Decoupling study – Questions and Answers

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1. Why did Sitra commission such a study? What is new in this study? Why is the topic important?

Historically, CO2 emissions have tended to increase with economic growth, in a coupled relationship. However, we need to break or ”decouple” the historic relationship between economic and emissions growth in order to meet the objectives of the Paris agreement in the context of a growing economy.

Sitra commissioned this study to investigate under what circumstances and assumptions emission decoupling can be achieved. Specifically, we wanted to better understand whether, and under what assumptions and policy measures, the decoupling of CO2 emissions from economic growth could occur at a sufficient rate for CO2 emissions to decline to net zero by 2050. The study is the first one to look at the economic impacts of strong decarbonisation for Finland in a global context.

The study includes a detailed summary and analysis of previous findings on the topic and additional modelling work. The objective of the new modelling exercises was to investigate further the sensitivity of the decarbonisation pathways to changes in key assumptions (such as availability of negative emissions technologies and the speed of phasing out the use of coal) and the economic impacts of the different emission reduction scenarios. The novelty of the research lay in the linking of previously separate models, the detailed characterisation of hydrogen and negative emissions technologies in the GEM-E3 model, and the focus on the determinants of economic growth under decarbonisation.

2. What is emissions decoupling?

Emissions decoupling refers to a break in the historic tie between the growth of the economy, as measured by GDP, and the growth of CO2 emissions. The decoupling can be relative or absolute. By relative emissions decoupling we mean that emissions grow along with economic growth (measured as the growth of the gross domestic product, GDP) but at a lower rate. For example, if in a given time period an economy of a country or region grows by 100 per cent (i.e. doubles) but the emissions grow by 50 per cent then the country or region experiences relative emissions decoupling. Absolute decoupling means that emissions decline while GDP grows.

3. Is emissions decoupling possible? What is the evidence thus far?

In order to achieve net zero emissions at global scale with a growing economy we need to have absolute emission decoupling. This means that emissions decrease when the economy grows. There is no evidence of absolute emissions decoupling at global scale so far, but at regional level (e.g. EU 27 + the UK), it has been achieved.

Countries may reduce their territorial emissions (i.e. emissions produced within their borders), but their overall emissions footprint (or their ‘consumption-based’ emissions), may remain stable or continue growing if products are increasingly imported from other countries instead of being produced domestically. If the emissions in the exporting countries increase (a phenomenon known as ‘carbon leakage’), this may not produce an overall emissions reduction at a global scale. We can also study emissions decoupling by focusing on consumption emissions, i.e. emissions related to the consumption of products and services within a country or region. The study demonstrates that for example Finland and the UK have experienced absolute emissions decoupling since 2010 measured both by consumption related and territorial emissions.

Based on the summary of previous analyses and the additional modelling work carried out in this study, absolute emissions decoupling at global level seems possible. However, strong public policies and technical progress acceleration on clean energy technologies are needed in all countries to drive the emissions down toward a pathway consistent with the Paris targets, while allowing the economy to continue growing.

4. What are NETs, CCS and CCU? How likely is it that such technologies could be applied at scale?

CCS stands for carbon capture and storage whereas CCU stands for carbon capture and utilisation.

NETs stand for negative emissions technologies. NETs are technologies that capture CO2 from the atmosphere and store it in a secure manner so that it does not re-enter the atmosphere.

Examples of NETs include bioenergy with CCS (BECCS), afforestation with the resulting timber left intact, carbon sequestration in soils and Direct Air Capture (DAC). In BECCS, biomass, such as wood pellets, is combusted to generate electricity and the resulting CO2 emissions are captured and stored. In DAC machines scrub CO2 from the air. DAC technology is at an early stage of development.

The main scenario of this study assumes that these technologies will be readily available. In recent analysis, the International Energy Agency (IEA) has similarly concluded that reaching the net-zero target is very difficult without CCU and CCS technologies. However, these technologies are not yet mature enough to be adopted at scale and there is uncertainty whether or when they will be. Therefore, the study includes sensitivity analysis to examine the extent to which the key results depend on the availability of NETs.

