Accelerated climate action will drive significant structural transformations across the global economy. OECD economic modelling indicates that, over the next 15 years, economic activity will shift towards less energy-intensive sectors in the presence of accelerated climate action. While national climate plans often place a strong emphasis on the energy sector, the modelling underscores the potential benefits of expanding the sectoral coverage of climate policies. By better distributing ambition across various sectors and aligning actions with the specific sources of emissions, many global regions could achieve greater overall effectiveness at reducing emissions relying on least-cost options. This chapter highlights the advantages of economy-wide policies, including the importance of addressing greenhouse gases beyond carbon dioxide. Furthermore, it emphasizes the critical role played by sectors such as agriculture, forestry and other land uses in supporting the objectives of the Paris Agreement.
Investing in Climate for Growth and Development
Abstract
4.1.1. The most substantial shifts in sectoral production occur within the energy system
Accelerated climate policies drive structural transformations across the economy, which affect both production and consumption. Both production and consumption are projected to change in the coming years and decades in response to socio-economic trends, including digitalisation, servitisation, as well as demographic changes, such as urbanisation and ageing. These trends strongly interact with the climate transition, which can accelerate some of them. For instance, the transition will accelerate servitisation and shorten the lifetime of emission-intensive technologies and physical capital. Understanding these structural changes is essential to anticipate adjustment needs, particularly in labour markets and in considering distributional implications of accelerated action (see Chapter 5). This chapter provides a sectoral analysis of the Enhanced NDCs scenario. The Enhanced NDCs scenario assumes accelerated climate policies and increased investments across countries able to achieve emission reductions in line with the “well-below 2°C” target of the Paris Agreement (see Chapter 2 for additional information on the scenario). This scenario is compared to a Current Policies scenario, which serves as the baseline and reflects policies already in place or legislated, incorporating the existing ambition and implementation gap in current NDCs. The primary tool employed for this analysis is the OECD’s ENV‑Linkages model, which, with its multi-sector, multi-region structure, is uniquely suited to evaluate the structural shifts induced by climate policies. ENV-Linkages is used as part of a larger toolkit of models, which support the calibration of economic projections, the evolution of the energy system as well as the effect of investment in clean technologies (Annex A).
Accelerated climate policies serve as powerful catalysts for transitioning production and consumption patterns toward cleaner, more sustainable alternatives. Where switching is not technically or economically feasible, such policies may lead to the contraction of specific sectoral activities, either at regional or global level.1 Climate initiatives targeting end-use sectors, such as transportation and services, typically focus on reducing energy demand, promoting energy efficiency and fostering the adoption of low-emission technologies. Unlike fossil fuel production, these sectors are often positioned to undergo structural transformations rather than outright contractions. Their capacity for adaptation hinges on the extent to which they can substitute carbon-intensive inputs with sustainable alternatives. For instance, service industries and light manufacturing, with their higher reliance on electricity rather than direct fossil fuel combustion, can benefit from the transition to renewable energy sources without requiring fundamental changes to their operational frameworks. Conversely, heavy industries like steel and cement face greater hurdles due to the technical challenges of replacing high-temperature combustion processes or fossil-based feedstocks which are integral to their production methods (see Section 6.2 in Chapter 6 on implementable investable NDCs).
In the Enhanced NDCs scenario, the limited effect of the policies on aggregate economic growth hides stronger sectoral changes (Figure 4.1).2 Sectoral emissions intensity is projected to change over time. Significant reductions in emission intensity highlight the key role for low-emission technologies in mitigating emissions. In the Enhanced NDCs scenario, emission intensity is projected to decline substantially for fossil-powered electricity production, from almost 10 kg CO2eq per unit of output in 2022 to around 7 kg CO2eq in 2040. This change is due to a switch towards less carbon-intensive fossil fuels, mostly notably gas, as well as the phase-out of coal-powered electricity production.3 In fossil fuels extraction and distribution, emission intensity in 2040 is projected to be less than half of 2022 levels in the Enhanced NDCs scenario. More moderate declines are observed in non-energy sectors, including transport and industry. Services and construction show no notable changes in CO2 intensity in the Enhanced NDCs scenario.
The most substantial shifts in sectoral production occur within the energy system, marked by a sharp decline in fossil fuel production and significant growth in renewable energy (Figure 4.1). By 2040, fossil fuel energy output is projected to drop by approximately 50% under the Enhanced NDCs scenario, compared to the Current Policies scenario. In stark contrast, renewable electricity sectors are projected to expand by 36%, thanks to targeted investment and to policy-induced substitution away from fossil-based energy. The effects on non-energy sectors are less pronounced in the Enhanced NDCs scenario. At the global level, gross output for non-energy sectors is projected to experience limited effects, supported by advancements in technology and targeted sectoral investments that help sustain economic activity. Among these sectors, construction stands out with the most notable change, anticipated to grow by 2% by 2040 relative to the Current Policies scenario. This increase is due to the higher demand for low‑carbon infrastructure, including for low-carbon public transport and for the expansion of the electricity grid. The relatively minor impacts on non-energy sectors can also be attributed, in part, to the scenario’s strong emphasis on energy-related policy measures.4
GHG intensity in kg CO2 equivalent/USD (primary axis) and % change in gross sectoral production compared to Current Policies in million USD (real) in 2040 (secondary axis), aggregate sectors
Note: Aggregate sectors are ranked according to their GHG-intensity (CO2-eq) in 2022. The aggregation of model sectors is detailed in Annex A. EITE industries refer to emission-intensive and trade exposed industries.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
A central feature of the transition with Enhanced NDCs is a structural shift in the energy system characterised by both electrification and energy savings. Widespread improvements in energy efficiency are a key driver of the transition under the Enhanced NDCs scenario. By 2040, total final energy demand in the Enhanced NDCs scenario is projected to be approximately 16% lower globally than in the Current Policies scenario, for a small GDP increase of 0.2% (Chapter 2). Energy savings are achieved across almost all sectors (Figure 4.2) and are primarily driven by policies (e.g. stricter efficiency standards and emission pricing), which incentivise investment in and deployment of more energy efficient technologies and processes. At the same time, direct fossil fuel use is projected to be increasingly replaced by electricity across non-energy production sectors. Driven by lower prices compared to energy from fossil sources, global demand for electricity in 2040 is projected to be 2% higher with more ambitious climate action compared to the Current Policies scenario. The additional demand is met through a large-scale expansion of renewables, which are projected to account for 75% of electricity generation globally in 2040, while fossil fuel-based electricity production and energy use is projected to decline.
The overall changes in the energy system give rise to indirect effects on energy demand. As worldwide energy demand falls, energy prices drop and make energy use more attractive for some sectors. In the services sector, this leads to a relative increase in energy intensity of production compared to the Current Policies scenario. This sector-specific rebound effect thereby partially offsets the overall reduction in energy use.
Difference in global sectoral energy demand (TwH) between Current Policies and Enhanced NDCs scenarios (%), 2040
Note: The aggregation of model sectors is detailed in Annex A. EITE industries refer to emission-intensive and trade exposed industries.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
4.1.2. Structural changes vary across regions
The sectoral impacts of accelerated climate action vary across regions. Although all regions experience a transformation of their energy systems, the scale and sources of these changes differ (Figure 4.3). These cross-regional disparities stem from variations in policy ambition between the Enhanced NDCs and Current Policies scenarios, as well as differences in initial economic structures. Key factors influencing the extent of the transformation include the current sectoral composition of each economy and energy mix and particularly the reliance on fossil fuels and the degree of renewable energy deployment.
High-income countries see the sharpest contraction in fossil fuel production and consumption in the Enhanced NDCs scenario, driven by more aggressive climate policies, such as higher carbon prices and fossil fuel phase-outs. In these regions, fossil fuel production declines substantially, both in absolute terms (-165 billion real USD) and relative terms (-81%). Conversely, while fossil fuel reductions in low‑income countries and oil‑producing regions are more moderate, these areas exhibit the highest relative growth in renewable power generation – 68% and 45%, respectively, compared to the Current Policies scenario. This growth reflects their lower initial renewable capacity and penetration rates.
