The Welfare Effects of Degrowth as a Decarbonization Strategy

Purpose The purpose of this paper is to asses the welfare and macroeconomic implications of three distinct degrowth strategies designed to reduce carbon emissions: penalizing fossil fuel demand, substituting aggregate consumption with leisure and disincentivizing total factor productivity (TFP) growth. Design/methodology/approach Using an environmental dynamic general equilibrium (eDGE) model that incorporates both green renewable technologies and fossil fuels in the production process, this study sets an emissions reduction target aligned with the goals of the Paris Agreement by 2050. Findings The results reveal that the conventional degrowth strategy, wherein a reduction in the consumption of goods and services is compensated with an increase in leisure, may entail significant economic consequences, leading to a notable decline in welfare. In particular, a degrowth scenario resulting from a decline in TFP yields the most pronounced reduction in welfare. Conversely, inducing a reduction in fossil fuel demand by fiscally inflating the price of the imported commodity, despite potential social backlash, exhibits noticeably less detrimental welfare effects compared to other degrowth policies. Furthermore, under this degrowth strategy, the findings suggest that a globally coordinated strategy could result in long-term welfare gain. Originality/value To the best of the authors’ knowledge, this is the first contribution that uses an eDGE model to evaluate the welfare implications of an additional degrowth strategy amidst the ongoing inertial reduction of carbon emissions.