5. Why does the study focus on the GDP? Is GDP a good measure for human well-being?

The key objective of the study is to shed light on the key assumptions and policy measures which need to be in place in order to achieve emissions decoupling at global scale. In order to do this, a measure for economic growth is needed. The growth of the gross domestic product (GDP) is the most common measure for economic growth and data for GDP are readily available across the countries. In the context of this study, GDP is solely an indicator of economic activity. It is not generally considered to be a reliable measure for well-being, though it may contribute to it.

The discussion on the broader issues of economic welfare or the extent to which these are reflected in GDP are beyond the scope of this study. For example, the Dasgupta report (2021) recommends the world to adopt stock-based measures on our wealth, such as inclusive wealth, as well as the old flow-based measures, such as GDP. Inclusive wealth refers to the aggregate value of a nation’s produced capital, human capital and natural capital in total. Current economic models do not generally account for inclusive wealth.

The report and its findings

6. What did the study analyse and what did it not analyse?

The purpose of this study is to investigate whether and under what assumptions and policy measures decoupling of global CO2 emissions from GDP growth can occur at a sufficient rate for CO2 emissions to decline to net zero by 2050, while the economy – globally, in Europe and in Finland – keeps on growing. The study summarizes previous findings on the topic and in addition uses two energy system models and a macroeconomic model to further explore the topic. By modelling the entire world energy and economic system, the new scenarios investigate further the sensitivity of the decarbonization pathways to changes in key assumptions and the impacts on economic performance under different scenarios of ambitious emission reduction. The models account for the possible rebound effects of the growing economy on emissions.

While the energy system models account for CO2 emissions from land use, and allow the use of bioenergy, they do not cover the wider impacts of producing bioenergy, such as the effects on biodiversity. This study also does not investigate or report on two other important broader environmental and resource issues. Thus, the study does not consider how possible moves towards resource efficiency and a circular economy could reduce the CO2 emissions and other environmental impacts of the extraction and processing of primary materials. Nor does it explore other possible environmental impacts of energy system change, except for the local air pollutants associated with the combustion of fossil fuels and traditional biomass. Further, this study does not assess the long-term sustainability of the use of natural resources, as the scope of the analysis is limited to greenhouse gas emissions. Finally, the economic focus of the study is economic growth as expressed by GDP. The report does not discuss broader issues of economic welfare or the extent to which these are reflected in GDP.

7. What is the main message the study conveys?

The results suggest that a maximum warming of 1.5 °C in 2100 can be achieved. However, this outcome requires increases in energy efficiency, investment in renewables, coal phase-out and CCS and NETs deployment at rates that greatly exceed anything that has yet been achieved at the global level.

Decarbonisation at scale and at speed will require strong commitment by policy makers, with clear strategies delivered by a mix of different policy instruments and approaches to remove the many barriers and constraints that impede it. All countries should update their policy to be in line with the Paris target as soon as possible to reach it.

The results show that under the various Paris-compliant emission reduction pathways, global economic growth will be sustained through to 2100. Investment needs to take a larger share of national incomes, to create the new infrastructures and industries required by a zero-carbon world, but average levels of income across the world can keep growing. However, the strong policy and fast emission reductions are a priority. The investments needed to decarbonize the world and technology improvements are drivers of economic growth. In contrast, the lack of these strong policies could result in very large, but currently uncertain, climate damage costs.

8. Are costs of climate change included in the analysis?

The impacts of climate change are not included in the economic impact analysis. Given that the scenarios aim for the 1,5 degrees limit, this stringent decarbonisation aim implies an assessment that inability to reach this target would have outcomes that are more costly than decarbonisation, or otherwise unacceptable.