The regional differences in sectoral output are more marked for non-energy sectors. The largest changes take place in oil producing economies, as they need to substantially redirect economic activity from the energy sector towards other sectors, thereby diversifying their economies. Specifically, the energy-intensive industrial sectors in oil producing economies are projected to increase output by over 13% by 2040 in the Enhanced NDCs scenario, compared to Current Policies, suggesting shifts in comparative advantages and subsequent production relocation towards less regulated regions in energy‑intensive industries. While high-income countries (HIC) experience a 3% output decline (– 202 billion USD), low-income countries (LIC) and oil-producing economies see output increases of 4% (+124 billion USD) and 13% (+138 billion USD) by 2040, respectively. In absolute terms, however, this shift is offset in high-income countries by the expansion of non-energy-intensive industries, where output is projected to be 3% (+555 billion USD) higher by 2040 compared to Current Policies. Transport and construction generally show a mix of moderate positive trends, influenced by advancements in low-carbon solutions and investments in sustainable infrastructure. In reality, future changes in industrial output will depend on the ability of policies and policy packages to stimulate private sectors’ efforts in innovating and deploying new technologies. To facilitate the transition in industrial sectors, many countries are adopting green industrial policies, namely interventions intended to improve structurally the performance of the domestic business sector, generally with a view to promote the development of specific sectors or technologies (Box 4.1).
Difference in gross sectoral output between Current Policies and Enhanced NDCs scenarios (%), 2040
Note: ENV-Linkages model regions are grouped into high-income, middle-income and low-income country aggregates based on their national income. 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 not included in any of the three income groups. The list of countries included in each group and the income classification thresholds are provided in Annex A, which also details the aggregation of model sectors. EITE industries refer to emission-intensive and trade exposed industries.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
The race for green innovation and technology deployment is heating up and countries are competing to secure a sizable share of this growing market. Global investment in clean energy manufacturing is booming, driven by industrial policies and market demand. In 2023, clean electricity accounted for around 80% of new capacity additions to the world’s electricity system and electric vehicles (EVs) for around one out of five cars sold globally. Employment in clean energy jobs exceeded that of fossil fuels in 2021. In this new global energy economy (IEA, 2021[1]), clean technologies offer huge market opportunities and areas for investment and international competition. The global market size for six main green energy technologies (solar PV, wind, EVs, batteries, electrolysers and heat pumps) exceeded USD 700 billion in 2023 and, in today’s policy landscape, is set to nearly triple by 2035, reaching a value close to that of the global crude oil market in recent years (RTSD, 2024[2]).
In this context, several governments have introduced green industrial policy packages triggered by the urgency of the green transition, but also the willingness to address important economic, social and environmental challenges, such as the competitiveness of industrial sectors, the concentration of global market power leading to strategic dependencies, as well as concerns about growth, inequality, economic resilience and security. While the expansion of climate action as a whole has slowed down in recent years, mitigation policy activity targeting the industrial sector has been strongly increasing since 2010 and showed signs of renewed momentum after 2022 across countries, especially due to a strong increase in non-market based policy instruments such as information instruments and performance standards (OECD, 2024[3]). For instance, China has provided long-standing support to clean energy, becoming a dominant player in clean energy transition technologies. Several OECD countries have adopted green industrial policies to preserve industrial competitiveness and to prevent deindustrialisation and the associated social and economic disruptions. Indonesia is implementing tax breaks for EVs and local production requirements that have attracted foreign investment (e.g. BYD plans to establish a USD 1.3 billion EV plant in Indonesia by 2026).
Yet, there is currently no consensus on the efficiency of such policies. On one hand, proponents consider them necessary for the transition. Used wisely, industrial policies can play a key role in addressing the interconnected challenges of competitiveness, climate emission reduction and security objectives. On the other hand, green industrial policies are raising some significant concerns, related to the impact on public finances and the opportunity cost of public spending, implications for competitiveness and the risk of leading to a green subsidy race.
OECD research shows that governments should consider some key design considerations to maximise the benefits of green industrial policies and minimise potential risks. These include a clear timeline for policy phase-out, promoting competition and establishing strong mechanisms for monitoring, evaluation and reporting of fiscal costs. Overall, policy packages should be designed to help accelerate emissions reductions, while minimising risks to competitiveness, inclusiveness, and economic efficiency. In this context, green industrial policies are increasingly considered a necessary part of policy packages to ensure that industrial sectors can be preserved and supported by the development and deployment of green technologies. While important progress is being made, including through the OECD’s work on quantifying industrial strategies and measuring distortions in international markets, knowledge gaps abound. Data on the magnitude and nature of government support to green industry remain incomplete and explain a lack of policy evaluation studies. These knowledge constraints highlight the need to put policy evaluation at the core of green industrial policies.
Source: (OECD, 2024[4]).
In the Enhanced NDCs scenario, electricity prices rise in the short term, but by 2040 they fall below Current Policies levels in all regions, as the productivity of renewables increases sufficiently to overcome the upward pressure of increased demand (Figure 4.4). Lower electricity prices facilitate the transition away from fossil fuel use, while such price shifts are also a direct outcome of more ambitious climate policies. In the short term, electricity prices exceed those projected under the Current Policies scenario due to the rising costs of fossil fuel-based generation, which accounted for 62% of global electricity production in 2024. Furthermore, the limited flexibility of capital stock in the short run restricts producers' ability to swiftly transition to cleaner technologies in response to policy-induced changes in production costs. However, this trend reverses over time. By 2040, electricity prices fall below Current Policies levels across all global regions, driven by increased investment in cost-effective renewable energy sources and advancements in energy efficiency. As the energy system transitions to a low-carbon model, electricity becomes both cleaner and more affordable, offsetting the initial price hikes observed during the early phases of the shift. Consumer prices for other essential goods are also affected. For instance, in the Enhanced NDCs scenario, transport prices are projected to follow a similar trajectory as electricity: an initial price increase driven by higher fossil fuel costs, followed by a long-term decline thanks to electrification.
The pace of the transition and its impact on electricity prices vary across country groups. High‑income countries benefit from a larger initial share of renewables in their electricity mix and a faster shift away from fossil fuels. Under the Enhanced NDCs scenario, electricity prices in high-income countries are projected to rise in the short term but return to 2022 levels before 2030. Beyond 2030, these prices are expected to decline, falling below those in the Current Policies scenario by 2035 and reaching levels approximately half a percentage point lower than the Current Policies scenario by 2040, equivalent to about 3 percentage points below current levels. Middle-income economies face a slower transition due to limited renewable capacity and continued reliance on fossil fuels, on aggregate. Their electricity prices are projected to show a less dramatic short-term increase, returning to current levels before 2030, and becoming lower than those under Current Policies after 2035. In low-income countries, the rise in electricity prices is more prolonged but also falls below Current Policies levels by 2040, reflecting a slower start in scaling up ambition. This slower start postpones the benefits of renewable capacity until later in the timeline considered.
Consumer Price Index (CPI) (2022=1) of electricity commodity in Current Policies and Enhanced NDCs scenarios by aggregate region
Note: CPI reflects market prices plus any consumer excise or ad valorem tax and subsidies. ENV-L model regions are grouped into high-income (HIC), middle-income (MIC) and low-income (LIC) country aggregates based on their national income. Oil producers (OilP) are economies which rely predominantly on extracting and exporting fossil fuels, regardless of income levels. Countries included in the Oil producers’ group are not included in any of the three income groups. The list of countries included in each group and the income classification thresholds are provided in Annex A.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
Countries can play a key role in ensuring that price increases are limited and that price decreases do not lead to rebound effects. Price increases for necessary goods, such as energy or transport, pose transition challenges, particularly for low-income households, which typically spend a higher share of their income on energy. Contrarily, the easing of price levels facilitates consumption, industrial competitiveness and additional investments in clean energy (IEA, 2024[5]). In the case of short‑run price increases, countries can support the transition through monetary policies that can help limit the price increases (Chapter 2). In the medium to long-term, lower prices could slow down the transition by sustaining energy demand. Countries could avoid rebound effects in energy use by designing policy packages that can prevent such effects. Specifically, policies that aim at limiting demand and facilitating behavioural changes can ensure that climate-friendly behaviours are maintained, even in the presence of lower prices (Box 4.2).
