of enhanced NDCs, which are intended, as outlined in Chapter 1, as national climate plans that are ambitious, implementable and investible. The analysis aims to support governments to make evidence-based, informed policy choices, identify trade-offs and minimise the cost of climate action while maximising the benefits. It focuses on understanding whether and how, in the current economic outlook, enhanced NDCs can mitigate climate change, while also ensuring economic growth and prosperity. While the analysis considers the benefits of policy action in reducing climate damages, it focuses on the effects of climate change mitigation policies and the energy transition and does not explicitly model adaptation measures.1
2.1.1. Scenario description
The aim of the modelling analysis is to understand the economic consequences of scaled up ambition, comparing it to a reference case in which policy action remains constant at current effort levels. The analysis compares two main scenarios between 2022 and 2040:
Current Policies scenario: This scenario reflects policies already in place or legislated, and thus incorporates the existing ambition and implementation gap in current NDCs.
Enhanced NDCs scenario: This scenario assumes accelerated climate policies and investments able to achieve emission reductions in line with the “well-below 2°C” goal of the Paris Agreement.
The main focus of the analysis is on scaled up ambition on emission reductions. However, the scenario design also reflects the three key characteristics of Enhanced NDCs considered in this report, as follows:
Ambitious: scaled up ambition, which collectively leads to a Paris-aligned pathway (no ambition gap).
Implementable: policies are implemented to reach the stated levels of ambition (no implementation gap).
Investible: finance is mobilised to enable policies implementation and technology deployment.
2.1.2. Scenario calibration
The calibration of the two scenarios relies on inputs from the International Energy Agency’s World Energy Outlook (IEA, 2023[1]), which provides information on future energy-related policies, energy investments and policy-induced changes in the energy system. In the Current Policies scenario, calibrated on the IEA’s Stated Policies Scenario (STEPS), global greenhouse (GHG) emissions decline by 7% by 2040 compared to 2022.2 This scenario is consistent with limiting global warming to 2.4°C by the end of the century. In the Enhanced NDCs scenario, calibrated on the IEA’s Announced Pledges Scenario (APS), global emissions are reduced by 34% by 2040, putting the world on a pathway compatible with an estimated 1.7°C of warming by the end of the century.
In the Enhanced NDCs scenario, energy-related investment grows by 40% between 2022 and 2030. Clean energy investment accounts for USD 3.1 trillion of the USD 3.8 trillion invested in energy in 2030, while fossil fuel investment falls from USD 1.1 trillion in 2022 to USD 0.7 trillion in 2030. As part of the transformation of the energy system, the global installed renewable power capacity almost triples by 2030 from 2022 levels. As a result, the share of renewables in electricity capacity increases from 42% in 2022 to 64% in 2030 and 75% in 2040, while the share of fossil fuels decreases from 52% in 2022 to 28% in 2030 and to 13% in 2040. Energy intensity improves at an average rate of 3% per year compared to a 2% annual rate under Current Policies.
In the Enhanced NDCs scenario, current national policy packages and NDC pledges are used as a starting point to model countries’ accelerated climate action. Regional policy packages are modelled taking into account existing policies as well as countries’ level of development. Countries that currently have long‑term net zero or carbon neutrality pledges are assumed to scale up mitigation policies to meet their pledges on time. No explicit pricing is assumed in sub-Saharan Africa (excluding South Africa) and some parts of Asia. Instead, these countries are assumed to rely on other policy interventions to transform their energy systems. Investments in the transition are also scaled up across regions. By 2030, the EU and other advanced economies are assumed to show the highest increases in energy-related infrastructure investment. By contrast, by 2050, Latin America, Africa and the Middle East see the highest levels of additional energy-related investments as a percentage of GDP. In a few fossil-fuel producing countries, the decrease in fossil fuel supply investments exceeds increases in low-emissions power generation investments, resulting in an overall decrease in energy-related investments.
Following the IEA’s scenarios (IEA, 2023[1]), emission reductions reflect the deployment of a diverse range of technologies, as featured in the IEA’s Global Energy and Climate Model. Assumptions on the range of technologies included and their development results from extensive research at the IEA. The IEA model includes the breadth of technologies that are available on the market today as well as innovative technologies and individual technology designs that are not yet available on the market at scale (IEA, 2023[2]). In this modelling set up, the CO2 emissions accounting also considers carbon dioxide removal from the atmosphere through capturing CO2 from the air (through direct air capture [DAC]) or from biogenic sources (Bioenergy with carbon, capture, and storage [BECCS]) for permanent storage in underground reservoirs. The scenarios reflect a portfolio of technologies within a framework of cost minimisation, while considering technical, economic and regulatory constraints (ibid).3
2.1.3. Modelling approach
The scenario analysis in this report is based on a modelling framework primarily relying on the OECD’s ENV-Linkages model (Château, Dellink and Lanzi, 2014[3]). ENV-Linkages is a dynamic, multi-sector, multi‑region computable general equilibrium (CGE) model that links GHG emissions to economic activities. As a general equilibrium model, ENV-Linkages is the ideal tool to compare different projections of the global economy, namely its current state and two possible future states by 2040, under Current Policies and under Enhanced NDCs.
As a general equilibrium model, ENV-Linkages is also well fit to estimate economy-wide effects of climate policies, as well as linkages through value chains and international trade. Climate policy addresses negative externalities - specifically, the economic and social costs of climate change, which are often not factored into market prices. By adjusting relative prices of goods to ensure that polluters bear the indirect cost of carbon or by mandating standards that require shifts in production processes, climate policies can help to correct this market failure and promote a more efficient resource allocation from a welfare perspective. In a general equilibrium framework, climate policies shift the current allocation of resources in economies away from GHG-intensive activities, thereby changing patterns in production and consumption. Consequently, climate policies simultaneously affect firms, households and governments. Firms need to adjust their production processes towards less-emitting technologies, which can be difficult in cases where alternative production technologies are inexistent or expensive. In most cases, such changes in production will result in an increase in prices, which, in turn, lowers consumer demand. Governments need to finance, at least partly, the transition.
However, CGE models are usually limited in their depiction of short-term macroeconomic effects, such as the positive effects of investment on economic growth. To capture short- and medium-term investment effects, ENV-Linkages has been calibrated relying on simulations with the National Institute Global Econometric Model (NiGEM) model, developed by the National Institute of Economic and Social Research (NIESR) (Hantzsche, Lopresto and Young, 2018[4]). NiGEM is a structural macro-econometric model of the world economy, used for the OECD Economic Outlooks (OECD, 2024[5]). NiGEM captures demand, supply, monetary and financial dynamics, reflecting the current macro-economic outlook. It is also endowed with a climate module, which allows to analyse the economic consequences of climate policies and of related revenue recycling as well as the effects of energy-related investment. While computable general equilibrium models such as ENV-Linkages are relevant for long-term analysis, macro‑econometric models such as NiGEM are best fit for short-term economic analysis.4 The analysis in this chapter therefore provides projections up to 2040, with a focus on the year 2035 as the date targeted by the next round of NDCs. A description of the ENV-Linkages and NiGEM models is provided in Annex A.
By combining these different models, the analysis manages to be relevant on two specific aspects. First, this framework reflects the short- and medium-term effects of investment in an economy-wide analysis of the effects of climate policies. This helps to understand the impact of climate investments for businesses and economic growth in the short term and the structural changes and adjustments needed in adapting to climate policies. Second, ENV-Linkages reflects comprehensive regional policy packages on climate change mitigation, including carbon pricing as well as subsidies and regulations. This modelling approach ensures a realistic assessment of the economic consequences of climate policies, rather than a simplified approach through carbon pricing only. It reflects the insights of OECD work in the context of the Inclusive Forum for Carbon Mitigation Approaches (IFCMA) (Box 2.1) and relies on previous OECD modelling accounting for a diversity of climate instruments (OECD, 2024[6]; Fouré et al., 2023[7]).
The IFCMA aims to understand the combined global impact of policies by producing comprehensive and systematic data, information and tools to analyse the effects of mitigation and mitigation-relevant policies and policy packages on emissions. As such, it aims to model policy instruments individually or grouped in policy packages to reflect the full spectrum of policy efforts undertaken by each country in reducing carbon emissions.
To this end, the IFCMA develops and applies a consistent methodological approach to estimate the effects of carbon mitigation policies and policy packages on GHG emissions. High-quality, consistent and objective insights on the effects of policies and policy packages on emissions will contribute to a better understanding of the effects of mitigation policies in terms of emission reductions across countries and support progress towards countries’ emission-reduction targets.
