What if climate targets can only be reached in a shrinking economy?A scoping review of challenges and potential solutions

Abstract

Debates on environmental sustainability are marked by divergent assessments of whether continued economic growth is compatible with ambitious targets to reduce the use of natural resources and greenhouse gas emissions. To account for the possibility that environmental sustainability can only be achieved with lower economic output, this study carries out a thought experiment in which ambitious environmental policies result in economic contraction. We provide an overview of potential challenges for labor markets, the welfare state, public finance, innovation and consumption patterns. We also discuss which types of policies might be implemented to address these challenges. On this basis, we highlight four central approaches of how to deal with the consequences of reduced economic output. First, making do with less by establishing clear priorities for public spending and increasing its efficiency. Second, tapping new streams of public revenue by increased taxation of externalities, wealth and top incomes. Third, rethinking the role of the state to guide innovation and to allow for more flexibility to adapt to changing economic conditions. Fourth, more participatory decision-making to limit the influence of special interest groups and navigate distributional conflicts.