Blog | 16 May 2023

Key themes shaping the outlook for city economies under different climate policies

Mark Britton

Director, City Services

Our new City Climate Scenarios add a local dimension to our existing range of climate scenarios which link the economy, the energy system, and the environment. As part of this analysis, we have modelled the regional economic implications of a range of policies that governments could impose to support the transition toward net zero. Under each scenario the future economic outlook of cities and regions will vary, with some places benefitting, while others will undoubtedly lose out.

Key themes from the analysis include:

• City growth rates vary under different transition pathways. Disparities exist between cities and regions, and there will be clear winners and losers of the transition towards net zero. This is underpinned by a common feature of our modelling in each scenario: the sectoral impacts primarily reflect the relative carbon intensity of industry-level output. Therefore, understanding each region’s unique sectoral composition, and inter-regional dependencies, is key to understanding the likely impacts.

• Cities and regions more reliant on carbon-intensive industrial sectors will face the most significant challenges from climate adjustment measures. Policies to tackle climate change will have major impacts on the future economic outlook of all cities and regions, but it is regions with greater dependency on fossil fuel extraction, and those with industries that are carbon-intensive in their production or operational processes, such as manufacturing and transport services, that face the most significant challenges as economies decarbonise. In the US, this suggests oil-dependent states and metros, many of which are in the South, and carbon-intensive manufacturing regions in the Midwest face some of the largest challenges. Similar trends are evident across Europe, with the burden of transition risk falling heavily on Europe’s industrial heartlands, particularly in regions across Central and Eastern Europe.

• Transition policies will reinforce regional growth differentials, with most major cities retaining or increasing their growth premia. A key feature of our projections is the outperformance of city economies, both in the baseline and under the transition towards net zero. This is underpinned by our expectation that growth across developed nations will be led by the digital sector and business services. As cities tend to have higher concentrations of these faster-growing industries, they (on average) fare better in our forecasts. This is amplified in transition scenarios as carbon-intensive sectors tend to have a smaller presence in major cities than the rest of the economy—which suggests they will typically face a smaller challenge to decarbonise economic output.

• But many cities could be amongst the biggest losers if governments fail in efforts to limit global warming. The geographic location of many cities leaves them vulnerable to more frequent and extreme climatic events that may occur in the event of climate inaction. For example, metro economies in Louisiana, Mississippi, Texas, Florida, and Alabama are particularly vulnerable to an increase in frequency and severity of hurricanes that may occur in a higher-emissions pathway.

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