The long-term costs of climate change stemming for example from increasing natural catastrophes, heat waves and droughts, rising sea levels and destroyed crops are very uncertain and depend on the level of global warming. The IPCC (2018) 1,5 degrees report shows clearly that the costs increase along with temperature. Limiting the temperature increase to 2 degrees over pre-industrial times is significantly cheaper than costs associated with 3 degrees world. Similarly limiting the global heating to 1,5 is less costly than a 2 degrees world based on the estimates. Additionally, the risks of tipping points in the climate system increase with temperature rise and these kind of abrupt changes in some crucial climate feature or ecosystems might bring along additional, significant costs and risks for human societies. An example of a tipping point is the melting of permafrost as a result of growing average temperature, which in turn may lead to increased emissions as methane (a strong greenhouse gas) stored in the permafrost is released, leading to further global heating.

9. What are the costs or “price tag” of 1,5 degrees climate target?

Section 6.8 of the report summarizes previous estimates on the Gross World Product losses of 1,5 degrees climate paths compared to “baselines”, which do not include climate measures or policies.

Only the total macroeconomic impacts of the different scenarios are reported. The main question of the report is to study whether and under what kind of policies the reduction of emissions in line with the Paris target is possible and whether it is possible to decouple total GDP growth from CO2 emissions.

It should be noted that neither the baselines nor the scenarios take account of the potentially very substantial costs of unabated climate change, though these costs may be expected to be much higher in the baselines because of the higher levels of GHG emissions. Therefore, all these cost estimates are likely overestimates of the costs of meeting the 1,5 degree target.

The economic effects in the new scenarios modelled for this study are not compared to any kind of artificial baseline without climate measures, since it is very difficult to tell whether the world average temperature will increase by 3 or 4 or 5 degrees in the absence of such measures. The economic costs of unabated climate change, again, are the higher the more the world will heat up. As mentioned, calculating the costs without taking in to account the costs of unabated climate change results in overestimates.

10. Why didn’t the study include also analyses on the decoupling of material resources use and biodiversity impacts from GDP growth?

The models used in the analyses are focused on the energy and the economic systems and do not describe in detail a number of other systems, such as food production and land use more generally, water, material flows, or ecosystems. Therefore, the models cannot be used to analyse these questions in detail. For example, GEM-E3 model cannot account for all the new business models of circular economy (see e.g. Annex 2 of the report) and therefore for the potential material recourse use effects of increased circular practices. This, however, does not imply that circular economy would not have significant potential to achieve a decoupling of material resource use from GDP growth, but this cannot be examined with the modeling tools available for this study.

The material resource use and biodiversity impacts, together with other important environmental impacts, of different decarbonization pathways would be very important to analyse in further studies to make sure that decarbonization pathways would help us to keep the world within all planetary boundaries.

Some of the assumptions included in the analyses are in line with the recommendations on how to protect biodiversity in general, such as low global population growth, dietary shifts and forest protection (see e.g. Dasgupta, 2021). In addition, circular economy practices could reduce both emissions and material use. However, as mentioned, it was not possible in this study to analyse all these environmental impacts in total and this is strongly recommended for further studies.

11. What are the key uncertainties and limitations of the study and its results?

As mentioned under the previous question, the key limitations of the models used are related to their inability to model in detail new circular business models and many other environmental systems, such as food production and land use more generally, water, material flows, or ecosystems. Therefore, the models cannot be used to analyse material resource use or biodiversity impacts of the decarbonization scenarios. In addition, there are uncertainties related to, for example, technology costs in the future, and the way the climate would react to emissions or emissions removal. The models also do not capture possible changes due to mega-trends such as automation/digitalization. The models produce a consistent/feasible projection of the economic and energy systems based on the current knowledge.

12. Do the results take into consideration the Covid-19 pandemic’s economic effects?

The analysis does not account for the effects of the Covid-19 pandemic, which are very difficult to forecast. The largest impacts of the pandemic are also likely to last relatively short time compared to the 80-year time-period in the analyses. In fact, it is likely that within the next 80 years, all the way to year 2100, the world economy might suffer various kinds of shocks and cycles, which are impossible to forecast in advance.

13. Based on the analyses, is degrowth of GDP needed to constrain global warming to maximum 1.5 degrees?

The modelling both for this report and in the many studies reviewed by the IPCC provide no basis for thinking that decarbonisation along with the Paris agreement targets will require “degrowth” (i.e. the economy getting smaller from today’s level), in either rich or emerging and developing economies.