An effective, holistic climate policy mix requires incorporating demand-side mitigation policies (i.e. policies aiming to influence demand for goods and services by end-users, to promote low‑carbon consumption patterns and lifestyles). Such policies have been relatively underused to date, with generally greater attention being paid to supply-side mitigation policies (i.e. policies aiming to influence how demand for goods and services is met). The IPCC estimates that demand-side mitigation strategies have the potential to reduce global GHG emissions in three key end-use sectors (buildings, land transport, and food) by 40-70% by 2050 (Creutzig et al., 2023[6]). Demand-side measures can be viewed as Avoid, Shift or Improve (ASI) actions. Avoid actions focus on reducing consumption and use where possible, e.g. working from home instead of commuting to an office. Shift actions focus on moving to other less carbon-intensive technologies or methods of service provision, e.g. using a bicycle or walking instead of travelling by car. Improve actions focus on decreasing the emissions intensity of existing products or services, e.g. using a battery electric vehicle (BEV) instead of an internal combustion engine vehicle (ICEV) (Creutzig et al., 2023[6]). Demand-side and supply-side measures are interdependent, indicating that leveraging synergies between the two, and thereby maximising emissions reductions, requires careful design of the composition and sequencing of policy packages.
A key element of demand-side mitigation is encouraging behavioural change towards sustainable choices, which requires supporting technologies and infrastructure. Climate change often ranks behind other issues such as economic concerns among household priorities, and motivation to change behaviours remains relatively low. For measures targeting behavioural change to be successful, they need to account for the most important drivers of decision making, namely affordability, availability and convenience (OECD, 2023[7]). For instance, promoting energy conservation through support for investment in energy efficiency can drive demand-side change by leveraging affordability concerns, while investing in infrastructure can shift behaviours by improving the availability and convenience of low-carbon alternatives. Insights from behavioural science can improve demand-side policymaking. For instance, tools such as green defaults, social influences and choice architecture have been shown to be effective in promoting behavioural change by populations. Information instruments (e.g. the provision of accurate and transparent information on products’ carbon footprints (OECD, 2025[8]) play a key role in overcoming informational barriers facing consumers and empowering them to make sustainable choices. Interventions for consumer education and awareness, as well as regulation, guidance to businesses, and other measures can help to tackle greenwashing, which represents a growing barrier to sustainable behavioural change.
Demand-side policies have significant potential co-benefits, including cost savings, reduced pollution and the preservation of biodiversity and human health. They can also lead to more equitable outcomes, insofar as they target the reduction of high-carbon consumption, which is typically concentrated in high‑income groups or high-income countries. For instance, advanced economies have the greatest potential to decrease demand through reductions in wasteful energy use or food consumption. Emphasising such characteristics of demand-side policies can help to bolster their acceptability to the public.
Recent OECD work has identified opportunities for demand-side policies across several key sectors, for example:
Shifts to low-carbon technologies and reductions in energy consumption can help to reduce emissions from energy use in buildings. Effective policy packages likely require a combination of financial incentives, information provision, regulation and mandatory standards to address barriers to behavioural change.
Investment in public transit systems and road space reallocation in favour of active mobility (e.g. walking and cycling) can contribute to reducing current high levels of dependency on cars, with high levels of emissions. Improvements to infrastructure, such as charging stations, appears to be an impactful way of encouraging adoption of battery electric vehicles by households.
Price-based measures to increase the affordability of plant-based proteins relative to meat are likely to be effective in reducing emissions associated with diets. More environmentally sustainable diets may offer co-benefits related to health and affordability, which policymakers can emphasise in public communication efforts.
The provision of better recycling services and expansion of charging schemes for mixed waste disposal can contribute to reducing waste and its associated emissions. In addition, both policies are associated with greater engagement in waste prevention behaviours.
Source: (OECD, 2025[8])
Energy security – the ability of nations to ensure a stable, affordable energy supply (IEA, 2025[9]) – has become an increasing policy priority. The energy crisis triggered by Russia’s war on Ukraine has exposed vulnerabilities in fossil-fuel reliance, reigniting concerns about national energy security (Kim, Panton and Schwerhoff, 2024[10]). Countries aim to safeguard uninterrupted energy availability against potential disruptions, including geopolitical events, supply chain disturbances and extreme weather. This section examines how the transition to low-emission energy will reshape global fossil fuel demand and trade, increasing dependence on renewables and transforming energy security strategies.
The energy transition also lowers geopolitical risks associated with fossil fuel imports, creating a more resilient and secure energy system. The energy transition implies lower reliance on fossil fuel imports, which are concentrated in a limited number of regions, and a higher reliance on low‑emissions energy, such as electricity renewables, which is primarily produced domestically. In 2022, 86% of the global population lived in countries that were net importers of fossil fuels (IRENA, 2024[11]). As every region and country has some form of renewable energy potential, the transition will allow these countries to increase the share of domestically produced renewable energy in their energy mix. Shifting energy dependencies from the global to the national level will enable countries to increase their energy independence and control and reduce exposure to international geopolitical disruptions and fossil fuel price volatility (IRENA, 2024[11]). Furthermore, by diversifying energy supply and investing in clean technologies, countries can mitigate supply disruptions, stabilise energy prices and strengthen energy independence.
In the Enhanced NDCs scenario, the transformation of the energy sector is projected to lead to a decrease in fossil fuel imports in all regions, with particular benefits for oil importing countries. All global regions are projected to import fewer fossil fuels compared to the Current Policies scenario (Figure 4.5), reducing dependency on external suppliers of fossil fuels and exposure to global price volatility (Figure 4.3). Fossil fuel import volumes decrease most – by 30% overall – in high-income countries where policies are most stringent. These are followed by low-income countries, where fossil fuel import volumes are projected to be 17% lower overall compared to Current Policies by 2040 (Figure 4.5). Fossil fuel import bills fall correspondingly across all country income groups.
Fossil fuel import volumes in 2040 (Mtoe in % deviation from Current Policies) by fuel type and aggregate region
Note: ENV-L model regions are grouped into high-income, middle-income and low-income country aggregates based on their national income. Oil producers (OilP) are economies which rely predominantly on extracting and exporting fossil fuels, regardless of income levels. Countries included in the Oil producers’ group are not included in any of the three income groups. The list of countries included in each group and the income classification thresholds are provided in Annex A.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
However, the transition could have mixed effects on energy security in the shorter-term as it is likely to lead to higher market concentration of fossil fuel suppliers (Kim, Panton and Schwerhoff, 2024[10]). There is already an existing trend of market concentration, especially for oil, which the IEA projects will continue under both current policies and an accelerated energy transition (IEA, 2023[12]). As fossil fuel demand falls internationally, fossil fuel suppliers with higher extraction costs will exit the market leading to higher concentrations and increased risks for energy security (Kim, Panton and Schwerhoff, 2024[10]).
