Climate Change and Productivity — An Exploration

This article explores the links between climate change and productivity. It finds that while much debate has focused on labour and multifactor productivity growth, improving productivity in the use of energy and materials is crucial to achieving net zero and requires much greater emphasis in productivity analysis. Although complementary productivity measures are available, these have not yet become mainstream. Productivity measurement also needs to be improved. Mainstream economic studies have long significantly underestimated the damaging impacts of climate change on growth and productivity. At the same time, studies today may overestimate the long-term costs of policies to address climate change. Standard measures of productivity show few signs of a transition to more sustainable growth. Multi-factor productivity growth – the combined efficiency of factors inputs – has been falling at the global level, and the transition to net zero will likely require large investments in resource-intensive fixed capital, and not just intangible and human capital. While energy and materials productivity are improving, global material use continues to grow rapidly. Moreover, although CO2 emissions have decoupled from GDP growth in many advanced economies, the current pace of decoupling is far below what is needed for net zero. The challenge for policy is how to design climate change policies to meet the global objective of net zero while limiting the impacts on productivity growth and living standards.