The G20 discusses climate change economic risks and links between digitalisation and economic recovery

With the G20 Finance Ministers and Central Bank Governors Meeting only a month away, the activities of the G20 working groups are underway to create a solid policy background to enable a sustainable and inclusive economic recovery. On 9 and 10 June 2021, the members of the Framework Working Group (FWG) met virtually for their fifth official meeting under the Italian G20 Presidency.

The Framework Working Group tracks the evolution of the global economic outlook, while coordinating policies aimed at underpinning the global economic growth and monitoring potential macro-economic risks.

Discussions at the fifth meeting of the Group focused on the macro-economic risks related to climate change and on the links between digital transformation and productivity. In particular, this meeting offered the Italian G20 Presidency the chance to present the Menu of Policy options on Digital Transformation and Productivity Recovery, thereby providing an analysis of policies already put in place by G20 countries complemented by targeted policy lines for boosting productivity through digitalization.

In April, G20 Finance Ministers and Central Bank Governors committed to tackling climate change and agreed to support environmental protection. They specified that taking into account environmental challenges is urgent for our economies and the recovery provides a unique opportunity to develop forward-looking strategies for investing in innovative technologies and promoting the transition towards more sustainable societies.

This meeting gave G20 FWG members the first chance to discuss the macroeconomic risks connected to climate change. The debate spanned from reflections on the economic costs imposed by climate change and the progresses made so far to address them, to the importance of mitigating climate risks when developing future policies.

While the impact of climate change on the global economy is fully recognized, this is far from being homogenous across countries. The IMF estimates that under a comprehensive policy package, net emissions could be brought to zero by around 2050, and temperature increases could be kept to 2 oC, with global output in 2050 only deviating by -1.2% from the level of baseline growth. However, the IMF stressed that variation in costs for different countries must be taken into account.

Although the economic impacts of climate change are difficult to quantify, especially in the long run, the FWG is working to better integrate climate risks more systematically into global economic risk monitoring discussions. In this context, the G20 will benefit from regular updates provided by International Organisations.

Recent studies show that the cost of more decisive actions to tackle climate change in the short term is small compared with potential future economic damages. In this sense, one of the objectives of the FWG is in fact to evaluate evidence – among G20 countries - linking climate change to short-, medium- and long-term global economic damage.

The risk assessment should also take into account the impact the transition towards a net-zero economy could have among households, and to various sectors of the economy. Some may be affected more than others, and economies that have not been able to achieve full progress on carbon reduction technology are likely to experience higher transition costs.

Another theme that was central in the April G20 Ministers and Governors meeting was the support to G20 economies. While the stimulus packages will continue until it is necessary, Ministers and Governors agreed that the economic support would need to move towards more targeted measures, with an effective and cautious macro policy mix, subject to country-specific circumstances. The G20 unanimously concurs on the need to harness the opportunities stemming from technological innovation to boost the recovery and ensure broad-based prosperity.

In this scenario the Italian G20 Presidency presented, to the FWG members, the G20 Menu of Policy Options on productivity-enhancing digital transformation. This policy toolkit provides good practices for harnessing the opportunities offered by digitalization while ensuring that these are shared within and across countries.

Digital technologies offer a vast potential to enhance welfare and living standards by raising product and service quality, and productivity. The COVID-19 pandemic has accelerated the digital transformation – allowing households, firms and societies to better cope with the pandemic -, and created new opportunities. However, the diffusion of digital technologies is incomplete and heterogeneous across sectors.

The COVID-19 crisis has also changed the way people work and consume. The need to reduce in-person interaction has boosted remote working and put a premium on digitalization and automation. Consumer spending has shifted from in-person to digital services and durable goods. The users of online platforms have jumped among both consumers and firms, and digital firms have been more resilient, in general, to the adverse effect of the crisis. Preliminary evidence shows that these trends will continue, and that technology adoption may accelerate further.

In this sense, the COVID-19 has triggered a strong policy response by all G20 countries. Not only to help firms and households to cope with the crisis, but also to promote the digitalization of public and private-sector activities, thereby laying the grounds for future productivity growth. For many countries, this starts with efforts to narrow the digital divide by training and reskilling. Within this framework, supporting investment in intangible capital is crucial, including through fiscal incentives to innovation and product market reforms.

The G20 Menu of Policy Options provides an overview of the measures adopted by G20 countries in their efforts to boost productivity through digitalization, including in response to the pandemic. It also benefits from background work from the Organisation for Economic Co-operation and Development, the International Monetary Fund, the International Labour Organisation and the United Nations Conference on Trade and Development, and discussions held within the G20 FWG.

All the above issues will continue to progress in the coming months at FWG meetings and will feed the agenda of the July G20 Finance Ministers and Central Banks Governors meeting in Venice.