Labor Market Implications for Green Investments and Carbon Pricing in Spain: Spain

Labor Market Implications for Green Investments and Carbon Pricing in Spain SPAIN Ana Lariau and Yu Shi SIP/2023/011 IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries. It is based on the information available at the time it was completed on December 16, 2022. This paper is also published separately as IMF Country Report No 23/034. 2023 JAN INTERNATIONAL MONETARY FUND 2 © 2023 International Monetary Fund SIP/2023/011 IMF Selected Issues Paper European Department Labor Market Implications for Green Investments and Carbon Pricing in Spain Prepared by Ana Lariau and Yu Shi Authorized for distribution by Dora Iakova January 2023 IMF Selected Issues Papers are prepared by IMF staff as background documentation for periodic consultations with member countries. It is based on the information available at the time it was completed on December 16, 2022. This paper is also published separately as IMF Country Report No 23/034. ABSTRACT: We provide a tractable framework for assessing the labor market impact of policies that support the green transition of the Spanish economy, taking into account input-output linkages. We present illustrative examples that quantify changes in sectoral employment, occupations and skills stemming from two different green policies: (i) the announced green investments in the recovery plan; and (ii) an increase in carbon pricing and an expansion of the EU Emission Trading System (ETS). Our analysis shows that the labor market impact of these two policies is net positive, although the results depend on the design of the green policies, particularly on the use of the proceeds from the increase in carbon pricing. Strengthening active labor market policies, with a focus on training, and complementing them with education policies such as the expansion of vocational training, would facilitate the transition of workers from shrinking to expanding sectors. RECOMMENDED CITATION: Lariau, Ana and Shi, Yu. Labor Market Implications for Green Investments and Carbon Pricing in Spain. IMF Selected Issues Paper (SIP/2023/XXX). Washington, D.C.: International Monetary Fund. JEL Classification Numbers: H54; J24; Q52; Q58 Keywords: green policies; input-output matrix; employment; occupations; skills Author’s E-Mail Address: ALariauBolentini@imf.org; YShi2@imf.org SELECTED ISSUES PAPERS Labor Market Implications for Green Investments and Carbon Pricing in Spain SPAIN SPAIN SELECTED ISSUES Approved ByEuropean Department Prepared By Ana Lariau and Yu Shi. LABOR MARKET IMPLICATIONS OF GREEN INVESTMENTS AND CARBON PRICING IN SPAIN _________________________________________________________________________________ 2 A.Green Policies in Spain _________________________________________________________________ 2B. The Labor Market Impact of Green Investments and Carbon Pricing ___________________ 3C.Conclusions and Policy Recommendations ____________________________________________ 8ANNEXES I. Estimation of Output and Employment Multipliers Using the Input-Output Approach_ 11II. Results for the Alternative Carbon Pricing Shock Scenario, Not Taking into Account theRedistribution of Revenue Proceeds _____________________________________________________ 14References _______________________________________________________________________________ 10 CONTENTS December 16, 2022 SPAIN 2 INTERNATIONAL MONETARY FUND LABOR MARKET IMPLICATIONS OF GREEN INVESTMENTS AND CARBON PRICING IN SPAIN1 We provide a tractable framework for assessing the labor market impact of policies that support the green transition of the Spanish economy, taking into account input-output linkages. We present illustrative examples that quantify changes in sectoral employment, occupations and skills stemming from two different green policies: (i) the announced green investments in the recovery plan; and (ii) an increase in carbon pricing and an expansion of the EU Emission Trading System (ETS). Our analysis shows that the labor market impact of these two policies is net positive, although the results depend on the design of the green policies, particularly on the use of the proceeds from the increase in carbon pricing. Strengthening active labor market policies, with a focus on training, and complementing them with education policies such as the expansion of vocational training, would facilitate the transition of workers from shrinking to expanding sectors. A. Green Policies in Spain2 1. Spain has set ambitious climate mitigation objectives. Spain’s Law on Climate Change and the Energy Transition, enacted in 2021, establishes the goal of climate neutrality by 2050 at the latest, when the Spanish electricity system must be 100 percent renewable. Furthermore, the Law includes an intermediate target to reduce emissions by 23 percent relative to 1990 levels by 2030, as well as targets for 2030 for renewables to account for 42 percent of the country’s energy mix, to g