Methodologically, the IFCMA proposes to link different modelling approaches to enable a detailed and comprehensive assessment of the impact of climate-relevant price-based and non-price-based policies on greenhouse gas emissions. Specifically, it combines sectoral, bottom-up models, offering a disaggregated representation of mitigation options and policies, with economy-wide models, which provide a broad coverage to assess indirect impacts on emissions.
Source: (OECD, 2024[6]; OECD, 2025[8]).
2.1.4. Emission reductions in the scenarios
All country groupings reduce their emissions in the Enhanced NDCs scenario compared to the Current policies scenarios, but at different rates (Figure 2.1), as a result of the model calibration and as projected in the modelling set up. High-income and middle-income countries are projected to reduce their emissions by 39% and 34% respectively by 2035 compared to 2022 levels, versus 20% and 14% under the Current policies scenario over the same period. Oil producers and low-income countries are projected to reduce emissions by 24% and 1% between 2022 and 2035 in the Enhanced NDCs scenario, while under the Current Policies scenario, emissions would be increasing by 4% and 20% respectively. Globally, emissions decline by 34% by 2040 in the Enhanced NDCs scenario, and by 7% in the Current Policies scenario.
Total GHG emissions (excluding Land Use, Land Use Change and Forestry (LULUCF) emissions) by country grouping and by scenario between 2022 and 2040, GtCO2e
Note: ENV-Linkages countries and regions are grouped into Low-income, Middle-income and High-income country aggregates based on their gross national income following World Bank Country classification. Oil producers are economies which rely predominantly on extracting and exporting fossil fuels, regardless of income levels. Countries included in the Oil producers group are excluded from any of the three income groups. The list of countries or regions included in each group and the income classification thresholds are provided in Annex A.
Source: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models. See Annex A for model descriptions and references.
2.2.1. Accelerated climate action can lead to global decoupling of economic growth from emissions
The modelling results show that accelerated climate action in the Enhanced NDCs scenario can lead to the absolute decoupling of emissions from economic growth (i.e. the decline of emissions while GDP grows). Indeed, Enhanced NDCs are projected to lead to robust global economic growth while cutting global GHG emissions, bringing them back close to their 1990 levels by 2040 (Figure 2.2).This would exceed progress made since the 1990s when relative decoupling of global emissions from GDP growth has been achieved (Figure 2.2) (i.e. emissions have continued to grow but at a slower pace than GDP). Policies currently in place are projected to slightly curb global emissions growth (Figure 2.2), but not enough to be on a pathway compatible with the Paris Agreement temperature goal.
Change with respect to 1990 (1990 indexed at 1), global
Note: Each line shows the development of an indicator (global GHG emissions, global GDP and global emission intensity of GDP) over time, indexed to its 1990 level (1990 = 1). A value of 2 means that an indicator has doubled relative to 1990, a value of 0.5 means it has halved. Total GHG emissions include all sources, excluding LULUCF (land use, land use change and forestry) emissions. GDP is measured in constant 2021 international dollars at Purchasing Power Parity (PPP). Global GHG intensity of GDP is calculated as global total GHG emissions (excluding LULUCF) divided by global GDP PPP.
Source: Historical data: authors, using the World Bank’s GDP PPP (constant 2021 international $) indicator dataset (World Bank, 2024[9]) and the EDGAR dataset of GHG emissions (EC, EU and IEA, 2023[10]). Enhanced NDCs projections: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models. See Annex A for model descriptions and references.
2.2.2. Accelerated climate action can lead to a small increase in economic growth, mostly thanks to climate-related investment
The climate mitigation policies included in the Enhanced NDCs scenario are projected to have a small but positive effect on global GDP in the next 15 years. Compared to the Current Policies scenario, global GDP is projected to be 0.12% higher in 2030, 0.20% higher in 2035 and 0.21% higher in 2040, without accounting for reduced climate damages (see Section 2.3). This limited GDP impact is aligned with results from other modelling studies on the economic consequences of Paris-aligned policy scenarios (see Annex 2.A for an overview of selected studies and a comparison with the analysis in this report).
The macroeconomic impact of the Enhanced NDCs scenario is the result of a combination of key effects triggered by climate policies (Figure 2.3). When countries initially implement and scale up climate mitigation policies, production and consumption patterns are constrained to adjust to pricing mechanisms and regulations, driving GDP down (Policy constraints effect). At the same time, the large‑scale deployment of energy efficiency technologies partly counterbalances these costs, reducing energy expenditures and thereby facilitating consumption and production (Energy transition effect). Furthermore, accelerated investment in energy and clean technologies stimulates aggregate demand in the short term and increases the productive capacity of economies and aggregate supply in the longer term (Increased investment effect). Recycling carbon revenues also increases GDP, while limiting distributive impacts and increasing the acceptability of climate policies (Revenue recycling effect). While these different mechanisms will affect the global economy already in the coming years and decades, enhanced climate action is likely to bring large economic benefits from reduced climate damages in the second half of the century, although uncertainties remain on their estimation. The economic benefits from reduced climate damages are explored separately in Section 2.3, as they are more relevant on a longer timeframe in the second half of the century.
Investment is the strongest driver of GDP increase in the Enhanced NDCs scenario (Figure 2.4). Climate-related investment plays a crucial role in supporting economic expansion, reinforcing the need to implement ambitious policies. Meanwhile, carbon revenues, which in this scenario are partially redistributed to households and used to reduce labour taxes, can help limit negative effects on consumption and labour markets, further supporting the transition. The modelling framework assumes that countries use a mix of policies, not just carbon pricing, to achieve emissions reductions, which limits the amount of carbon revenue recycling. However, when designed effectively, recycling revenues can enhance equity, protect vulnerable households and create additional social and economic benefits beyond aggregate GDP growth.
Decomposition of changes in global GDP between the Current Policies and Enhanced NDCs scenarios, in 2021 trillion USD(PPP)
Note: The figure presents projected deviations in global GDP (in trillion constant 2021 USD at Purchasing Power Parity (PPP)) between the Enhanced NDCs and the Current Policies scenarios, for the years 2030, 2035, and 2040, decomposed by the main mechanisms connecting climate action to economic outcomes. The bars for Current Policies and Enhanced NDCs show the absolute level of global GDP (in trillion 2021 USD PPP) in these scenarios in each respective year (with a different y-scale for each year). The intermediate bars show the incremental effect on global GDP of the key mechanisms that drive the Enhanced NDCs scenario relative to the Current Policies baseline.
Source: OECD ENV-Linkages model, with inputs from NIESR’s NiGEM and IEA’s GCEM models. See Annex A for model descriptions and references.
The implementation of climate policies, if considered in absence of the positive effects of investment, energy efficiency and revenue recycling, is projected to lead to a small slowdown in economic growth. If only distortive impacts were considered, global GDP would decrease by 0.38% in 2035 and by 0.87% in 2040 in the Enhanced NDCs scenario in comparison with Current Policies. This outcome stems from increased fossil fuel prices, constraints on private consumption and structural changes in the economy caused by scaled-up climate mitigation policies.
On the other hand, efficiency gains resulting from a faster energy-sector transition can contribute to economic growth. Taken in isolation, energy efficiency improvements are projected to result in a global GDP increase of 0.17% in 2035 and 0.34% in 2040 in the Enhanced NDCs scenario compared to Current Policies. Accelerated electrification and the switch to energy-efficient technologies lead to economy-wide energy efficiency gains in the Enhanced NDCs scenario, in comparison with both past rates and projected rates with Current Policies. This effect is projected to increase the productivity of economies with respect to energy use and reduce households’ spending on energy over time. The World Bank’s Country Climate and Development Reports also find large immediate and long-term economic benefits from making energy systems more efficient, linked to reduced energy spending and energy imports (World Bank, 2022[11]). For example, the reports show that in Kazakhstan, energy efficiency improvements in key sectors can achieve total system cost savings of over USD 70 billion in the period to 2060 (World Bank Group, 2022[12]). In Bangladesh, energy efficiency solutions can reduce energy consumption in the textile sector by around 30%and increase productivity by 10–15% (World Bank Group, 2022[13]).
A wise use of budgetary surpluses realised by climate policies can help to mitigate the adverse distributional effects of climate policies on households while also fostering modest economic growth through relevant tax rate reductions. The Enhanced NDCs scenario assumes that governments which rely on carbon taxation or fossil fuel subsidy reforms in their climate policy packages are able to recycle the resulting additional fiscal revenues half as reduced labour tax rates and half as direct transfers to households. Transfers to households partially compensate households for higher energy prices and help mitigate the distributional impacts of climate policies, while reduced labour taxes mitigate possible negative impacts on total employment. Overall, carbon tax revenue recycling is projected to have a modest positive effect on global GDP of 0.09% by 2040 in the Enhanced NDCs scenario (Figure 2.4. ). The extent to which carbon revenues can be raised and recycled depends on the type of policies implemented. Therefore, different national and regional policy mixes would have led to a different outcome. Carbon pricing instruments or reductions in fossil fuel subsidies generate government revenue whereas subsidising green technology will need to be financed, with different fiscal and macroeconomic outcomes (Fouré et al., 2023[7]).