While the net zero transition can offer long-term energy security benefits, it also introduces new risks and dependencies. The Enhanced NDCs scenario sees increased renewable electricity production across all global regions, in the range of 28-70% in 2040 compared with Current policies. Meeting such a significant increase in renewable capacity, together with the demands from other transitioning sectors (e.g., transport), implies a strong demand for critical materials and technologies, which are concentrated in a few countries. As shown by the International Energy Agency (2024[13]), by 2040, in a scenario reflecting current pledges the global demand for all critical minerals in the clean energy sector is projected to be 3.3 times higher than in 2023 (Figure 4.6).5 Supplies of critical minerals are highly concentrated in China and Indonesia, with China accounting for 50 to 90% of new capacity growth for almost all critical minerals (copper, lithium, cobalt, graphite and rare earths). Clean energy manufacturing capacity is also highly concentrated geographically, mainly in China, for solar PV, wind, heat pumps and especially battery components (IEA, 2023[12]). China also accounts for a large portion of announced clean energy manufacturing capacity additions in these sectors, due to lower capital and production costs for these manufacturing facilities (IEA, 2023[12]). Additionally, intermittent renewable energy sources like wind and solar require robust infrastructure and storage solutions, and delays in their deployment can risk supply instability and energy shortages during the transition period. These risks can be mitigated by diversifying technologies and developing the recycling and circular economy strategies (IRENA, 2024[11]). Demand‑side measures to encourage more sustainable choices in the use of energy, such as providing targeted financial incentives for the installation of energy-efficient technologies to households, will also be crucial to limit reliance on energy (OECD, 2024[14]).
Global critical minerals demand for clean energy technologies, by mineral, IEA’s Announced Pledges Scenario
Note: Critical mineral demands for the clean energy sector are based on deployment trends projected for the IEA Announced Pledges Scenario (IEA, 2023[12]) on which the Enhanced NDCs scenario is calibrated. The IEA GCEM assesses the mineral demands for following clean energy technologies: low-emissions power generation, electricity networks, electric vehicles, grid battery storage and hydrogen technologies. Growth rates (annotation over 2040 bar) are between 2023 and 2040.
Source: IEA Critical Minerals Dataset (IEA, 2024[15]) based on IEA’s GCEM model.
4.4.1. The policy implementation gap varies by sector
According to recent trends in policy adoption and changes in policy stringency, current policy action shows an implementation gap in many sectors. Countries have adopted different policy packages targeting various sectors and emission sources, often combining market-based and non‑market‑based instruments (Figure 4.7).6 Despite an increasing share of global emissions sources subject to mitigation policies, significant coverage gaps remain (Eskander and Fankhauser, 2020[16]; Nascimento et al., 2021[17]). Furthermore, current climate policy action appears to be misaligned with countries’ sectoral emission profiles (OECD, 2024[3]). For example, while transport accounts for the highest share of energy-related emissions in OECD countries, climate action is second to lowest, based on an analysis of the OECD’s Climate Action Policy Measurement Framework (CAPMF) (Nachtigall et al., 2024[18]).
Note: The top panel presents the average stringency across market-based and non-market-based climate policy instruments aggregated across OECD countries. The climate action scores are derived from the Climate Actions and Policies Measurement Framework (CAPMF), a harmonised database tracking countries’ climate mitigation policies. Climate policy action is measured as a combination of policy adoption and policy stringency. The measures reflect the adoption and relative stringency of climate policies but do not assess their effectiveness. Scores (0-10) were calculated by normalizing policy instruments based on their in-sample distribution across countries and years, where score of 0 indicates the absence of the instrument and a score of 10 represents the highest observed stringency for that instrument (for further details on the scoring methodology, see (Nachtigall et al., 2024[18])).
Source: Authors based on data from (OECD, 2023[19]) and the EDGAR 2024 global emissions database (Crippa et al., 2024[20]).
The composition of policy packages is influenced by country-specific economic and political factors, and by the institutional context. In developing countries, policy approaches need to be aligned with local development goals and consider potential constraints of institutional capacities. Policy recommendations in high-income countries often assume well-regulated financial markets, privatised energy markets and a public sector capable of effectively administrating tax and subsidy reforms. In contrast, limited institutional capacity, thin financial markets and a large informal economy make certain policies, for example emissions trading systems, difficult to implement in less developed countries (Caucheteux, Fankhauser and Srivastav, 2025[21]). As a result, policies in all regions are on average more stringent for non-market-based instruments, in particular in the transport and industry sectors (Figure 4.8).
In the past two decades countries have enlarged the variety and stringency of policy instruments that they use, although this progress has slowed in recent years (OECD, 2024[3]). Since 2021, the expansion of climate action – measured as a combination of policy adoption and stringency – has declined significantly to around 2% in OECD and OECD partner countries, well below the average growth rate of 10% observed between 2010 and 2021 (OECD, 2024[3]). This points to an increasing gap between commitment ambitions and actual implementation, especially in specific sectors.
Climate action across policy categories, sectors and country groups a score of 0 indicates that no policy is in place, while a score of 10 is representing the highest possible stringency)
Note: The figure presents the average stringency across market-based and non-market-based climate policy instruments aggregated by country groups and four key sectors for the year 2021. The stringency scores are derived from the Climate Actions and Policies Measurement Framework (CAPMF), a harmonised database tracking countries’ climate mitigation policies. The measures reflect the adoption and relative stringency of climate policies but do not assess their effectiveness. Scores (0-10) were calculated by normalizing policy instruments based on their in-sample distribution across countries and years, where score of 0 indicates the absence of the instrument and a score of 10 represents the highest observed stringency for that instrument (for further details on the scoring methodology, see (Nachtigall et al., 2024[18]). Scores for policy categories and sectors were aggregated using an unweighted average across policy instruments included within the respective policy categories. Country group scores were calculated using an unweighted average across the respective countries. Following the World Bank country classification (World Bank, 2022[22]), income groups are defined by 2023 gross national income per capita as follows: low income (<USD 1,145), middle income (USD 1,146–USD 14,005), and high income (>USD 14,005), with OECD countries forming a separate group.
Source: (OECD, 2023[19]).
4.4.2. Economy-wide policy action can lead to additional benefits
Spreading policy action across all sectors in the economy can bring additional benefits by further reducing emissions of non-CO2 greenhouse gases. This section presents the effects of a hypothetical Economy-wide scenario in which all regions implement economy-wide climate action, relying on a uniform carbon tax on all sectors and sources of emissions (Box 4.3).7 The uniform carbon tax is less distortive, as it allows policy efforts to be spread evenly across the economy.8
For the analysis in this section, the ENV-Linkages model was used to develop an additional scenario that reflects a regional carbon tax, uniformly applied to all sectors and gases. In this scenario, for each region, GHGs emission reduction targets are set at the level of the Enhanced NDCs scenario. However, contrarily to the initial scenario design, which reflects a mix of policy instruments (see Chapter 2), in the Economy-wide scenario emission reductions are achieved through an economy-wide carbon tax, imposed on all sources of GHG emissions.
In the Economy-wide scenario, the model calculates uniform regional prices by optimising the level and distribution of abatement efforts across emission sources and sectors. By levying a uniform carbon price to all sectors and gases, the costs of reducing an additional unit of GHG-emissions (marginal abatement cost) are equalized across the economy within a region. This allows to achieve cost-efficient emission reductions in the model, as emissions are cut where it is cheapest to do so. As such, the scenario is designed so that the carbon tax replaces all policies included in the Enhanced NDCs scenario, with the exception of the additional investments to support clean energy technologies and the associated economic boost, estimated with the NiGEM model (Hantzsche, Lopresto and Young, 2018[23]). Clean energy investment is maintained to ensure comparability between the two scenarios. The rule of redistribution of revenue through income taxation is also maintained. The sectoral distribution of emissions therefore changes compared with the Enhanced NDCs scenario, all while maintaining the same aggregate emission reductions (Figure 4.9).
