NiGEM Topical Feature 1: Modelling a sudden largescale global carbon tax shock in NiGEM

Climate change policies such as carbon taxes and emissions trading schemes (ETSs) have become key policy tools to reduce greenhouse gas (GHG) emissions and limit global temperature increases. In this Topical Feature, we use the National Institute Global Econometric Model (NiGEM) to illustrate the expected macroeconomic fallout from a sharp and unexpected rise in the price of carbon. The rise in carbon tax is accompanied by a temporary rise in global credit constraints, to capture the heightened uncertainty triggered by the sudden shift in asset valuations. Our findings suggest that countries that have a higher energy intensity of output, and those that consume relatively more carbon intensive fuels, are more vulnerable compared with countries that predominantly use gas or renewables. In terms of macroeconmic impact, our scenario yields lower GDP and higher inflation in all major economies.