Energy Scenario: Employment Implications of the Paris Climate Agreement (1)

Eurofound

This analysis assesses the potential employment and economic impacts on the EU, and other parts of the world, of a transition towards a low-carbon economy by 2030. The transition envisaged is in line with the ‘below 2-degree’ temperature change target and the associated reduction in carbon emissions. It analyses the impacts
across sectors and occupations, with particular focus on manufacturing. The analysis is carried out using the E3ME macro-econometric model,1 which provides information on sectoral impacts, together with the Warwick Labour Market Extension model for occupational analysis. Further analysis of the employment developments in Europe are undertaken using Eurofound’s European Jobs Monitor.
The impact of a transition to a low-carbon economy is positive for the EU as a whole. The positive impact on the number employed is largely due to the investment activity required to achieve such a transition together with the impact of lower spending on the import of fossil fuels. The impacts vary considerably among sectors. For example,
jobs are lost in fossil fuel extraction and processing, but gained in the construction and manufacturing of renewable and energy efficiency equipment, together with the associated supply chains.
This shift in production has implications for labour market demand. For example, the expected shift towards production of capital goods, such as equipment, machinery and buildings, will result in an increased demand for construction and for labour from the associated occupations, as well as increased demand for metal and machinery, and related labour.
The various estimates are compared to a largely ‘business as usual’ baseline forecast up to 2030. In the EU, the two headline measures of gross domestic product (GDP) and employment show growth of 1.1% and 0.5% respectively. The most positive results for both these measures are found in China and the EU. The United States, however, experiences a drop in GDP of 3.4%, with employment falling by 1.6%.
While overall the energy scenario implies more employment in Europe, much of the employment created is at the bottom and the middle of the wage distribution. These jobs, to a greater extent than in the baseline forecast, are filled by lower-educated employees and involve performance of less advanced tasks.
However, these projections do depend on modelling assumptions, some of which have important policy implications. Firstly, the model assumes no labour market frictions. In particular, the labour force is assumed to adapt to the structural change in skill requirements associated with the transition to a low-carbon economy; the faster the change, the more likely it is that there may be frictions that leave some workers unemployed and some demands for new skills unmet, preventing the full potential benefits from being realized. Moreover, the appreciable investment required assumes that there are no barriers in accessing the finance necessary for this transition. Finally, it is assumed that countries which currently have a lead in certain sectors are able to maintain it when switching to new technologies; for example, the main manufacturers of conventional cars and trucks become the main manufacturers of electric vehicles and their components.
Introduction
Unconditional NDCs are expected to be met by the country without international support, while conditional targets would be achieved by the country if it received the requested international support. In most cases, countries submitted a conditional contribution alongside an unconditional contribution, but about a third of NDCs include only a conditional contribution.
There is uncertainty about the extent to which greenhouse gas emissions impact on global temperature. Large-scale climate models report the probability that any given reduction in emissions will achieve a desired target for limiting temperature change. Targets for emissions reduction are then based on the level that is likely to achieve the target, where ‘likely’ is defined by the Intergovernmental Panel on Climate Change (IPCC) as a 66% probability or better. We refer to the business-as-usual projection as the ‘Cedefop baseline’ because its employment projections are consistent with projections by the European Centre for the Development of Vocational Training (Cedefop), which were prepared by Cambridge Econometrics in January 2018.
In 2015, at the United Nations Climate Change Conference in Paris, 163 parties agreed to stabilize global warming by: holding the increase in the global average temperature to well below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels. (United Nations, 2015)
Countries submitted their own Nationally Determined Contributions (NDCs) to specify their conditional and unconditional targets. 2 The EU submitted a target of reducing carbon dioxide (CO2) emissions by 40% below
1990 levels by 2030. However, even if all countries meet their NDC targets, the collective ambition is not sufficient to limit global warming to below the 2-degree target. In the baseline and energy scenarios presented in this report, we investigate the impact of policies that would achieve the 2-degree target, defined here as the level of global emissions that would have a 66% chance3 of limiting the temperature increase to below 2ºC according to the IPCC (2014). Achieving the target requires stronger climate policies than are currently in place and a different technological trajectory than can be expected under ‘business as usual’.
Curbing emissions to meet the 2-degree target will change the types of activity taking place and have substantial impacts on the economy and employment levels across countries and across sectors. For example, employment gains are expected in low-carbon construction projects, while job losses will occur in the fossil fuel industry and other sectors that are energy (carbon) intensive. It is important to note that the degree target itself may not impact the economy so much as the rate at which society implements change (Grubb, 2014): the longer action is delayed, the more rapidly change must occur to meet the target.
This report is part of the Future of Manufacturing in Europe (FOME) pilot project, delegated to Eurofound by the Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs (DG GROW). Given that much of the energy required in advanced economies emanates from the manufacturing production process, responses to the Paris Agreement are highly relevant for the future of manufacturing in Europe.
The purpose of the scenarios is to explore the employment impacts in the EU of the set of policies that are in line with achieving the 2-degree target, with a specific focus on the manufacturing sector. The E3ME model is well suited for this purpose because it calculates energy demand by sector and fuel type, allowing CO2 emissions to be calculated and compared with the profile needed to reduce the pace of global warming. We first construct a business-as-usual4 projection in which the emissions target is not met and contrast this with a projection which implements additional policies that do succeed in meeting the CO 2 emissions reduction target.
The economic impact is calculated as the difference between the 2030 outcomes in the energy scenario and those in the baseline scenario.
From a modelling point of view, the main inputs to the energy scenario target the sectors that emit the most CO 2 – electricity generation and road transport – through minimizing the use of fuels with the highest carbon content: coal, followed by oil and gas. To target the carbon content of fuels in the scenario, a carbon price is introduced at a global level. Policies are also required to encourage the uptake of alternative fuels and of renewables in power generation, not least because of the key role that electrification of energy demand is likely to play in decarburization efforts throughout the economy.
The modelling proceeded in an iterative manner, adding emissions reduction measures until the global emissions reduction target was met.
The impact of these policies is expected to vary from country to country. Additional investment in renewable technologies and energy efficiency is likely to stimulate the economy if the new technologies are produced domestically. However, if they are imported, there is no additional stimulus. Furthermore, the deployment of more renewables may lead to higher electricity prices, affecting both consumer real incomes and the competitiveness of exporters. Large producers and exporters of fossil fuels, which are located mainly outside of Europe, are expected to reduce fossil fuel extraction and processing as global demand and prices for these fuels fall.
Conversely, importers of fossil fuels are expected to benefit from the transition to a low-carbon economy, as fuel prices fall and imports decrease. Generally, as a net importer of fossil fuels, the EU overall is expected to benefit from the transition, but the GDP impact will vary between Member States, reflecting respective countries’ different economic structures.
For example, countries with large energy sectors, such as Poland, where energy consumption is strongly dominated by the use of coal, are expected to see less of a net gain compared to large fossil fuel importers, such as Germany or France.
These expected outcomes depend on a set of implied assumptions in the modelling. The labour force can adapt to the structural change in skill requirements associated with the transition to a low-carbon economy; the faster the change, the more likely it is that there may be frictions that leave some workers unemployed and some demands for new skills unmet, preventing the full potential benefits from being realized.
There are no barriers in accessing the finance necessary for the investments needed in this transition. Countries that currently have a lead in certain sectors are able to maintain it when switching to new technologies; for example, the main manufacturers of conventional cars and trucks become the main manufacturers of electric vehicles and their components.

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