The impact of climate change on European Union (EU) countries and regions will vary significantly, depending on factors such as the average temperature change/rise, sector composition, development levels and adaptation efforts. An abrupt shift towards a more climate friendly economy could lead to lasting productivity costs, thus underscoring the importance of a well-planned transition. The consequences for businesses will depend on their size, access to financing and innovation capabilities. While transition policies can encourage green innovation without causing crowding-out effects, stricter climate regulations can impede the productivity growth of polluting firms. Realising the benefits of innovation will thus take time. The policy mix plays a crucial role in determining success. While market-based tools are less distortionary than non-market-based ones, they do not necessarily spur innovation. Subsidies for green research and development (R&D) are particularly helpful in promoting innovation. Transition policies will necessitate a significant reshuffling of resources across and within sectors, potentially resulting in short-term adverse effects. Substantial productivity disparities exist between top and bottom emitters within various sectors, depending on industry specifics. A significant portion of firms and jobs may be at risk during the transition, with a decline in new entrants expected in affected sectors.

In this article, we share the findings of the European System of Central Banks’ (ESCB) expert group on climate and productivity, whose members are drawn from the European Central Bank (ECB) and national central banks.