Additional investment for the transition, as included in the Enhanced NDCs scenario, is projected to increase global GDP by 0.38% in 2035 and by 0.66% in 2040 compared with Current policies (Figure 2.4), assuming that these additional investments do not crowd out other productive investments. The additional investments are projected to stimulate aggregate demand in the short term and to increase the productive capacity of economies and aggregate supply in the medium term. Within the NiGEM model, which is used to estimate the short to medium-term effects of investment on growth, additional investment efforts in the climate transition are assumed to be shared in equal proportions between governments and firms. This reflects the current state of climate finance, where private finance represents a little over 50% and public finance a little less than 50% of mitigation flows globally (Climate Policy Institute, 2024[14]). Public investment efforts are assumed to be primarily financed by a temporary increase in income tax over the next decade. This ensures government deficits and debt levels stay in check in the medium term. Indeed, mobilising funds can be difficult for many governments as it implies reducing resources on other competing priorities, especially for countries with high levels of government debt. The rise in income tax, however, also reduces households’ disposable income and constrains private consumption, limiting the positive impact of investments on GDP in the short term.
The benefits of increased energy efficiency and climate-related investment together highlight the importance for governments to create incentives to invest in the deployment of green technologies and infrastructures, as well as in research and development, with a possible boost to the economy. The structural changes and technological developments needed to reduce emissions constitute an opportunity to reform economies and address inefficiencies in their production and use of energy. In countries and regions where the economic system suffers from inefficiencies, climate policies can lead to better economic performance. Climate action can stimulate technology deployment and innovation that might not have taken place in their absence. In many cases, technology deployment and innovation can result in an improvement in both the environmental and business performance of firms (Box 2.2).5 Given the interconnectedness of global economies through trade and financial markets, the effect of policies on economic performance is influenced not only by the ambition of climate action but also by the relative stringency of these policies compared to those of other countries and sectors. Firms could gain a significant benefit from a first mover advantage and leverage their comparative advantage, especially if firms in other countries operate under less stringent policies.
Innovation will be key to the transition and to achieving the targets set in the NDCs. According to the IEA, seven clean energy technologies – solar PV, wind, nuclear, electric vehicles, heat pumps, hydrogen and carbon capture – will be key for the clean energy transition. These technologies account for three-quarters of the energy-related CO2 emissions reductions by mid-century in the IEA’s Announced Pledges Scenario (APS), on which the Enhanced NDCs scenario is calibrated.
Innovation has been key to the large progress seen in the development and deployment in some of these key carbon-free and low-emissions technologies in recent years. Thanks to large drops in costs, solar photovoltaic and wind power have become the cheapest electricity sources in most markets and their global power capacity increased fourfold and sixfold respectively between 2015 and 2022 (IEA, 2024[15]). Research and development (R&D) efforts focused on efficiency in these technologies need to continue to maintain this cost reduction trajectory.
On the other hand, while all technologies required for emissions reductions by 2035 exist, many remain too expensive to be deployed rapidly and at industrial scale. Other less mature technologies, such as green hydrogen and some negative emission technologies, need further development. Hydrogen, for instance, only provides 4% of power in the IEA’s APS by 2035, but is nonetheless key for the energy system transition as a dispatchable low-carbon fuel (IEA, 2024[15]). Besides the scaling up of renewable energy, these technologies are particularly important for the decarbonisation of hard-to-abate industrial sectors.
Progress in innovation on these technologies depends on the amount of investment and resources dedicated to low-emissions technology developments. R&D in energy reached USD 44 billion in 2022, with about 80% directed toward low-carbon solutions (IEA, 2023[16]). Venture capital has also surged with more than USD 70 billion invested in climate tech startups between 2020 and 2023 (PwC, 2023[17]). An analysis of funding measures announced in the aftermath of COVID (2020-2021) to support low-emissions technology development, adoption and diffusion, shows that around 40% of total low-emissions technology government support has been directed to the energy sector, one third to the transportation sector, 14% to the buildings sector and a mere 4% to industry (Aulie and al., 2023[18]). This explains the current rapid progress in the energy and transport sectors.
Policies and regulations also play a key role in supporting innovation in low-emissions technologies. Climate policies have been estimated to be effective at inducing innovation in low-emissions technologies (Dechezleprêtre and Kruse, 2022[19]), as they create an incentive for firms to change their production processes in favour of cleaner and more efficient ones. Innovation can also compensate the additional costs of climate policies for firms by increasing efficiency. Policies and initiatives can further facilitate technology spillovers and diffusion, which will be crucial for the transition to take place globally.
A key enabling factor for innovation is the presence of structural reforms that establish the right economic conditions for innovation. Well-designed structural reforms can improve long-term economic growth, overcome fiscal challenges, facilitate competitive dynamics that can foster innovation (OECD, 2024[20]). Enabling innovation can in turn facilitate an increase in productivity for firms, as clean innovation may enable firms to compensate for the potential costs implied by new environmental regulations (Dechezleprêtre and Kruse, 2022[19]).
While Enhanced NDCs can foster growth, uncertainty over current and future climate policies is projected to damage investors’ confidence and hamper growth. Ensuring a successful climate transition without disrupting sustained economic growth requires policy certainty and clear investment signals. The Enhanced NDCs scenario assumes that countries implement well-designed, investable NDCs that provide long-term clarity on climate policies, enabling businesses to invest confidently in clean energy opportunities. Research shows that policy uncertainty has a strong negative effect on business investments, particularly in sectors requiring long-term commitments (Gulen and Ion, 2015[21]). In the power sector, for example, firms are more likely to delay investments in carbon abatement and clean energy technologies when faced with unclear policy signals (Blyth et al., 2007[22]). Overall, an uncertain macroeconomic environment, where uncertainty leads to delayed or reduced clean energy investments, could result in global GDP being 0.75% lower in 2030 compared to estimates under the Enhanced NDCs scenario. This underscores the critical role of stable and predictable climate policies in driving both emissions reductions and economic resilience. These close and complex interactions call for putting climate change at the centre of economic, fiscal and monetary policies through the development of whole-of-government approaches to climate change (see Part II).
2.2.3. All regions would see robust economic growth in an Enhanced NDCs scenario, though at different paces
Under an Enhanced NDCs scenario, accelerated climate action is projected to be compatible with continued economic growth across all regions, while building more efficient and sustainable systems. The results of the modelling analysis show that the global economy would continue growing at a sustained rate in the coming decades, consistent with projections of population growth and increasing living standards. In the Enhanced NDCs scenario, global GDP is projected to grow by 60% by 2040, compared to 2022. Regionally, GDP is projected to grow by 37% in high-income countries, 69% in middle‑income countries, 104% in low-income countries, and 42% in oil producing countries, by 2040 compared to 2022 (Figure 2.5). While overall GDP growth remains similar to the Current Policies scenario, stronger climate policies in the Enhanced NDCs scenario enable a shift toward cleaner, more resilient economies. This transition reduces emissions, enhances resource efficiency and strengthens long-term economic and environmental sustainability.
Most regions are projected to see additional economic benefits from Enhanced NDCs, though outcomes will depend on countries’ starting points and economic structure (Figure 2.5). The benefits of increased investments are projected to be greatest in developing countries, where such investments might not have materialised without climate policies. Here, climate-driven investments can stimulate economic growth, accelerate clean technology deployment and support more sustainable development pathways. Revenue recycling will have the strongest effect in regions that include carbon pricing in their policy mixes. In countries with current high fossil fuel support and with low institutional capacity to adopt carbon pricing, revenue recycling can stem from reforming fossil fuel support, which amounted to more than USD 1 trillion globally in 2023 (OECD, 2024[23]).