On the contrary, the model represents economic growth as particularly driven by population growth, investments and technical progress. Already the huge investments in low-carbon technologies needed for decarbonisation will contribute to economic growth as measured by annual GDP change. With regard to technical progress, recent years have shown that low-carbon technologies have enormous potential to increase technical progress. Rather than constraining economic growth, it seems increasingly likely that the push for decarbonisation will create a new industrial momentum, with new industries that are cheaper, more efficient and more productive replacing older technologies, as they have done in previous cycles since the Industrial Revolution. The difference this time is that the new technologies are much cleaner environmentally as well. Population growth is assumed to slow down and following it the annual average growth rate of world GDP is expected to go down from current 3,5% per year to about 1% per year by 2100, by which time the global economy is projected to be about four and a half times its size in 2015.

What the study cannot analyse in detail, is whether this increase in the GDP can result also in an increase in inclusive wealth as discussed in the Dasgupta report (2021), i.e. increase in the aggregate value of a nation’s produced capital, human capital and natural capital in total.

The results show that global mean temperature will go over the 1.5 degree limit (i.e. overshoot over it) in the later decades of the century before declining to 1.5 degrees by 2100. How likely is it that the temperature will go down after an overshoot and do the results take into account possible tipping points in the climate system?

In line with various other scenarios that model the Paris target of limiting warming to 1.5 °C by 2100, the modelled scenarios show that global average temperature overshoots the 1.5 degree limit in the later decades of this century. The temperature is after the overshoot reduced with the use of negative emissions technologies (NETs) in large scale.

However, there are various uncertainties associated with the potential to obtain the various NET technologies to use, their cost and their potential scale. Further, the different climate models assume that removing carbon from the atmosphere with NETs will bring down the average global temperature in the same way that emissions increased it. But natural systems sometimes do not behave in this neat, symmetrical way. There can be tipping points or threshold effects that prevent them from returning to their prior state, and it is not currently known how the climate will behave in this respect. Although the likelihood of realising such tipping points increases with temperature, there is a risk that some may occur at well below 1.5 °C, and towards the 1 °C temperature rise compared to pre-industrial levels that has already been reached. Therefore, it is not certain whether the temperature increase can be limited in practice to 1.5 °C even with these measures. Yet, fast emissions reductions and investments to NETs seem still like our best option to limit global heating.

14. Which countries are expected to benefit from the strong climate action and which might be less better off?

In the main scenario of the report, China presents the highest GDP growth rate and becomes the biggest economy by 2100, followed by the EU and USA. China becomes a significant supplier of equipment and services required to decarbonise the energy system. India also grows significantly over the projection period. In the EU, an ageing population and slow population growth result is a smaller growth rate over the entire period from 2010 to 2100. In general, as the world energy system is expected to transform, the key beneficiaries will be the suppliers of clean energy technologies (RES, electric vehicles, batterie/storage, NETs etc.). On the other hand, fossil-fuel sectors will decline and countries with large fossil-fuel sectors will be less better off unless they manage to transform their economic structure.

Recommendations and further research needs

15. What are the main policy recommendations for the world?

The study identified various policy recommendations applicable to policy makers everywhere. These are particularly topical as the COP26 negotiations are approaching and various countries are planning updates on the long-term climate strategies.

The results clearly suggest that, with stringent public policies, the Paris target of a maximum warming of 1.5 °C in 2100 is achievable with continuing economic growth. However, for this outcome public policy will need to generate substantial increases in energy efficiency and investment in renewables, coal phase-out and the development and deployment CCS and NETs deployment at rates that greatly exceed anything that has yet been achieved at the global level. The modelling work quantified the Paris-consistent level of some of these factors.

The instruments and approaches to deliver these outcomes include regulation, consumer information, digitalisation, carbon pricing, infrastructure provision, innovation support, and institutional and behaviour change across a range of policy areas.

The changes required are both systemic and transformational. Most of society’s fundamental techno-socio-economic systems will need to be refashioned: the energy system and the transport system; how buildings are constructed, and how businesses and individuals occupy and heat and cool them; the food system, what people eat and where it comes from; and how practically everything is made, used and disposed of at the end of its life.

