Publication: The Macroeconomic Implications of a Transition to Zero Net Emissions: A Modeling Framework
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2023-03
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2023-03-22
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Analyzing the macroeconomic consequences of a transition to a net-zero economy creates specific modeling challenges, including those related to the non-marginal nature of the required transformation, the role of technologies, and the replacement of fossil fuel-based assets with greener ones. To address these challenges, this paper proposes a hybrid modeling approach that starts from a set of sectoral techno-economic scenarios to construct an illustrative resilient and net-zero decarbonization trajectory. It then assesses the macroeconomic implications by linking sectoral dynamics to two macroeconomic frameworks: a multisector general equilibrium framework and an aggregate macrostructural model. This approach combines the advantages of multiple tools and captures the various dimensions of the transition, including the need to tackle simultaneously multiple market failures beyond the carbon externality. The paper illustrates this methodology with Türkiye’s objective to reach net zero emissions by 2053. The multisector general equilibrium framework suggests that the transition could contribute positively to Türkiye’s economic growth despite the large investment needs, especially when indirect mitigation benefits are taken into account and if labor market frictions can be reduced. Improved energy efficiency in the transportation and building sectors drives the growth benefits in the short and medium terms. The growth benefits depend on how transition investments are financed: if they crowd out other productive investments, the benefits are significantly reduced and can even become slightly negative in the long term. The macrostructural model focuses on implications for public debt and the current account, using two extreme scenarios in which additional investments are triggered by higher productivity or a set of budget-neutral incentives (taxes and subsidies). The model concludes that the transition would have moderate impacts on the current account and public debt. With budget-neutral incentives, there is a small increase in gross domestic product (GDP) growth, the debt-to-GDP ratio increases by 1 to 3 percent, and the current account remains unchanged thanks to the reduction in fuel imports.
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“Hallegatte, Stephane; McIsaac, Florent; Dudu, Hasan; Jooste, Charl; Beck, Hans; Knudsen, Camilla. 2023. The Macroeconomic Implications of a Transition to Zero Net Emissions: A Modeling Framework. Policy Research Working Papers; 10367. © http://hdl.handle.net/10986/39569 License: CC BY 3.0 IGO.”
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