The Enhanced NDCs scenario presents specific challenges for fossil fuel-exporting countries and especially oil producers (Box 2.3). As fossil fuel importers accelerate the transition of their energy mix away from fossil fuels, they will improve their trade balances, energy security and resilience to commodity price shocks. However, for economies heavily dependent on fossil fuel exports this shift will negatively impact export revenues. According to the modelling analysis, Oil Producers are projected to still benefit from economic growth but at a slightly lower rate than under Current policies (Figure 2.5). Strategic policy responses can help mitigate these impacts. Reforming fossil fuel support and freeing fiscal space can support counties in implementing macroeconomic policies that accelerate diversification and support new sources of economic growth. Some countries have already taken steps in this direction; for instance, the Future Made in Australia agenda aims to maximise the economic and industrial benefits of the transition to a net-zero global economy by supporting the development of new clean energy industries and supply chains, including the renewable hydrogen industry with the Hydrogen Production Tax Incentive. Saudi Arabia has managed to sustain robust economic growth while diversifying away from fossil fuels by heavily investing in non-oil sectors, such as technology, entertainment and renewable energy, through initiatives like Vision 2030.6
% change in GDP in the Enhanced NDCs scenario in 2030, 2035 and 2040 with respect to 2022 levels, by country grouping
Note: ENV-Linkages model countries and regions are grouped into Low-income, Middle-income and High-income country aggregates based on their gross national income following World Bank Country classifications. Oil producers are economies which rely predominantly on extracting and exporting fossil fuels, regardless of income levels. Countries included in the Oil producers group are excluded from any of the three income groups. The list of countries and regions included in each group and the income classification thresholds are provided in Annex A.
Source: OECD ENV-Linkages model, with inputs from the NIESR’ NiGEM and IEA’s GCEM models. See Annex A for model descriptions and references.
The net zero transition will require an important shift of activities in the energy sector, with significant implications on public budgets. The IEA estimates that if governments successfully pursue a 1.5 °C trajectory and emissions from the global energy sector reach net zero by mid-century, oil and gas use would fall by 75% by 2050. Fossil fuel exporting countries are particularly exposed to long-term challenges related to the energy transition, as they will lose of a key source of revenues, which is essential for the smooth functioning of their economies. Another challenge is the ability to monetise their large reserve base.
Economies that are heavily reliant on oil and gas revenues therefore face some stark choices and pressures in energy transitions. Transitions create powerful incentives to accelerate the pace of change while also draining a source of revenue that could finance it. Compared with the annual average between 2010 and 2022, per capita net income from oil and natural gas among producer economies is 60% lower in 2030 in a 1.5 °C scenario. Many producers are also heavily exposed to risks from a changing climate, which stand to further disrupt the security of energy supply.
The challenges are significant, but there are workable net zero energy strategies available to producer economies and national oil companies. Oil exporters can pursue economic diversification strategies, to be more resilient in face of future climate policies and strategies. Building on their existing energy advantages, major producers of hydrocarbons also have expertise and ample, underutilised renewable energy resources that could anchor positions in clean energy value chains and low-emissions industries. Other options to diversify and reduce vulnerabilities of their economies include reducing emissions from traditional supplies and particularly end-use emissions, leveraging domestic markets potential, phasing out inefficient subsidies and boosting clean energy deployment; and developing low-emissions products and services.
The OECD’s Equitable Framework and Finance for Extractive-based Countries in Transition (EFFECT) provides recommendations for fossil fuel producing developing economies, industry and financial institutions to enable a just transition to low-emissions by implementing fossil fuel exist strategies and just transition plans. In particular, the framework shows that global demand for critical minerals and low-carbon fuels presents an opportunity for fossil-fuel exporting countries to create jobs, foster innovation, promote sustainable infrastructure and diversify their economy through the development of local value-added industries as well as regional low-emissions value chains such as battery storage, electric vehicle manufacturing and hydrogen. Net-zero plans in most advanced economies are largely unachievable without substantial hydrogen and renewable electricity imports from developing countries. This presents an opportunity for fossil fuel-producer emerging and developing economies with abundant renewables potential, know-how and experience.
Sources: (IEA, 2023[1]; OECD, 2022[24]).
2.2.4. Aligning climate and macroeconomic policies could further support growth
Given the scale of economy-wide transformations required to achieve Paris-aligned emissions pathways, co-ordinated climate, fiscal and monetary policies could help to better combine growth, price stability and climate mitigation objectives. Reaping the economic benefits from the transition will depend on governments striking a difficult balance to simultaneously create the macroeconomic conditions to boost public and private investments in climate while maintaining investments levels in the rest of the economy, preserve price stability and maintain government’s debts under check over the next decades. Supporting climate policies with appropriate fiscal and monetary policies could improve the economic impacts of the transition in the short run and increase growth prospects in the longer run. On the other hand, inappropriate fiscal and monetary responses could result in the transition’s being delayed and having a negative impact on GDP.
Modelling the Enhanced NDCs scenario with alternative fiscal and monetary policies shows fiscal reforms and coordinated and flexible monetary policy to avoid high interest rates can increase the positive effect of the overall transition on global GDP (Figure 2.6). In addition to the central Enhanced NDCs scenario presented in Section 2.1, this section explores a set of scenarios aligned with the Enhanced NDCs scenario but with alternative assumptions on monetary and fiscal policies The fiscal consolidation scenario assumes most countries reduce their target budget deficits by 1% by cutting on government consumption while maintain government investment. In the debt-financed investments scenario, countries use higher government budget deficits and debt to finance public investments for the climate transition in the short term. Tighter monetary responses and looser monetary responses scenarios simulate a tighter or looser reaction of central banks to public investment and climate policies shocks, with 0.2-0.5 percentage points higher (respectively lower) short-term interest rates. The private investment crowd out and crowd in scenarios introduce a 0.2% increase (respectively decrease) in both the equity and investment risk premia in all countries, resulting in a decrease (respectively increase) of economy-wide private investments.
With the set of alternative macroeconomic policies considered, the difference in GDP with respect to the central Enhanced NDCs scenario could range from +0.20% to -0.75% in 2030 and from +0.25% to -0.12% in 2040. On the public investment side, depending on governments’ fiscal situations, counties may benefit from undertaking fiscal reforms to clear up fiscal space, as a complement to temporary taxes and fossil fuel subsidy reforms to finance the transition. In any case, governments need to integrate climate-related investments in fiscal planning immediately and over the next decades. Adequate macroeconomic policies are also needed to create an environment that supports overall private investments levels while boosting climate-related private investments. Limiting the crowding out of private investments in other sectors of the economy will, in particular, require a close co‑ordination with central banks, as uncoordinated and excessively tight monetary responses to climate policies and public investments would worsen the effects of the transition on growth and delay the unlocking of business investments required for the transition.
First, the transition requires significant financing efforts on behalf of governments and will require careful fiscal planning. Many countries already rely on subsidies to renewables and R&D as a key policy instrument for the transition and large public investments in energy infrastructure will be required. On the other hand, it is increasingly acknowledged that revenues from carbon taxation will have to be partly recycled as transfers to households to limit adverse distributional impacts from potentially regressive taxation (Pisani-Ferry, 2021[25]). This means carbon tax revenues cannot be fully used to finance the investment gap and subsidies for the transition, as has been previously put forward in part of the economic literature. In the Enhanced NDCs scenario, half of revenues are recycled as transfers to households and the other half as labour tax cuts to limit the impact of the transition on employment. Overall, the transition will therefore significantly affect public finances. The options available to governments are resorting to public debt and/or conducting fiscal reforms to clear up fiscal space to finance the transition by either cutting other government expenditures or raising (potentially temporary) taxes. This includes fossil fuel subsidy reform, but this may be insufficient.
Fiscal consolidation reforms (i.e. to achieve an aggregate reduction of government consumption) would allow countries to free up fiscal space to finance public investments for climate and improve growth prospects in the medium term (Figure 2.6). Two scenarios are explored where governments use alternative ways to finance the additional public investments in the transition compared to the Enhanced NDCs scenario, either by cutting governmental expenses to free up fiscal space for investments, or by resorting more heavily to public deficits and public debt. In the fiscal consolidation scenario, in which countries pursue fiscal reforms with debt reduction objectives and reduce their target budget deficits by 1%, global GDP decreases by around 0.1 percentage point in 2030 but then increases in the medium term, up to around 0.25 percentage points by 2040, compared with the Enhanced NDCs scenario. Fiscal consolidation is achieved through a reduction in government consumption while maintaining government investment levels to the same level as in the Enhanced NDCs scenario. In the short-run, fiscal consolidation through government consumption reductions directly reduces aggregate demand, leading to lower GDP than in Enhanced NDCs. By avoiding increased taxes and public deficits to finance the additional governmental investment for the transition, the fiscal consolidation scenario however has higher positive economic effects from 2035 on compared to the Enhanced NDCs scenario. Lower taxes have a positive effect on private consumption, and lower public deficits have a positive effect on interest rates and on private investments, overall stimulating the economy in the longer term. On the other hand, using public deficits and debt to finance public climate investments would dampen growth in the medium term. In the debt-financed investments scenario, countries make more extensive use of budget deficits in the first 5 years after the new NDCs to finance public investments in the transition. Resorting to budget deficits instead of raising taxes to finance investments allows to smoothen the effect of the transition in the very short-term, at the expense of negative impacts on GDP after 2030 due to higher interest rates (Figure 2.6).
