Macroeconomic Impacts of the Transition to Net Zero in Small Open Economies: A Case Study for Canada

Tatjana Dahlhaus (), Madan Ghosh (), Yena Joo (), Stephen Murchison (), Genevieve Nelson (), Rachit Lumb (), Jonathan Swarbrick (), Alexander Ueberfeldt (), Raven Wheesk (), Yinxi Xie () and Yang Zhang ()
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Tatjana Dahlhaus: Bank of Canada
Madan Ghosh: Carleton University
Yena Joo: Bank of Canada
Stephen Murchison: Bank of Canada
Genevieve Nelson: Bank of England
Rachit Lumb: Bank of Canada
Jonathan Swarbrick: University of St Andrews
Alexander Ueberfeldt: Bank of Canada
Raven Wheesk: Bank of Canada
Yinxi Xie: Indiana University, Bloomington
Yang Zhang: Bank of Canada

No 2604, Economics Discussion Papers from Department of Economics, The University of St Andrews Business School

Abstract: Climate change presents significant macroeconomic challenges, particularly for small open economies deeply integrated into global trade and energy markets. Focusing on Canada, we analyze the macroeconomic implications of the transition to a low-carbon economy, paying attention to global and domestic spillovers. On the domestic side, we introduce Energy-ToTEM (E-ToTEM), an extension of the Bank of Canada’s Terms-of-Trade Economic Model (ToTEM), which captures energy sector dynamics, substitution effects, and policy interactions. To account for international forces, we use a global, multi-sector, multi-region general equilibrium model, allowing us to assess international climate policy transmission and global demand implications for Canada. Our results indicate that, under the net-zero scenario, global carbon prices rise persistently through 2050. By 2050, world gross domestic product (GDP) is about 8% lower and Canadian GDP about 7% lower relative to a no-policy benchmark, while inflation rises modestly under the historical monetary policy rule. Monetary policy faces a clear trade-off: strict inflation targeting would deepen the Canadian output loss to about 7.5%, whereas a more accommodative stance would limit it to around 5.5%, at the cost of inflation about 1 percentage point above target. Overall, our findings highlight the importance of accounting for both global spillovers and monetary policy when evaluating the macroeconomic consequences of the transition to net zero.

Keywords: macroeconomic simulations; transition to net-zero; climate policies; scenario analysis (search for similar items in EconPapers)
JEL-codes: E27 E52 Q43 Q58 (search for similar items in EconPapers)
Date: 2026-09-29
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