Global sectoral greenhouse-gas emissions (Gt CO2eq), by year and scenario
Note: All GHG emissions are presented in CO2-equivalent, thus accounting for the differential global warming potential (GWP) relative to CO2 over a 100-year time horizon. The GWPs used in the modelling analysis are based on the IPCC Fifth Assessment Report (Myhre et al., 2013[24]). Aggregation of the model sectors is detailed in Annex A. EITE industries refer to emission-intensive and trade exposed industries.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
The redistribution of efforts from CO2-intensive sectors towards other sectors entails distinct levels of reductions of all GHGs. Different GHGs originate from different sectors. For instance, 60% of methane originates from agriculture and waste while F-gases mostly originate from electrical equipment (including refrigeration and AC). The Enhanced NDCs scenario already shows reductions in non‑CO2 GHGs (Figure 4.10. ), mostly due to change in energy demands and productions. Keeping the same levels of ambitions as the Enhanced NDCs scenario in terms of temperature increases, economy‑wide policy action would imply a slight increase in CO2 emissions, compensated by larger reductions in non‑CO2 greenhouse gases, which have higher global warming potential (Figure 4.10. ).
Global greenhouse-gas emissions (Gt CO2eq) in 2040 by gas and scenario, excluding LULUCF emissions
Note: Greenhouse gas (Carbon dioxide (CO₂), Methane (CH₄), Nitrous oxide (N₂O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), and Fluorinated gases (FGAS)) emissions are presented in CO2-equivalent,accounting for the differential global warming potentials (GWP) relative to CO2 over a 100-year time horizon. The GWPs used in the modelling analysis are based on the IPCC Fifth Assessment Report (Myhre et al., 2013[24]).
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
By 2040, global GDP growth is projected to increase by 1% in the Economy-wide scenario, compared to the Enhanced NDCs scenario (Figure 4.11), thanks to a more efficient allocation of policy action across sectors and gases (Box 4.1). Indeed, economy-wide action implies that policy action and emission reductions are spread across the economy, therefore exploiting remaining low-cost emission reduction options, whenever available. These results should be interpreted with caution as the scenario set up does not consider externalities and market failures that arise when expanding policy action to non‑energy sectors via a carbon tax. For instance, in hard-to-abate sectors, emission reductions are usually not achieved via carbon taxation but thanks to subsidies and dedicated support for technological development.
At the regional level, while differences between the Enhanced NDCs and the Economy-wide scenarios are small, the results depend on the region. While GDP slightly increases in high- and middle-income countries in the Economy-wide scenario compared to the Enhanced NDCs scenario, it slightly decreases in lower-income countries and oil producing countries. In high- and middle-income countries, the uniform tax allows to reallocate reductions to sectors with lower cost-options. In oil producing countries, the negative effect is driven by the fact that the Economy-wide scenario maintains the investment changes, which, for these countries, can be negative due to a strong decline in support to fossil-based energy production, not sufficiently compensated by an increase in support for renewables. In these countries, where the highest share of GDP comes from the energy sector, reallocating action to other sectors is more costly, when maintaining the reallocation of investment towards clean sectors. In the case of low-income countries, the slight negative effect is instead due to trade adjustments and relative losses of competitiveness compared to the Enhanced NDCs scenario. For instance, as high- and middle-income countries increase their industrial production in the Economy-wide scenarios, the demand for industrial and agricultural goods produced abroad declines, therefore negatively affecting output in other countries.
Projected real GDP by aggregate region in 2040 (trillion constant USD 2021 PPP) under Enhanced NDCs and the Economy-wide scenario
Note: Gross Domestic Product (GDP) is presented in purchasing power parity (PP) and real terms to account for inflation and differences in price levels between countries. ENV-L model regions are grouped into high-income, middle-income and low-income country aggregates based on their national income. Oil producers (OilP) are economies which rely predominantly on extracting and exporting fossil fuels, regardless of income levels. Countries included in the Oil producers’ group are not included in any of the three income groups. The list of countries included in each group and the income classification thresholds are provided in Annex A.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
The structural changes in the economy are projected to be less marked with economy-wide policy action. Compared to Enhanced NDCs, in the Economy-wide scenario, the reallocation from fossil‑based energy towards low-emissions energy is less strong (Figure 4.12). Output increases in industry sectors because the impact of policy on fuel prices is less stringent for those sectors, while it decreases slightly in transportation sectors where changes in fossil fuel price have a stronger impact. Both output and emission reductions in the services sector are higher in the Economy-wide scenario, than in the Enhanced NDCs scenario, as in the Economy-wide scenario there is no rebound effect in services (Section 4.1), thus enabling a stronger decoupling of emissions from output for these sectors. Finally, much of the new emission reductions take place in the agriculture and food sector in the Economy‑wide scenario. This effect is the result of the direct taxation of N2O and CH4 in crops and livestock activities and comes at the cost of lower output for these sectors. Several options are available to ensure that emission reductions in agriculture are compatible with food security (Ignaciuk et al., 2021[25]). These include avoiding excessive demand for food and decreasing food waste. Additionally, food security concerns are related to the distribution of food supply, rather than overall food production.
Difference in gross sectoral output between Current Policies and Enhanced NDCs scenarios (%), 2040
Note: The aggregation of the model’s sectors is detailed in Annex A. EITE industries refer to emission-intensive and trade exposed industries.
Source: OECD ENV-Linkages model, with inputs from the NiGEM and IEA’s GCEM models.
Abating non-CO2 GHGs can have strong health and environmental benefits, in addition to contributing to climate change mitigation. The case of methane is particularly compelling. While not directly dangerous for human health, methane contributes to the formation of ground level ozone, which is formed in the atmosphere because of chemical and photochemical reactions involving precursor gases such as NOx, VOCs and methane. High concentrations of ground level ozone can cause respiratory disease, with consequences in both the short and long-term. Globally anthropogenic methane emissions cause approximately half a million premature deaths globally (UNEP, 2021[26]). High concentrations of ground level ozone can also lead to negative impacts on crop yields, as well as plants in general (Feng et al., 2022[27]).9 Both health and crop-yield impacts can have feedbacks to the economy that can limit economic growth, via reduced labour productivity due to health issues and lower agricultural production due to the negative impacts on crop yields (OECD, 2016[28]). Reducing methane emissions could be particularly beneficial for health in oil and gas producing developing countries (OECD, 2025[29]). These countries could improve public health and air quality and retain the competitiveness of their exports as natural gas importing requirements tighten. Robust methane abatement policies in developing countries can help reduce emissions upstream in the value chain and avoid shifting emissions to developing countries (OECD, 2025[29]). Developing countries could benefit from support in methane abatement to facilitate policy implementation and technological developments.
4.5.1. Emission reductions in AFOLU are a central element of ambitious climate policy packages
The Agriculture, Forestry and Other Land Use (AFOLU) sector plays an important role in emission reduction scenarios compatible with the Paris Agreement. The AFOLU sector is a major source of global GHG emissions, contributing to 22% of global GHG emissions (IPCC, 2023[30]). AFOLU emissions originate from various sources, including methane from livestock, nitrous oxide from soils and manure management, CO2 from land use, land use change and forestry (LULUCF) and from forest fires. Although categorised as energy-related, the agricultural sector is also a source of CO2 emissions from fossil fuel use from agricultural machinery, buildings and farm operations.
In the absence of additional policy action, emissions from AFOLU are projected to continue to rise. Climate action is therefore required to limit the sector’s emissions to meet the Paris Agreement’s temperature goal. However, contrary to many other emitting sectors, the AFOLU sector also holds the potential to remove emissions from the atmosphere through afforestation, reforestation, forest and soil management and to reduce emissions related to energy supply through bioenergy (biogas and biofuel using livestock manure, intermediate crops and crop residues). However, climate mitigation policy coverage in the sector has been limited, particularly in terms of carbon pricing (OECD, 2022[31]). In the Economy-wide scenario, where carbon pricing is applied equally across all emitting sectors and types of gases, AFOLU emissions are reduced by 14% compared to the Current Policies scenario by 2040, versus 2.5% in the Enhanced NDCs scenario.10 This shows that the AFOLU sector holds significant cost-effective mitigation potential, untapped by current policies. In countries where the AFOLU sector represents a high share of national emissions and/or has large potential for carbon land sinks, AFOLU policies can be a central part of optimal climate policy mixes.