How much governments can resort to debt to finance the transition in reality depends on their current level of debt sustainability and fiscal space. Developing countries and in particular the lowest income countries, are facing debt sustainability challenges after spikes in debt levels during the pandemic and with the global recession (United Nations, Inter-agency Task Force on Financing for Development, 2024[26]). Debt service burdens could already prevent many countries from financing the climate transition, as an increasing number of developing countries are already spending more on debt service than on public investments (ibid). In some developed countries, high debt and deficit levels would also limit room for public debt financing of climate investments. On the other hand, a few countries with low debt-to-GDP ratio may temporarily rely on public deficits to finance the transition and reap higher growth benefits from investments.
Second, monetary policy will have to integrate the inflationary risks posed by an accelerated transition under enhanced NDCs.7 The transition can affect price stability in different ways depending on countries, posing inflationary risks through increased energy prices, combined with disinflationary effects from energy efficiency gains in the longer term. In the Enhanced NDCs scenario, the shock on energy prices caused by climate policies leads to inflationary pressures in most economies. As countries scale up their climate policies over time, the negative shock from increased carbon taxation leads to higher fossil fuel energy prices, which results in a rise in inflation during the first years of the modelling exercise. The investment boost and the carbon tax revenue recycling in the form of transfers and investments are also inflationary in the short term, as they directly stimulate aggregate demand, but the effect of the energy price shock largely dominates. In the NIGEM model, these inflationary pressures are immediately followed in all countries by an increase in policy intervention interest rates of 0.25 to 1.5 percentage points, bringing inflation back towards baseline levels globally. Productivity shocks further contribute to bringing inflation down in the medium term: the energy transition progressively leads to energy efficiency gains and energy savings while investments in energy infrastructure increase aggregate supply. The combination of these effects is disinflationary from 2035 onwards. These results are particularly relevant if taken in the current macroeconomic context. Currently, inflation is projected to decline, but inflationary pressures continue to linger in many economies and cost and price pressures persist in many service sectors (OECD, 2024[5]). Despite stabilisation of inflation, price levels at the beginning of 2025 across OECD countries were more than 20% higher in 2024 than they were in 2021 (OECD, 2025[27]). This price increase has put the climate crisis in the backseat, highlighting that inflation and climate crisis are closely linked and cannot be addressed separately.
Co-ordination with central banks to ensure a flexible monetary response to the potential inflationary effects of climate policies will be key to maintain private investment levels and to allow the growth benefits of climate action to be captured. Looser monetary responses to inflationary pressures, which aim to maintain lower interest rates, can smoothen the effects of the overall transition on economies and boost private investments required for the transition, while tighter monetary responses would jeopardise the ability of firms to invest in the energy transition. In the looser monetary responses scenario, major countries are assumed to be less reactive to inflation, raising policy intervention interest rates to a lesser extent compared with the central scenario. For example, the rise in central bank interest rates are 0.4 percentage points lower in the People’s Republic of China’s (hereafter “China”), the euro area or Canada than in the central Enhanced NDCs scenario in the short term (2025 to 2035). This would push inflation up by 0.1 percentage points in 2035 in most countries and globally, in comparison the central scenario, while GDP impacts would be improved by 0.2 percentage points (Figure 2.6) thanks to higher private investment and consumption levels. On the contrary, the tighter monetary responses scenario assumes governments are more reactive to inflation and introduce higher interest rates in response to increased energy prices and public investments. Short-term interest rates increase in the range of 0.2-0.5 percentage points depending on countries. This has a negative impact on growth, by constraining business investment and would jeopardise the ability of firms to invest in the energy transition. This exercise considers only moderate deviations on monetary policies; higher levels of tightening and loosing would have similar but stronger effects on inflation and GDP.
With climate change emerging as a key policy priority in many countries, central banks can choose to show flexibility to align with this objective. Central banks might in particular be called for greater flexibility, for example in terms of how quickly or slowly they aim to bring inflation back to target. However, the ability of central banks to be accommodative of climate policies depend on their mandates and on their respective countries’ current situation with respect to inflation (Boneva, Ferrucci and Mongelli, 2022[28]). Risks of ‘stagflation’ could arise, especially under more flexible monetary policy, if the transition’s GDP effects are more severe and inflationary pressures higher than expected. In any case, the transition calls for increased co‑ordination of central banks with governments on climate policies and their implementation, so as to better manage their effects on price stability and GDP.
Finally, mobilising private investments for the transition while boosting business investments in the rest of the economy (private investments crowd in) is crucial to capture economic benefits from the transition. If investments for the transition are mobilised at the expense of private investments in the rest of the economy (i.e. crowd out), the positive growth effects of climate action can be cancelled out. The Enhanced NDCs scenario already assumes some level of crowding in, assuming climate-related public investments targeting infrastructure development in the energy, transportation and industry sectors create new opportunities for private enterprise and that together with NDCs, they create certainty and encourage businesses to invest in the transition (see Chapter 8). This is consistent with evidence that public investment can crowd in private investment especially in the case of infrastructure investments, policy certainty and in developing countries (Argimon, Gonzalez-Paramo and Roldan, 1997[29]; Pereira, 2001[30]; Atukeren, 2006[31]; Matvejevs and Tkacevs, 2023[32]). To further demonstrate the importance of crowding in private investments for positive economic outcomes, two other scenarios are developed where either a stronger crowding in effect or on the contrary a crowding out effect are assumed. A Private investment crowd in scenario, which introduces an 0.2 percentage point decrease in both the equity and investment risk premia in all countries, would result in a positive effect on global GDP which increases over time from around a 0.1 percentage point in 2030 to around 0.2 percentage points in 2040 (Figure 2.6). On the contrary, a Private investment crowd out scenario would cancel out the economic benefits of Enhanced NDCs (Figure 2.6). Overall, it is key that private investments are crowded in and complement public investments in the transition. Indeed, the OECD’s Global Debt Report highlights that an excessive reliance on either the public or private sector to finance the transition is impobable and/or undesirable. If the public sector is assumed to take on all the investment effort for the transition, public debt-to-GDP ratio would rise significantly across all economies, to levels that would be unsustainable in a macro-economic environment where interest rates are insufficiently low and economic growth insufficiently high. Heavily relying on private sector investments to finance the transition would require a very rapid development of capital markets, in particular for energy companies, at a rate unforeseen to date (OECD, 2025[33]).
Additional global GDP effects with respect to Current Policies of Enhanced NDCs scenarios with alternative macroeconomic assumptions, in % points
Note: The figure represents the global GDP deviation with respect to the Current Policies scenarios, in % points, additional to the Enhanced NDC’s effect. The fiscal consolidation scenario assumes most countries reduce their target budget deficits by 1%. In the debt-financed investments scenario, countries use higher budget deficits and public debt instead of raising income taxes to finance public investments for the climate transition in the short term. Tighter/looser monetary responses scenarios simulate a tighter/looser reaction of central banks to public investment and climate policies shocks, with 0.2-0.5 percentage points higher (respectively lower) short-term interest rates. The private investment crowd out and crowd in scenarios introduce a 0.2% increase (respectively decrease) in both the equity and investment risk premia in all countries, resulting in a decrease (respectively increase) of economy-wide private investments. For example, the Enhanced NDCs scenario resulted in a +0.12% deviation of global GDP in 2030 compared to Current Policies (see Figure 2.4). The global GDP deviation with respect to Current Policies in the fiscal consolidation scenario is -0.2% points lower than the effect of the Enhanced NDCs, meaning the fiscal consolidation scenario results in an overall loss of 0.08% of global GDP in 2030 compared with Current Policies.
Source: NIESR’s NiGEM model. See Annex A for model descriptions and references.
National and international choices on openness to trade also have strong interactions with climate policies, by affecting the possibility to relocate production abroad according to resource availability and comparative advantages, as well as affecting global investments, growth and inflation. The scenarios presented in this chapter do not incorporate developments in countries’ trade policies after the end of 2024, but significant changes are occurring in trade policies that could hit global growth and raise inflation (OECD, 2025[34]). The world faces uncertainties related to trade tensions and risks of fragmentation of the global economy, through changes in trade policies and value chains. Recent estimates show a sharp increase in trade policy uncertainty with a risk of fragmentation, which is likely to hurt investment, especially for trade-intensive firms (IMF, 2025[35]). Financial conditions have become tighter, especially for risky assets in emerging markets, which appear to be more sensitive to trade policy uncertainty. While the effect of uncertainty is expected to be temporary, world trade volume estimates have been revised downward slightly for 2025 and 2026 by the IMF.
