Bulletin No. 261, article 2. The impact of low carbon transition policies on foreign trade has not been greatly explored, but the gradual implementation of the Paris Agreement pledges and macroeconomic transition scenarios such as those prepared by the NGFS (Network for Greening the Financial System) are providing some insight on the issue. The transition could lead to a reduction in global trade due to the expected decline in fossil fuel imports, which would see the trade balances of advanced countries, which are net importers, improve at the expense of fossil fuel exporters. However, the financing for the investments needed will be a determining factor. If the public deficits of advanced countries increase as a result of these investments, their current account balances could deteriorate. Furthermore, if oil-producing countries anticipate the transition by reducing their fossil fuel investments, the negative effect of the transition on their current account would be mitigated. Lastly, private capital flows must be directed towards the green sectors of emerging economies to ensure a balanced transition.
Historically, the trade in fossil fuels – oil, gas, coal – has had a major impact on the balance of payments and its associated financial flows. The low carbon transition is expected to lead to a decline in this trade in favour of renewable energies, with capital flows redirected to meet the significant investments needed during the transition. However, the geographical distribution of these financial flows remains difficult to predict and will depend on individual countries’ transition strategies – including the industrial policies they implement – and on the appetite of private investors to get involved. We use macroeconomic simulations to illustrate some of these mechanisms. We first examine the impact on current accounts under the long term low carbon transition scenarios developed by the Network for Greening the Financial System (NGFS). We then analyse variants of these NGFS scenarios by simulating different methods of financing the public investment needed for the transition. Finally, we discuss the uncertainties associated with modelling choices and agents’ expectations.
1 Impact of the low carbon transition on current accounts
A decline in global trade in the short term
Most transition scenarios feature the introduction of a rising carbon price to alter the relative prices between brown and green products or sectors, and thereby encourage the transition. In this instance, we base our work on the NGFS scenario that includes countries’ announced pledges under the Paris Agreement (nationally determined contributions or NDCs). The assumptions underlying this scenario are briefly outlined in the box below.
This scenario would see a 15% decline in global fossil fuel consumption in 2050 relative to the baseline scenario, and a drop in oil prices of around 20%. Consequently, and given the time lags involved in adjusting the energy mix, most countries’ GDP would fall in the short term to a greater or lesser extent depending on each of their specific energy characteristics. In terms of trade, advanced countries would experience a sharp drop in their imports and their exports due to the rising cost of carbon based inputs and the decline in production that would result, despite a boom in trade in mineral inputs and semi finished and finished products as part of the energy transition (see Appendix 1 on changes in the structure of global trade). …
Download the full publication
Updated on the 14th of January 2026