AFOLU mitigation measures represent some of the most important and cost-effective options currently available, including for reducing near-term emissions (Nabuurs et al., 2023[32]). Based on the IPCC, the OECD estimates the potential for emissions reductions in AFOLU at 6 to 21 Gt CO2-eq per year between 2020 and 2050 (OECD, 2022[31]). Up to half of the AFOLU mitigation economic potential could be achieved at low cost, under 20 USD per tonne of CO2-eq (Nabuurs et al., 2023[32]). Most AFOLU mitigation options are available and ready to deploy. They include the protection, improved management and restoration of forests, peatlands and coastal wetlands for the land use sector; soil carbon management; agroforestry; the use of biochar; improved rice cultivation; fertilisation management; and livestock, fertilisation and nutrient management for the agricultural sector, as well as demand-side measures such as shifting to sustainable healthy diets and reducing food waste. Most of the evaluated economic mitigation potential in AFOLU comes from land use change solutions, in particular reducing deforestation (3.2-6.4 Gt CO2-eq per year), rather than from reducing on-farm agricultural emissions (0.3‑1.3 Gt CO2-eq per year) (OECD, 2022[31]).
AFOLU mitigation measures also offer unique and substantial environmental and well‑being co‑benefits compared to mitigation options in other sectors. By contributing to better land use practices, most AFOLU mitigation measures help to conserve biodiversity and ecosystem services, and protect water quality and supply, soil fertility, food security and livelihoods, and also offer adaptation potential and resilience to droughts, floods and other climate-related disasters (Nabuurs et al., 2023[32]).
Progress on AFOLU mitigation policies to date has been slow, especially for market-based policies. While fuel excises in the agricultural sector are comparatively high, the AFOLU sector is otherwise subject to mitigation policies that are relatively limited in scale (OECD, 2024[33]; OECD, 2022[31]). There are very few examples of national-level market-based instruments that target AFOLU emissions (OECD, 2022[31]). In most countries, carbon pricing policies such as carbon taxes or emission permits do not cover AFOLU emissions, although the AFOLU sector is sometimes indirectly included through offset provisions (La Hoz Theuer et al., 2023[34]). A notable exception is the New Zealand Emissions Trading Scheme for which some categories of forest owners have mandatory participation.11 (Henderson, Frezal and Flynn, 2020[35]). More recently, Denmark has also announced, as part of the “Tripartite Agreement on a Green Denmark”, the enforcement of a carbon tax on a portion of livestock emissions as of 2030, set to start at 40 EUR per ton of CO2e increasing to 100 EUR per ton of CO2 by 2035 (Danish Government, 2024[36]).
Subsidies are currently the predominant policy instrument for GHG mitigation in the AFOLU sector. A wide range of schemes compensate landowners for taking actions that reduce emissions (OECD, 2024[33]). An OECD inventory of direct and indirect mitigation policies in the AFOLU sector across 44 countries found that out of 1,300 implemented policies, two-thirds are economic instruments. Of these, the vast majority (96%) consist of subsidies, such as producer payments or payments for ecosystem services. (OECD, 2024[37]). Beyond subsidies, two other prominent policy types are information instruments (e.g. education and labelling) and framework regulations safeguarding carbon sinks (e.g. regulations related to deforestation in Brazil and Indonesia) (Henderson, Frezal and Flynn, 2020[35]; OECD, 2024[37]; OECD, 2024[33]). A review of OECD and G20 studies on the effectiveness of AFOLU mitigation policies showed that conservation-focused zoning policies, which protect natural carbon sinks, had the highest potential mitigation effects per hectare, followed by technology standards and government investment R&D, which can improve productivity and reduce emissions intensity (Lee and Ignaciuk, 2025[38]). Direct or indirect subsidies to climate mitigation in AFOLU were also found to reduce emissions, but at a lower average level (ibid).
The development of AFOLU mitigation policies has faced persistent barriers in both developed and developing countries. The AFOLU sector guarantees global food and wood security and sustains many livelihoods in developed and developing countries (Nabuurs et al., 2023[32]; OECD, 2022[31]). In the agricultural sector in particular, governments face the triple challenge of ensuring the affordable and safe provision of food, maintaining livelihoods dependent on agriculture, and making the sector more sustainable (OECD, 2022[31]). In developed countries, concerns over public acceptability, feasibility of monitoring, reporting and verification systems, as well as emissions leakage, have presented barriers to developing carbon pricing policies for the AFOLU sector (Raude et al., 2024[39]). The OECD estimated that about one-third of emission reductions achieved through a tax applied only to OECD countries’ agricultural emissions would be leaked in other countries not subject to such a tax (OECD, 2019[40]). Policies to reduce agricultural emissions have been focused on innovation productivity to reduce the emissions intensity of agriculture, but direct incentives for reducing agricultural emissions remain limited over concerns that policies may lower production or farm incomes (OECD, 2022[31]). In developing countries, AFOLU policies raise concerns about wood and food security among poorer producers and consumers (OECD, 2019[40]; Nabuurs et al., 2023[32]). Moreover, forest and carbon sink preservation regulations in many countries have been hindered by weak enforcement, governance issues, fragmented land ownership, or unclear property rights (Nabuurs et al., 2023[32]).
Environmentally distortive support to agricultural and forestry sectors and lack of financing for mitigation measures also constitute a major barrier to reducing AFOLU emissions. Agriculture is one of the most heavily supported sectors in OECD countries. Total support to agriculture reached USD 842 billion per year between 2021 and 2023 in 54 countries, as evaluated by the OECD (2024[41]). Only a small share of agriculture support is tied to improving the sector’s environmental outcomes, with 20% of support to mandatory constraints linked to existing regulations and only 5% used to promote voluntary actions beyond statutory requirements (OECD, 2024[41]). Re-orienting budgetary support to incentivise and facilitate more sustainable agricultural production and GHG emissions reduction would help address this finance gap. Directly paying farmers directly for ecosystem services, carbon sequestration in agricultural soils, and resource-saving production practices would help reduce AFOLU emissions while creating new income sources for farmers (OECD, 2022[31]). Beyond support to the agricultural sector, lack of financing remains a considerable barrier to AFOLU mitigation in general, especially in developing countries. To date, an estimated USD 0.7 billion per year has been spent on AFOLU mitigation overall, with a large share of this coming from REDD+ (Nabuurs et al., 2023[32]). The estimated global funding requirement to deliver Paris-compatible mitigation in the AFOLU sector is USD 400 billion per year by 2050 (Nabuurs et al., 2023[32]).
Efforts to reduce emissions in the AFOLU sector must balance policy-driven food security risks with climate-related threats to agricultural output and nutrition. AFOLU mitigation policies can drive up food prices and exacerbate food security concerns both directly – by increasing production costs for emission-intensive farming, and indirectly, by intensifying competition for crop land and water resources through afforestation, ecological restoration and scaling up bioenergy (e.g. BECCS) (Hasegawa, Fujimori and Havlík, 2018[42]; Gao et al., 2025[43]). However, these trade-offs must be framed against the baseline risk of climate-change-related yield losses and crop failures, which pose a substantial threat to global food security and nutrition (OECD, 2023[44]). With global food demand projected to substantially increase in the next decades in response to population growth and rising living standards (van Dijk et al., 2021[45]), developing countries are faced with the challenge of adapting the sector to reconcile mitigation, adaptation and development objectives. A range of options can ensure that emission reductions in AFOLU are compatible with food security goals (Ignaciuk et al., 2021[25]). For example, on the demand-side, feebates can be used to alter the relative demand of different food items and raise the price of high-GHG-intensive food products while simultaneously lowering that of lower-GHG alternatives. When such feebates are imposed on non-optimal dietary products such as red meat, additional public health co-benefits could be realised (Springmann et al., 2016[46]; Errendal, Ellis and Jeudy-Hugo, 2023[47]).