2.3.1. With Enhanced NDCs, avoided damages would be substantial in the long term, albeit uncertain
When looking further ahead, the economic case for climate ambition is even more compelling as the bulk of environmental and economic benefits from accelerated climate action will be realised in the second half of the century. Following the IEA (2023[1]), it is assumed that, if the trends of the Enhanced NDCs scenario continued beyond 2040, emission reductions would limit global average temperature rise to 1.7°C above pre-industrial levels by 2100, compared to 2.4°C8 under Current Policies. This lower global temperature rise will lessen the expected economic and physical impacts of climate change, such as ecosystem degradation, more frequent extreme weather events and rising sea levels and limit the risk of very severe negative consequences, compared to the Current Policies scenario. Reducing physical damages and risks from climate change will generate significant economic and welfare benefits, e.g. enhancing food security, minimising productivity losses and health impacts due to heat stress, lowering risks to the financial system and decreasing expenditures on disaster recovery and infrastructure repairs.
While the precise scale of economic benefits remains uncertain, avoided damages are likely to be substantial in the long run. Considering three prominent damage functions,9 Howard and Sterner (2017[36]), DICE 2023 (Barrage and Nordhaus, 2024[37]) and Kotz, Levermann and Wenz (2024[38]), collective global action to mitigate climate change in the Enhanced NDCs scenario could lead to reduced physical impacts, such as those related to sea level rise, health or agricultural crop yields. Global GDP losses under the Enhanced NDCs would be reduced to 1–10% by 2050 and to 1-10% by 2100, from 1-13% in 2050 and 2-23% in 2100 in the Current Policies scenario (Figure 2.7). The estimates of aggregate global avoided damages in an increased ambition scenario in 2050 compared to the Current Policies scenario range from 0.2 % to 3 % of potential global output. In the short term, the differences in damages across scenarios remain small, as cumulative emissions have already locked in near-term warming. However, as carbon concentrations lower in the Enhanced NDCs scenario and temperature trajectories begin to diverge, the benefits will increase.
Global GDP loss from climate damages by scenario, % of potential GDP
Note: Damages are expressed as the percentage reduction in global GDP relative to a no-warming counterfactual scenario. Each bar represents the range of estimated global damages made up from the point estimates of the three damage functions applied to a given scenario and year. For example, under the projected temperature trajectory of the Current Policies scenario, global GDP in 2100 is estimated to be 23.5% lower than in the no-warming counterfactual when using the Kotz et al (2024) damage function. To assess avoided damages, comparisons should be made between projections using the same damage function. For instance, the avoided damage between the scenarios associated with the Kotz et al. (2024) function corresponds to the vertical difference between the two triangular markers for the same year. The methodology used to apply the different damage functions to the scenarios of this report is detailed in Annex A.
Source: Authors, based on three damage functions (Howard and Sterner, 2017[36]; Kotz, Levermann and Wenz, 2024[38]; Barrage and Nordhaus, 2024[37]) as well as inputs from IEA’s GCEM model and the 2024 NGFS climate scenarios (NGFS, 2024[39]).
Projected economic gains from reduced climate damages in the Enhanced NDCs scenario are positive for almost all regions. The map in Figure 2.7 shows national-scale avoided damages in 2100 under Enhanced NDCs compared with Current Policies, as a percentage of national GDP, based on the estimation of global climate damages by Howard and Sterner (2017[36]). Projected economic gains from avoided damages vary significantly across regions, reflecting regional differences in geographies, climate conditions and projected climate hazards, economic structures and adaptive capacities. The regional heterogeneity highlights that countries do not face the same level of risk from climate change. While at the global scale, the Enhanced NDCs scenario would allow to avoid damage worth 3% of GDP, avoided damages would be much higher for developing countries in low latitudes, mainly in Sub-Saharan Africa and South Asia, amounting to up to a projected 7% of national GDP in 2100 in Niger. On the contrary, in countries in higher latitudes and with higher levels of GDP, such as Canada, Norway and Iceland, there would be minimal avoided damages.
Overall, the greatest economic benefits from avoided damages with the implementation of Enhanced NDCs are expected to be realised in less developed regions, especially those in lower latitudes, which are commonly reported to be particularly at risk from climate change impacts (O’Neill, 2022[40]; Tol, 2024[41]; Bilal and Känzig, 2024[42]). This can be attributed to several factors. The poorest populations are also most exposed to climate damages (Cruz and Rossi-Hansberg, 2023[43]). Moreover, less developed countries often tend to rely more heavily on climate sensitive sectors such as agriculture. At the same time, financial constraints limiting adaptive capacities exacerbate their exposure to climate risks (Tol, 2024[41]). In contrast, high-latitude and developed countries are projected to incur relatively smaller losses. Few of these countries may even gain economic benefits from higher global temperature levels, which could arise from new comparative advantages in agricultural markets, lower energy costs for heating and increased tourism (OECD, 2015[44]; Burke, Hsiang and Miguel, 2015[45]).
Uncertainty ranges around climate damages become even broader when analysed by region rather than on a global scale. Regional damage estimates are particularly sensitive to projections about future regional patterns in the climate system as well as to (implicit or explicit) assumptions about local socioeconomic developments. Additionally, localised high-impact extreme weather events and climate-change related disasters like wildfires, heatwaves, droughts, add an additional layer of uncertainty. While these are projected to occur more frequently and intensely, their exact spatial distribution, timing and severity are highly stochastic and thus difficult to predict.
Avoided climate damages (% of national potential GDP) in 2100, based on damages estimates from Howard and Sterner
Note: The map presents the geographic distribution of avoided climate damages to GDP under the global warming levels implied by the Enhanced NDCs scenario compared to Current Policies in 2100, based on the Howard and Sterner (2017[36]) damage function. The disaggregation of global economic damages into country-level estimates is aligned with the OECD long term model (Guillemette, forthcoming[46])(Guillemette, forthcoming[38]). Grey shading indicates regions for which data are not available. Subnational differences in impacts can be significant, especially in large counties with diverse climates such as the United States of America; such regional differences could not be taken into account. The methodology used to apply the different damage functions to the scenarios of this report along with the corresponding figures for the alternative damage functions is provided in Annex A.
Source: Authors, based on Howard and Sterner (2017[36]) and inputs from IEA’s GCEM model and the 2024 NGFS climate scenarios (NGFS, 2024[39]).
Environmental and economic benefits may be underestimated, as the damage functions do not account for all potential impact channels, most importantly the increased likelihood of crossing tipping points. Accelerated climate policies are crucial to reduce the likelihood of crossing tipping points, i.e. critical thresholds that, if reached, will lead to large, abrupt and/or irreversible changes in the climate system – such as the irreversible collapse of ice sheets or the reversing circulation patterns in ocean. If crossed, they could trigger drastic and irreversible changes in the climate system, accelerated global warming and severe impacts on human society (OECD, 2022[47]). Based on a synthesis of the tipping point literature by McKay et al. (2022[48]), the higher warming implied by the Current Policies scenario would likely lead to the crossing of two additional tipping points: the collapse of the Labrador Sea circulation; and the loss of mountain glaciers. Furthermore, the crossing of three other tipping points would become possible: the collapse of East Antarctic Subglacial Basins; the dieback of the Amazon rainforest; and the increased intensity of the West African monsoon. If triggered, these events could set off cascading climate feedbacks, further accelerating global warming and leading to severe societal and economic disruptions.
2.3.2. Accelerated climate action brings significant additional environmental and social benefits, not captured by GDP
Climate action to reduce GHG emissions in a global pathway compatible with the Paris Agreement goals will result in additional benefits for the environment, society, human health and well-being, which cannot be easily quantified with modelling tools. Overall, the avoided damages from climate change, combined with additional benefits for health and well-being, make mitigation a welfare-enhancing strategy, with health improvements from better air quality alone potentially offsetting the costs of mitigation (IPCC, 2023[49]). Ambitious climate action is closely linked to human well-being, as it safeguards ecosystems, economies and communities. By reducing the need for costly adaptation measures, mitigation efforts also contribute to enhanced economic stability and resilience, particularly for vulnerable regions.
