The Welfare Effects of Degrowth as a Decarbonization Strategy

We evaluate the welfare and macroeconomic implications of three distinct strategies aimed at reducing carbon emissions, which could be categorized within the diverse landscape of ideas encompassed by the degrowth literature. These strategies include penalizing fossil fuel demand, substituting aggregate consumption with leisure, and curbing consumption by limiting total factor productivity growth. Using an environmental dynamic general equilibrium model (eDGE) that incorporates both green renewable technologies and fossil fuels in the production process, our study sets an emissions reduction target aligned with the goals of the Paris Agreement by 2050. The results reveal that the strategies analyzed, which most closely align with the strictest interpretations of degrowth—namely, a reduction in the consumption of goods and services compensated by an increase in leisure, or strong impediments against conventional economic growth—may entail significant economic consequences, leading to a notable decline in welfare. In particular, a degrowth scenario aimed at curbing consumption through a decline in Total Factor Productivity (TFP) yields the most pronounced reduction in welfare. Conversely, inducing a reduction in fossil fuel demand by increasing the price of fossil fuels through taxes, despite potential social backlash, shows noticeably less detrimental effects on welfare compared to other degrowth policies. Furthermore, under this degrowth strategy, our findings suggest that a globally coordinated strategy could result in long-term welfare gain.