Winners and losers in the climate change transition

As world leaders negotiate at the United Nations Climate Change Conference (COP26) summit in Glasgow, the need to ensure global warming does not exceed 2 degrees Celsius, avoid the worst consequences of climate change, and rapidly reduce carbon emissions critical. This will require a substantial increase in carbon prices, and in a low-carbon world, not all countries can compete equally for business.

In an orderly transition scenario, the impact on global trade would be modest. Only a small share of global trade is transferred. Overall trade may even rise slightly as carbon pricing creates new spreads between countries. The biggest losers, energy-intensive countries, Russia and India, will see their GDP fall by 2 percentage points. Western Europe, which cuts carbon emissions early, is expected to grow.

In a disorderly transition scenario, a larger share of global trade would shift, but same as with an orderly transition, the overall value of global trade would be little changed. Compared to an orderly transition, winners and losers have the same results, but with significantly higher levels of impact. Russia's GDP will drop by nearly 7%, India by nearly 4 percentage points, and China by nearly 2%. GDP growth in France, Spain, Italy and Germany were all around 2 %.

And if the US, Europe, and Japan lead the rest of the world in raising carbon prices and protect domestic producers from price competition by imposing carbon border taxes, the impact on international trade will be even greater. A carbon border tax would boost gains in Europe, minimize losses in the U.S. and Japan, and increase the impact on the rest of the world.