While the economic benefits from reduced climate damages will only be felt in the longer term due to the inertia in climate and economic systems, there are many environmental and social benefits from climate action that can be felt in the short-term. Possible benefits from climate action include environmental ones, such as resource protection, air and soil quality improvements, as well as social ones, which include improved health, more active lifestyles, sustainable food systems, stronger communities and reduced exposure to stressors such as traffic and congestion, among many other benefits (Helgenberger and Jänicke, 2017[50]). Some of the many co-benefits associated with climate action (IPCC, 2023[49]) include:
Public health: Clean energy deployment, removals of fossil fuel support, and a lower reliance on combustion vehicles reduce air pollution, thereby improving health. Encouraging walking, cycling and public transport also promotes physical activity, reducing health risks associated with sedentary behaviour. Nature-based solutions have a positive impact on health and well-being through people’s exposure to nature and by increasing people’s access to ecosystem services.
Urban resilience and liveability: Green infrastructure in cities mitigates extreme weather impacts and the urban heat island effect while creating healthier, better connected, more liveable urban environments, with higher accessibility.
Biodiversity and ecosystem services: Protecting and restoring ecosystems preserves biodiversity and enhances ecosystems’ ability to absorb carbon and mitigate climate change. Maintaining ecosystems ensures access to essential services like clean water, pollination and natural disaster protection.
Sustainable food systems: Promoting sustainable diets and reducing food waste helps cut emissions, supports healthier eating and limits environmental degradation.
Water stress and access to clean water: The availability of water, both in quality and quantity, is crucial for sustaining ecosystems and biodiversity. Smart water management and efficient water use across all sectors can significantly reduce conflicting water demands by different sectors, therefore lowering economic vulnerability, cutting operational costs, and improving resilience to water stress. Promoting equitable and efficient use of water in energy, agriculture, industry, and households contributes not only to resource sustainability but also to economic stability and climate-resilient development.
Increasing circularity: Circularity allows to lower the use of raw materials, relying instead on secondary materials as well as a longer lifetime of products. This has benefits for health and the environment, thanks to lower extraction and related pollution and health impacts.
Energy security10 and access to energy and clean cooking: More efficient, cleaner energy systems can reduce energy security risks for fossil fuel importing economies. Climate action can also be a chance to bring attention to energy access issues, setting targets and attracting capital.
Climate co-benefits can also contribute to building a more equitable and resilient future. Environmental improvements from climate action can contribute to a just transition, as they are stronger in aeras with lower-income households, who are usually more exposed to environmental risks. Communities in mining regions might both lose or benefit from the transition, depending on whether the mining areas provide fossil fuels or critical materials needed for the transition. Low-income households spend more heavily on energy and food, implying that they will likely feel the effects of the transition more strongly, in absence of additional support (Chapter 5). Furthermore, women and men can benefit differently from climate action. For instance, women in low-income countries often rely more strongly on natural resources for food preparation. Some environmental risks, such as those on water quality or air pollution, usually affect women, children and the elderly proportionately more severely on average; implying that they would also have stronger climate co-benefits (OECD, 2019[51]). Women disproportionately suffer from the health risks arising from the lack of access to clean cooking fuel supplies and will benefit more from clean energy in the transition (IEA, 2024[15]). Co-benefits of climate action will also be unequally distributed spatially, across regions and across rural and urban areas (OECD, 2023[52]). Involving different territorial scales of government in climate action is key to better assessing local co-benefits and better targeting the communities most vulnerable to the transition (OECD, 2023[52]). Countries can develop subnational climate goals and locally-specific transition pathways or plans that reflect local interests and co-benefits potential, in line with the Paris Agreement. NDCs and other national climate plans and strategies can aim to fully incorporate local climate action such as targets sets by regions or cities.
Co-benefits from climate change mitigation, such as improved air quality would have the most immediate effect from climate action. In 2019, air pollution was responsible for 6.7 million premature deaths, 62% of which were linked to ambient particulate matter (PM2.5). Reducing the processes that rely on fossil fuel combustion leads to lower emissions of those key air pollutants. Most notably, combustion processes generally cause emissions of pollutants such as black carbon, which is both a short-lived climate forcer, strongly contributing to climate change and a pollutant which has strong negative health effects. Likewise, methane, which declines by 30% in the Enhanced NDCs scenario compared to Current Policies, is not only a powerful greenhouse gas but is also the primary contributor to the formation of ground-level ozone, a hazardous air pollutant that has negative effects on health and biodiversity, as well as on crop yields. Slowing down or halting combustion processes, such as those in transport or energy generation, would therefore have immediate benefits for air quality and health. Lower pollution levels lead to lower rates of respiratory and cardiovascular diseases, reduced healthcare costs and increased workforce productivity, in turn, positively affecting economic growth. Combining estimates of the social cost of atmospheric release for six pollutants and 56 regions in the world, a modelling analysis projects that a Paris-aligned scenario could lead to air quality benefits ranging from USD 8 to USD 40 per tonne of greenhouse gases abated in 2030, thanks to improved health (Vandyck et al., 2020[53]).
Climate change mitigation policies do not always have synergies with other environmental issues and this needs to be considered in the design of the NDCs. For instance, the expansion of renewables often comes at the expense of other land uses and modifies landscapes. Changes in land use can in turn affect indigenous populations (IEA, 2021[54]; Hodok and Kozluk, 2024[55]). A heavy reliance on critical materials implies increased extraction to meet the needs from clean technologies such as renewables. While extraction will decrease thanks to the lower demand for fossil fuels, the expansion of mining areas for critical materials can have negative consequences on biodiversity, pollution and human health and well-being. Additionally, supply chain vulnerabilities remain a pressing concern, as refining capacity for critical minerals is highly concentrated in a few key countries. Under a Net Zero emissions by 2050 scenario, metals such as copper, cobalt, nickel and lithium are expected to experience between a twofold to tenfold increase in demand (IEA, 2024[15]). The availability of such minerals at scale is a key success factor of the feasibility of the Paris Agreement and will alter the structure of the global energy landscape. This shift signals unprecedented levels of demand for critical minerals, creating both opportunities and risks for the global economy. Vehicle electrification further exacerbates land use changes and the demand for critical minerals and its related risks. Orsi (2021[56]) estimates the impact on land use of a 40% electrified European car fleet to be approximately 60 000 km2 (roughly the size of Latvia). Banza Lubaba Nkulu et al. (2018[57]) suggest that mining and battery production are unlikely to keep up with rising EV demand in a sustainable way in Congo (the larger cobalt producer globally) and Katwala (2018[58]) argues that adding and expanding mining sites may exacerbate unfair labour conditions, cause habitat loss for endangered species and displace communities. Possible negative effects of climate action should be anticipated and pro-actively managed with direct engagement from relevant stakeholders and the affected local communities.
Environmental, health and well-being improvements induced by climate change mitigation can result in positive feedback to the economy. When climate policies lead to positive effects on the environment, health and well-being, this has positive economic feedbacks by improving labour productivity and reducing medical expenditures, among other effects. For instance, improved air quality from lower reliance on fossil fuel combustion results in better health, making people more productive at work as well as improving student performance at school. These changes drive economic growth (OECD, 2021[59]) and could significantly reduce economic losses. The OECD (2016[60]) estimates a reduction in global GDP of 1% by 2060 (with such reduction increasing as much as 2.5% by 2060 in some regions) and the economic cost of labour productivity at USD 330 billion annually by 2060 due to outdoor air pollution (OECD, 2016[60]). Transport policies encouraging a shift to walking, cycling and public transport can also lead to health improvements and economic savings, estimated at up to USD 1.4 trillion annually by 2050 (ITF, 2024[61]). In Europe, climate policies improving air quality could reduce health costs by 166 billion EUR per year (EEA, 2023[62]).
Achieving ambitious mitigation targets will require a transformation of the current socio-economy systems, which can contribute to well-being improvements and interact with other environmental issues. IPCC reports and assessments often call for transformational actions to address climate change and emphasise the importance of transformational pathways through systems transitions (IPCC, 2023[49]). Such transformative change will require adjustments but is also likely going to come with additional positive benefits in terms of improved environmental conditions, health and well-being. For example, policies identified as transformative in the transport sector, such as road space reallocation, have the potential to reduce emissions while improving health, safety and equity (OECD, 2021[63]). The need to transform the current system in the transition offers the unique opportunity to reconsider current approaches and move towards better systems.
The way in which transformative climate change mitigation policies contribute to well-being improvements and interact with other environmental issues differs by sector. For instance, reducing emissions in buildings can include policies to increase energy efficiency, by improving insulation or the heating system, including in new buildings. Better insulation or more efficient buildings imply better living conditions, with positive consequences for well-being and health (OECD, 2019[51]). The climate transition in the buildings sector often has interactions with local and social developments. For instance, there are increasing examples of new buildings being designed with energy efficiency targets that are also affordable or self-sufficient in energy and heating, through the presence of solar panels or geothermal energy. The passenger transport sector is another good example of how transformative climate change mitigation actions can imply well-being improvements. The mobility system can be transformed to reduce emissions while increasing accessibility to services, opportunities and amenities. Improving accessibility by giving priority to sustainable modes and shortening travel time can lead to lower emissions as well as improved well-being (OECD, 2019[51]).