The policy approaches to achieve this transformation must be consistent, coherent, credible and comprehensive to be effective, and be projected to be maintained over the decades that the low-carbon transition will take.

No government in the world is yet close to the kind of policy architecture that will enable its country to achieve the level of emission reductions that would play its part in achieving the global goals of the Paris Agreement. We hope this study will encourage policy makers everywhere to adopt ambitious targets and strategies for achieving rapid decarbonisation.

16. What are the main policy recommendations for Finland?

The main policy recommendations target policy makers everywhere. Compared to many other countries, Finland is well ahead; it has set an ambitious target of achieving carbon neutrality by 2035. However, the practical tools and methods to reach the carbon neutrality target are not yet all in place, and are in part on the drafting tables. In this, it resembles many other countries.

The report suggests that with strong afforestation and reforestation the 1,5 degree target is easier to reach. Is it possible to combine vast forest industry and the 1,5 degrees target?

The report summarizes that the 1,5 degrees target is easier to reach if afforestation and reforestation at global level is increased together with the various other assumptions included in the SSP1 scenarios. Similarly, the role of all NETs seems important as they are one of the key ways, in addition to afforestation and reforestation, to withdraw the already accumulated emissions out of the atmosphere. This major role that carbon sinks and negative emission technologies play in the big picture stress their importance in national policies. Yet, the report does not analyse forest practises in detail.

Based on other studies Sitra’s experts conclude that sustainable forestry practices can strengthen carbon sinks. The use of forest-based materials can provide good ways to replace and reduce fossil fuels in some sectors and wood-based products increase the total stock of forest resources. However, the overall assessment of forests, land-use changes and forest-based raw materials should be based on a holistic sustainability framework, with a particular weight on ecosystem services’ total productivity and impacts.

17. How do the results compare to the main findings and messages of the Dasgupta Review?

This study relates to the mitigation of climate change and the possibility of decoupling greenhouse gas emissions from economic growth. The main focus of the Dasgupta Review was biodiversity and ecosystems which, as noted above, was outside the scope of this report. However, the broader arguments of the Dasgupta Review about the need take account of nature and include environmental impacts in assessments of economic developments are absolutely consistent with this report.

18. How should the reports’ findings related to GDP growth be interpreted?

The results show that under the various Paris-compliant emission reduction pathways, global economic growth will and can continue through to 2100. Investment needs to take a larger share of national incomes, to create the new infrastructures and industries required by a zero-carbon world, but average levels of income across the world can keep growing in developed and in developing countries.

The impact of decarbonisation on GDP is the effect of many adjustments that take place in the economy – some with opposite effects. The model used here shows that decarbonisation increases the user cost of energy and has a negative effect on fossil-producing sectors/countries but accelerates also technical progress, increases system productivity and diverts resources to higher value added processes. The report shows a steady/sustained long term GDP growth indicating that the decarbonisation of the energy system is aligned with GDP growth. However, whether decarbonisation might accelerate or decelerate global growth cannot be concluded from the results of this study.

The results do not mean that continuing with the current focus on economic growth at the expense of the environment would be sustainable. On the contrary, in the scenarios the environmental regulations and fast emission reductions are a priority to reach the Paris targets, while the investments in low-carbon technologies resulting from the deep decarbonization policies contribute to economic growth. An absence of these strong policies would result in contrast in very large climate damage costs expected from unabated climate change. Therefore, the results stress again that deep decarbonization and modernization of our economic and societal structures and practices to be in line with the Paris target are a more sustainable and less costly way for our world than continuing on current development paths.

19. What kind of additional research needs are identified by the report?

There are many possible future lines of research inquiry. A natural next step would be to also analyse in detail the issues that were not covered in this report, such as material use, circular economy, land use and biodiversity, and assess the economic implications of addressing these issues. More specifically, the importance of NETs on the emission-reduction pathways presented in this study stress again the need to analyse in detail the land-use and biodiversity impacts of wide-scale use of NETs.