Some countries have successfully implemented AFOLU policies as part of their climate policy mix and reduced the sector’s emissions. One notable example is Costa Rica, a country with strong reliance on land-based mitigation and nature-based solutions, and specifically forests. The 1996 Forest Law represented a turning point in the country’s land use, redefining public and private forest management requirements (Corbera et al., 2011[48]). It included a total ban on deforestation and introduced an innovative countrywide Payment for Ecosystem Services programme (PES), the first in Latin America (ibid). Between 1997 and 2015, Costa Rica reduced 166 million tonnes of CO2e due to deforestation and forests now cover 60% of the country’s surface, up from 40% in 1987 (Obando-Vargas and Obando-Coronado, 2020[49]). Since 2013, its land use sector has become a net-carbon sink (Obando-Vargas and Obando-Coronado, 2020[49]). Costa Rica has implemented the REDD+ program (Reducing Emissions from Deforestation and Forest Degradation), which has been recognised for its success in reversing deforestation and conserving biodiversity. The country was the first tropical country to reverse deforestation and the first country in Latin America to receive payments from the World Bank’s Forest Carbon Partnership Facility for verified emission reductions under the REDD+ programme (World Bank, 2022[50]). Costa Rica aims to further enhance its LULUCF sinks to reach carbon neutrality goal (Climate Action Tracker, 2024[51]). In 2020, Costa Rica launched a new large-scale emission reductions ”Carbon Fund” programme to increase the impact of policies implemented over the previous 30 years, including by strengthening the governance of national protected areas, which cover 25% of its territory, and by expanding its PES programme (World Bank, 2022[50]).
In the agricultural sector specifically, several countries have consistently reduced their agricultural emissions over several decades, in particular in Europe. European countries that have reduced their farm-gate emissions in the past two decades include Albania (-40% between 2000 and 2022), Belgium (‑25%), Croatia (-21%), Denmark (-20%), France (-18%), Germany (-16%), Greece (-40%), the Netherlands (-10%), Slovakia (-28%) and Switzerland (-13%).12 Overall, in the EU, agricultural emissions have slightly declined since the 2000s (-5% since 2005, (European Environment Agency, 2024[52])) while agricultural production has increased (Eurostat, 2025[53]). However, it remains difficult to attribute these emissions reductions to specific agricultural policies. Successive reforms of the EU’s Common Agricultural Policy (CAP) have aimed at decoupling support from production (1992 MacSharry Reform, 2003 Fischler Reform, 2009 Health Check) (OECD, 2022[31]). In 2013, another CAP reform introduced the sustainable management of natural resources and climate action as one of the CAP’s three pillars. Under this reform, 30% of direct support is conditioned to measures to enhance the provision of environmental public goods, including related to GHG mitigation. Climate-friendly land use and management practices, including investment in climate action, are supported through a mix of mandatory and voluntary instruments (OECD, 2022[31]). However, there is limited evidence that CAP policies contributed to the observed reduction in agricultural GHG emissions in the EU since 1990 (Nabuurs et al., 2023[32]). Despite some progress in the past decades, EU countries project that in aggregate their agricultural emissions will increase from current levels until 2030 if no further policies and measures are put in place (European Environment Agency, 2024[52]). EU countries’ agricultural GHG emissions are covered by the EU Effort Sharing Regulation (ESR), which sets annual targets for each Member State for 2030, to reach the EU’s overall GHG reduction targets of 55% by 2030 under the EU Climate Law (OECD, 2022[31]).
Because of the unique characteristics of the AFOLU sector, AFOLU mitigation policies must be designed with a broader sustainable development perspective, considering social, economic and environmental aspects. These three dimensions are interdependent and necessary to ensure global food security as well as resilience of the sector. A comprehensive sustainable development approach is also key because AFOLU mitigation offers many opportunities for co-benefits. Many land use mitigation measures and some agricultural mitigation measures have substantial co-benefits for biodiversity conservation, resilience to climate change, and air and water quality or food security (Nabuurs et al., 2023[32]). Some other mitigation measures pose significant risks to food security and the environment. Large-scale bioenergy with carbon capture and storage (BECCS) holds substantial mitigation potential but, because of its land requirements, could put increasing pressure on ecosystems and their ability to sequester and store carbon. Ill-deployment of BECCS would indeed compete with other AFOLU mitigation measures (e.g. reduced deforestation) and result in the loss of land sinks (Hanssen et al., 2020[54]). By raising food prices and reducing food availability, it could also come in competition with food security objectives, depending on the scale of deployment (Calvin et al., 2021[55]; Bustamante et al., 2014[56]; Smith et al., 2013[57]). The AFOLU sector’s characteristics substantially differ across countries and regions, warranting policy responses adapted to regional specificities and to the local risks and co-benefits they can deliver.
4.5.2. The reliance on carbon dioxide removal, including forest carbon sequestration, can influence the socio-economic costs of the transition
Forest sequestration and, in general, negative emissions are an integral part of Paris‑aligned pathways, with mitigation efforts requiring both GHG emission reductions and carbon dioxide removals (CDR).13 CDR can come from a wide range of nature-based (e.g. planting trees) and technology-based approaches (e.g. facilities and infrastructure that capture and store CO2). To achieve ambitious climate targets, the focus must be on deep, rapid and sustained emission reductions (UNFCCC, 2023[58]). However, CDR will be key to balance remaining emissions in hard-to-abate sectors and to bring global average temperatures to levels compatible with the Paris Agreement temperature goals (Bednar et al., 2023[59]). Unlike technology-based approaches, nature-based solutions can also bring about several co‑benefits, most notably for ecosystem services.
Countries’ climate plans rarely detail how their CDR efforts will evolve. Currently, CDR efforts amount to around 2 Gt CO₂ per year (less than 4% of global net GHG emissions). Afforestation and reforestation are the dominant CDR activities, with forest carbon sinks in China, the EU27, the USA, Russia and Brazil accounting for more than half of global negative emissions (Smith et al., 2024[60]). Novel CDR approaches, such as bioenergy with carbon capture and storage (BECCS) and direct air capture and storage (DACS), only removed around 1.3 Mt CO2 in 2023 (less than 0.1% of all CDR) (Smith et al., 2024[60]). While many countries are now aiming to scale CDR activities, their NDCs and long-term strategies rarely outline specific removal targets. In a review of 111 NDCs,14 only 55 provided information on the specific contribution of CDR to their 2030 GHG mitigation target (Lamb et al., 2024[61]). Similarly, only 28 of 70 long-term strategies submitted to the UNFCCC by November 2023 included quantifiable information on their intended levels of CDR by 2050 (Smith et al., 2024[60]).
Modelling results depend on assumptions made on future pathways for CDR, including both nature-based and technology-based CDR. In the modelling analysis presented in Chapter 2, the Enhanced NDCs scenario assumes levels of energy-related CDR (i.e. BECCS), based on projections from the World Energy Outlook (IEA, 2023[12]). The Enhanced NDCs scenario assumes a required level of energy‑related CDR to balance GHG sources and sinks of 1.9 Gt CO2-eq, while most 1.5°C-compatible scenarios analysed by the IPCC have higher estimates, ranging between 3.5 and 16 Gt CO2-eq (IEA, 2023[62]). This is because the IEA modelling prioritises deep and rapid reductions in GHG emissions, with rapid improvements to energy efficiency as well as high shares of wind energy, solar energy and hydrogen in the energy mix.
The level of reliance on CDR also affects the economic consequences of ambitious climate policies. Most energy-related CDR approaches have high costs per tonne of CO2 removed, and very limited co‑benefits and revenue generation opportunities other than payments for removal outcomes (Honegger et al., 2021[63]). Furthermore, many CDR approaches require significant land, energy and water resources, creating trade-offs with other mitigation options and societal objectives (Fuss et al., 2018[64]). Therefore, if GHG emission reductions are slower than modelled, and more CDR is required, this could increase the overall cost of ambitious climate action to limit temperature increase to a given level. Risk factors that may drive higher reliance on CDR by mid-century include:
Slower than modelled improvements in energy efficiency and demand-side climate change mitigation policies (OECD, 2024[14]; IEA, 2024[65]).