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Recent modelling studies assessing the impacts of increased climate action on GDP have generally found no or small negative impacts by 2030 and 2040 (Annex Table 2.A.1. ). However, results across modelling studies are not easy to compare, due to differences in modelling frameworks and therefore the mechanisms through which climate action impacts the economy, as well as scenario design, including the ambition of the scenarios and the assumptions underlying baseline projections.
Ex-ante assessments of the macroeconomic impact of the transition differ in the level of ambition of mitigation scenarios modelled and the baseline they are compared to. Some studies model net zero by 2050 scenarios, scenarios that allow to remain below 1.5°C of warming with different levels of overshoot, or scenarios that allow to remain below 2°C. In addition, these scenarios are assessed with respect to baseline scenarios, usually a business-as-usual or current policies baseline, which also differ in their level of ambition across modelling studies. In this report, the Enhanced NDCs is a 1.7°C scenario that is compared to an already ambitious 2.4°C Current Policies scenario that takes into account policies under development and achieves small emissions reductions by 2040, which is considered to be the realistic future trajectory of climate action by the IEA. By comparison, the median estimate of the end of the century global temperature increase under current policies used in the UNEP Emission Gap Report is +2.9°C (UNEP, 2024[64]). Some modelling studies focus on measuring the impact of additional efforts to bridge the gap to net zero or 1.5°C compared to a ‘current ambition’ or ‘current NDCs’ baseline.
Second, assumptions and modelling choices regarding the mechanisms through which climate policies will impact macroeconomic outcomes differ across studies. These assumptions and choices vary across studies, in particular on:
The climate policies modelled and their economic impact channels. The current report relies on the modelling of carbon pricing and other climate-related policies. In some studies, such as those by the NGFS, climate action is represented only by carbon pricing which is used as a proxy policy for all other policies (NGFS, 2023[65]) and the specific mechanisms through which different policy instruments affect demand and supply are therefore not captured. Some recent studies, such as Pisani-Ferry and Mahfouz’s assessment of the impacts of climate action in France, have moved away from modelling stylised generic policies to detailed bottom sectoral policy instruments e.g. ban on fossil fuel heating systems, subsidies to wind energy, banning of thermal car sales with or without subsidies to EVs, arguing it is key to provide a more realistic assessment of the overall economic effects of the transition (Pisani-Ferry and Mahfouz, 2023[66]). Such detailed policy instrument modelling is more difficult at the global level, as it is not known precisely which sectoral policy combination each country will choose to scale up climate action.
Revenue recycling assumptions. Assumptions vary with regards to the extent to which governments rely on carbon pricing or reduce price support to fossil fuels and how they use these extra revenues to finance other expenses (transfers to households, labour tax cuts, investments in the transition, indirect tax cuts, debt reduction…). The theoretical literature on ‘double dividend’ states that carbon taxation would allow governments to lower emissions while improving economic efficiency by recycling revenues to reduce distortionary taxes (e.g. labour taxes). Recycling carbon tax revenues to lower distortive labour tax cuts, for instance, has a higher positive GDP effect compared to returning revenues as lump sum transfers to households. However, many countries are choosing to implement climate policy packages with limited levels of carbon taxation. Currently, explicit and implicit carbon pricing only represent between 20 and 50% of climate policy mixes in OECD countries, and much in less in some non-OECD countries (IMF, 2024[67]). It has also become evident that that revenues from carbon pricing will need to be recycled, at least in part, as transfers to households to cushion impacts on the most vulnerable households (Pisani-Ferry, 2021[25]). The present modelling analysis assumes a more realistic mix of policy instruments to mitigate GHG emission beyond carbon taxes and it assumes half of extra revenues (relative to revenues from the Current Policies scenario) from carbon pricing and phasing out of fossil-fuel subsidies are recycled as transfers to households.
The incorporation and quantification of co-benefits (e.g. productivity gains from better air quality). While these are not included in most modelling exercises, including the present, they are explicitly included in the CCDRs (World Bank, 2022[11]) although they often do not include the corresponding opposite co-costs, such as environmental degradation due to extraction of minerals for renewable energies.
Finally, differences inherent to the model types and frameworks used influence the results. Integrated Assessment Models, simulation models, neo-Keynesian Dynamic Stochastic General Equilibrium (DSGE) models, CGE models and structural macro econometric models have different representations of macroeconomic dynamics and can capture different economic mechanisms. This leads to important differences in the modelled effects of climate-oriented investments. Modelling studies based on macro-econometric or new-Keynesian economic modelling differ from standard CGE models in whether they asses the investment-multiplier associated to the additional investments for climate transition, while in neo-classical based modelling studies those additional investments lead to crowding out investment in other sectors. Modelling studies also often rely on calibrating macroeconomic models with bottom-up technical energy models (such as the IEA’s GEC) that provide different representations of the energy transition. The sectoral scope of climate action and emissions reductions also varies across models, with some assessing only the macroeconomic impacts of the energy transition and others also considering agriculture and land use policies and emissions reductions. In the present study, there is much more detailed representation of the energy transition and policies targeting energy-related emissions based on calibration to the IEA.
Macroeconomic studies of the impact of the climate transition are useful tools but all, including the present, have modelling limitations that should be considered when using their results. Macroeconomic studies of climate action incorporate different effects of the transition as shocks to demand and supply, but the actual transition will lead to a complex transformation of economies whose precise mechanisms it remains difficult to fully model with current frameworks (Direction Générale du Trésor, 2025[68]). Some negative impact channels are omitted or rarely reflected in macroeconomic models. Trade dynamics linked to the climate transition and in particular bottlenecks in supply chains of critical materials for the energy transition are rarely integrated and are likely to have negative effects on global GDP. Studies, including the present, are also built on the core assumption that financing for the transition is accessible. On the other hand, many studies, including the present, do not specifically consider potential spillover effects of climate transition-related technical progress on innovation and productivity which could further increase the positive effect of climate action on GDP.
Source: Adapted from (Direction Générale du Trésor, 2025[68]) and individual macroeconomic studies as listed.
← 1. The modelling framework is also focused on climate change and cannot quantify costs and benefits from indirect impacts of climate action on other environmental issues, most notably the co-benefits for air quality.
← 2. As such, the modelling exercise relies on a fairly optimistic Current Policies scenario, taking into account not only existing policies but also those that are currently legislated and under development but not yet implemented, in line with the IEA’s STEPS scenario.
← 3. The IEA scenarios do not take a least-cost approach, which may fail to take account of all potential issues, such as market failures, political or individual preferences, feasible ramp-up rates, capital constraints and public acceptance.
← 4. Both models provide global results but also disaggregated country-level and regional ones, allowing for distinction between different types of economies, based on income level but also on the reliance of economies on fossil-fuel based energy.
← 5. This mechanism is usually referred to as the Porter hypothesis (Dechezleprêtre, Nachtigall and Venmans, 2023[75]; Dechezleprêtre et al., 2019[76]).
← 6. Diversification has been driven by improvements in the regulatory and business environment.
← 7. Inflation is also linked to climate impacts. Extreme weather events, such as floods and heatwaves, drive food prices up, as they damage crops and disrupt supply chains and energy production. The effect of climate-related extreme events on inflation can be particularly severe in developing countries and for vulnerable households, where food accounts for a significant share of spendings.
← 8. Global mean surface temperature at the 50% likelihood level.
← 9. The selection of damage functions used in this analysis reflects a range of plausible estimates from the literature. The 2023 DICE damage function (Barrage and Nordhaus, 2024[37]), widely used in integrated assessment models, represents a low-end estimate derived from a synthesis of existing studies. For a high-end estimate, the econometrically derived damage function from (Kotz, Levermann and Wenz, 2024[38]) is used. This function is used in the NGFS scenarios (NGFS, 2024[39]) and reflects the most recent empirical advancements in climate-econometric modelling. As a middle-ground estimate, the damage function from (Howard and Sterner, 2017[36]) is used. This function is based on a meta-analysis of previous studies and is also used in the OECD Long-Term Macroeconomic Model (Guillemette, forthcoming[46])(Guillemette, forthcoming[38]). Together, these functions capture a broad range of projected economic impacts from climate change across different methodological approaches.
← 10. The energy transition is strongly linked to energy security. While clean energy does not necessarily decrease energy security risks, it changes the nature of energy security challenges (Chapter 4). The energy crisis has highlighted the vulnerability of the energy system and its dependency on international trade.