Global | How likely are decarbonization targets? A data-driven approach

Based on historical evidence, the Economic Watch assesses the plausibility of meeting Net-zero and NDC emission pathways (with GDP growth conditioned or not to BBVA baseline) and suggests that if unprecedented shocks are not induced (e.g. through carbon price policies), climate targets will not be reached.

Key points

• Key points:
• Achieving the Paris Agreement temperature target implies an unprecedented global decarbonization effort in terms of intensity and persistence over-time. However, in different countries and periods, they have previously experienced great decarbonization efforts as a by-product of policies directed to reduce the dependency on oil and industrial pollutants.
• That is, history provides homologous situations to the decarbonization that we are currently facing, which allows an empirical approach to analyze the effects that standard changes or technological shocks had in CO2 emissions in the past, and hence, assess if shocks of similar magnitude could be sufficient to reach the Paris Agreement’s target.
• This approach takes the form of a Vector Autoregressive Model, capturing the historical pattern of interrelationships between GDP and CO2 emission annual growth rates for a specific country. Thus, from the historical pattern of interrelationships, the probability distribution of all the possible future paths of CO2 emissions (either conditioned or not to a given baseline scenario for GDP growth) is extrapolated.
• The results from the sample of countries analyzed indicate that in the light of historical evidence, i.e. with the historical combination of decarbonization shocks, net-zero pathways are unfeasible (or highly unlikely) given the expected GDP growth paths. Furthermore, the materialization of the Nationally Determined Contributions (NDC) can be considered, in general, a tail event.
• The conclusions do not change when the model gives room to lower GDP growth scenarios either, indicating that only the use of unprecedented policy instruments, like a global carbon tax, can make net-zero scenarios possible.

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