Delayed deployment of renewable energy due to supply-chain bottlenecks (IEA, 2024[13]).
Unsuccessful efforts to halt and reverse deforestation before 2030 (Climate Focus, 2024[66]).
The crossing of climate system tipping points with additional large releases of greenhouse gases in the atmosphere and/or additional global warming impacts (including the Greenland ice sheet meltdown, permafrost collapse, Amazon forest dieback), which would require climate ambition to be increased (OECD, 2022[67]).
Climate damages will entail substantial impacts throughout the whole economy. Climate change poses both chronic risks – long-term, gradual impacts due to increased temperature levels or precipitation variability, sea level rise, and ecosystem degradation – and acute risks from the increased occurrence of extreme weather events such as droughts, heatwaves, floods and wildfires (O’Neill, 2022[68]). Both types of risks affect economic activities through various drivers, including productivity losses, direct damages to assets, and disruptions in operations and supply chains.
Exposure to climate risks and impact channels differ across sectors. Sectors relying directly on inputs from natural resources such as land and water are particularly vulnerable to climatic conditions, e.g. agricultural yields are heavily dependent on rainfall and ambient temperatures (OECD, 2023[44]). In addition, the risk faced by a sector depends on the share of workers in heat-exposed occupations and by how susceptible its infrastructure, capital assets, and production processes are to climate variability and extreme events. Yet, even subsectors not directly prone to physical risks are likely to be subject to productivity losses and cost increases through inter-sectoral spillovers, such as price changes that result from climate impacts or changes in the productivity of capital that result from capital destruction from sea-level rise or flood events (OECD, 2015[69]). Examples of sector-specific climate change impacts include:
Agriculture: The sector is generally considered to be at high risk due to climate change, because it relies heavily on natural capital that is directly affected by change in climate conditions and has a high share of workers that are exposed to heat stress. Rising mean temperatures and greater precipitation variability, depress crop yields and shift suitable cultivation areas, while extreme heat events and increased occurrence of droughts can trigger crop failures and livestock stress (Deschênes and Greenstone, 2007[70]; Schlenker and Roberts, 2009[71]; OECD, 2023[44]). In many places, forestry faces increased wildfire risk and fisheries suffer natural resource stock losses from ocean warming and acidification (OECD, 2023[72]).
Energy: Extreme weather events can damage generation facilities and transmission networks (Fant et al., 2020[73]). Water stress and prolonged droughts may limit the availability of cooling water for thermal power generation (e.g. coal, natural gas and nuclear) and directly affect the supply of hydroelectric power (Ganguli, Kumar and Ganguly, 2017[74]). On the demand side, rising average temperatures change heating and cooling day patterns, for example in residential heating where a decrease in heating demand is not projected to offset an increase in cooling demand (Wang et al., 2023[75])
Industry: Rising temperatures and increasing occurrence of heatwaves have a detrimental effect on labour-productivity in the industrial sector, leading to lower output (Costa et al., 2024[76]). For example, Somanathan et al. (2021[77]) estimate that annual plant output for a sample of Indian manufacturers falls by about 2% for each increase per 1°C above average temperatures. Water‑intensive subsectors, such as concrete production, are under the risk of water stress and climate-related water scarcity (World Bank Group, 2016[78]). At the same time, capital-intensive industries are exposed to acute shocks. For instance, an estimated 18–23 % of global chemical‑manufacturing capacity is in flood-prone zones, making plants vulnerable to asset damage, supply-chain disruptions and costly downtime (UNEP, 2023[79]).
Services: Health services are confronted with rising heat-related morbidity and mortality, alongside the spread of climate-sensitive vector-borne and food-borne diseases that increase demand for healthcare and could strain public health systems (Lüthi et al., 2023[80]). Projected shifts in tourism flows are heterogenous across regions, with losses in southern regions and benefits in high altitude regions (OECD, 2015[69]). For the financial services sector, climate change can imply an increased risk of credit defaults and lower asset values as well as higher liabilities for insurers.
Transport: Transport infrastructure and operations face both permanent impacts, e.g. loss of infrastructure and increased maintenance costs, and temporary service disruptions from extreme weather events or due to high temperatures jeopardizing worker and passenger safety. Yet, in some locations reduced ice formation can extend shipping seasons and reduce winter-related delays (Christodoulou and Demirel, 2018[81]).
Countries' varying economic structures shape the extent and nature of their climate-related risks. Alongside climatic exposure and conditions, a country’s adaptive capacity depend from national wealth and from its economic structure. Economies with a large agricultural share of GDP, such as many low‑income countries, or small economies reliant on coastal tourism are particularly exposed to risks, whereas diversified economies are better positioned to absorb climate-related shocks (Tol, 2024[82]). Nonetheless, even well-diversified economies face significant costs across sectors: labour productivity losses from increased heat stress, infrastructure adaptation expenditures (e.g., seawalls and cooling systems), and increased insurance liabilities. Adaptation to climate change will play a key role in fostering resilience to climate change.
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← 1. Firms could decide to relocate production activities, or the competitive position of firms could be reduced vis-à-vis competitors, or there may be a contraction of the global market.
← 2. The Current Policies scenario already implies a non-zero level of climate action and living standards are projected to increase worldwide in both scenarios. Subsequent changes in household demand change the sectoral demand structure over time irrespective of climate policies (non-homothetic preferences in ENV-L).
← 3. This refers to coal-powered electricity, without carbon capture and storage (CCS).
← 4. The scenario design reflects the current focus of climate policies on the energy sector and relies on input from the IEA’s World Energy Outlook. A scenario with a different distribution of efforts across sectors would lead to different results. The implications of such a scenario are discussed in Section 4.4.
← 5. These estimates reflect the results of the IEA’s Announced Pledges Scenario (APS) (IEA, 2023[12]) on which the Enhanced NDCs scenario is calibrated.
← 6. Policies in non-OECD countries tend to rely more on non-market-based instruments, while non-market-based policies are most prevalent in the transport and industry sectors.
← 7. In ENV-Linkages, different GHGs (CO2, CH4, N2O, F-gas, HFC, SF6, PFC) are presented in CO2-equivalent.
← 8. This is a hypothetical scenario designed to gather information on the possible economic and environmental consequences of economy-wide policy action. Results from this scenario should be interpreted accordingly.
← 9. As a strong oxidant, ozone is toxic to plants and causes several types of symptoms including markings on the foliage (which can make leaf crops such as spinach or lettuce unsaleable), reduced growth and yield, as well as premature death of the plants.
← 10. Emissions for the ENV-Linkages’ aggregated agriculture sector including crops, livestock, forestry and fisheries. These are very close to the agriculture and food emissions reported in Figure 4.9but exclude food product emissions.
← 11. New Zealand’s Emissions Trading schemes (ETS) includes both forestry emissions and removals. Since 1990, forest owners can choose to be subject to the ETS in which case they receive and surrender credits for their forestry removals and emissions.
← 12. Calculations based on FAO’s estimations of national farm gate greenhouse gas emissions (FAO, 2024[83]). Farm gate emissions cover greenhouse gas emissions generated within the farm boundary from crop and livestock production activities, excluding emissions related to land use change.
← 13. Anthropogenic activities removing carbon dioxide (CO2) from the atmosphere and durably storing it in geological, terrestrial, or ocean reservoirs, or in products. This includes existing and potential anthropogenic enhancement of biological or geochemical CO2 sinks and direct air capture and storage (DACS) but excludes natural CO2 uptake not directly caused by human activities (IPCC, 2021[84]).
← 14. The 111 NDCs were prioritised according to Parties’ contributions to global net GHG emissions. The Parties covered account for more than 95% of GHG fluxes in 2021.