Summary of the NGFS Climate Macroeconomic Modelling Handbook

• To model chronic physical impacts of climate change, the handbook recommends the use of models based on a CGE structure. This assumes perfect foresight, and the simplification of dropping uncertainty in this manner allows other factors, including greater sectoral granularity, to be included.
• To understand the effects of acute climate impacts, models based on a DSGE structure are suggested. These are better at dealing with stochastic events and can help evaluate policy scenarios, though they have a higher level of aggregation.
• Damage functions are often used to analyze the physical impacts of climate change. Mean temperature rise is usually the main climate stressor, but the handbook emphasizes that other climate dimensions should be considered as well.
• Modeling the macroeconomic implications of decarbonization involves considering the (limited) substitution of production inputs and how to model technological change, which can play a role in the speed of the transition.
• There is no silver bullet to modeling climate change. Central banks should develop a research agenda that gradually incorporates and adapts different models into a broader analytical toolkit.

Regarding physical impacts, the key uncertainty is about physical climate change (e.g., tipping points) and how it will interact with economies. Regarding transition impacts, there is uncertainty about technological change and how it may affect the rate of change toward net zero in different industries. Importantly, firms and households also face policy uncertainty (i.e., the possibility that climate policies could be implemented or reversed due to the political cycle), with consequences for resource allocation.