Spain | The welfare effects of degrowth as a decarbonization strategy

Summary

This Working Paper contributes to the existing literature by examining the welfare implications of degrowth. We use an environmental Dynamic General Equilibrium (eDGE) model, calibrated to replicate the most relevant macroeconomic and environmental features of Spain.

Key points

• Key points:
• Three different degrowth strategies are considered: obstacles to economic growth, with the consequent deterioration of Total Factor Productivity (TFP), the reduction of working hours and consumption, with the consequent recalibration of household preferences and the substitution of consumption for leisure, and restrictions on the use of fossil fuels through the increases in their prices.
• Among all the considered plans, the degrowth resulting from a decline in TFP causes the most significant reduction in welfare, followed by a strategy based on substituting consumption for leisure, and an approach centered on a pronounced increase in the price of fossil fuels.
• In the case of the reduction in working hours and consumption, average welfare declines by 17% in terms of equivalent consumption between 2019 and 2050, but the welfare loss escalates to 186% in the very long run (2019-2150).
• Despite its potential unpopularity, a degrowth strategy centered on a pronounced increase in the price of fossil fuels is the least harmful among all the degrowth plans. It incurs a moderate welfare loss of 1.4% between 2019 and 2050 and 8% in the long run, which could transform into a welfare gain of 14% if world economies coordinate their strategies.

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