Growth in the New Economy Towards a Blueprint 2026

2.4 Sustainability and economic policy No-regret move: focus on economic and societal synergies in green transition strategies Sustainability, inclusion and growth are deeply interdependent. Embedding natural capital and sustainability into growth strategies has become an economic imperative and essential to long- term prosperity and stability. Achieving carbon neutrality through a combination of technologies, policies and market mechanisms is becoming a largely shared global goal, even if the pace and pathways differ across countries. Yet, climate and environmental policies cannot be pursued in isolation from considerations of competitiveness, employment, access and affordability.12 Ensuring that the green transition delivers benefits for both people and the planet requires attention to how costs and opportunities are distributed – across regions, industries and income groups.13 Growth strategies must deliver progress on all three fronts simultaneously: environmental sustainability, economic vitality and shared prosperity. Dilemma: how to manage the costs and trade-offs of greener growth Both tensions and mutually reinforcing opportunities exist between economic growth and the green transition. Climate change will impact productivity, infrastructure, resource security and fiscal stability, making environmental sustainability and resilience a precondition for sustained prosperity. Yet addressing climate risks requires bold and urgent interventions that carry major costs and societal implications. Governments must deploy regulation, standards and fiscal policy to mitigate environmental externalities while harnessing the green transition as a source of productivity and competitiveness, which requires vast investments in economic transformation. In the new economy – marked by public fatigue regarding climate action in many countries, a high-debt, low- growth environment and increasing geoeconomic competition – how countries reconcile these objectives will shape their long-term economic trajectory in terms of environmental sustainability. Countries face two broad approaches for aligning climate and growth: investment-led and cost-led transitions. Investment-led strategies frame the green transition as a growth opportunity, using public and private capital to drive innovation, build clean industries and create jobs. Still, they require substantial fiscal support, risk market distortions and tend to favour countries capable of coordinating complex industrial policies. Cost-led strategies rely on carbon pricing, standards and regulation to internalize environmental costs and curb unsustainable growth, helping align incentives and strengthen accountability, but potentially slowing short-term growth, generating political resistance if costs are unevenly distributed,14 and shifting investment towards jurisdictions with weaker rules. While both approaches aim to align economic incentives with climate goals, how countries navigate these approaches will shape the pace of the green transition and its broader impact on global growth. Governments may face tension between fiscal prudence and forms of financial repression. Fiscally prudent governments seek to minimize fiscal deficits and, when they have a high level of debt to refinance, aim to run primary surpluses to offset the cost of servicing existing debt. To avoid politically difficult tax increases or spending cuts, some governments might consider various forms of financial repression, including keeping interest rates artificially low, capping yields or using regulatory measures to channel private capital and central banks’ investments into public debt markets. Fiscal prudence helps maintain stable macroeconomic conditions and transparent capital markets, protects creditors’ investments and focuses on long-term government credibility – while potentially limiting the scope for large-scale public investments. Financial repression can create more space for public spending and investment, but can impose hidden costs on creditors, reduce market transparency and potentially crowd out private borrowers. In a context of high debt and low growth, how governments manage this tension will shape countries’ ability to finance the transitions underpinning future resilience, innovation and social cohesion. Growth strategies must deliver progress on all three fronts simultaneously: environmental sustainability, economic vitality and shared prosperity. Growth in the New Economy: Towards a Blueprint 12