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A new modeling approach combining bottom-up sectoral analyses with top-down macroeconomic models to understand the economic impacts of resilient and low-emissions development

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The World Bank’s Country Climate and Development Reports (CCDRs) use a hybrid modeling approach to explore the economic impacts of resilient and low-emissions development pathways.

The approach integrates granular insights from sector-level transition pathways (analyzed via sectoral technoeconomic models) into macroeconomic models, which helps ensure consistency, analyze general equilibrium effects, and ascertain the implications for macroeconomic variables such as GDP, employment, and debt. The implications of different financing options are also considered.

Key Messages

  • The hybrid approach can overcome some challenges of modeling the transition. It can help account for the non-marginal nature of the transition, consider the role of technologies, and reflect non-price policies via sectoral models, without sacrificing the analysis of general equilibrium effects and macroeconomic feasibility, i.e., consistency across sectors.
  • Through the approach, MoFs can use the work of line ministries, which use technical sectoral models to develop their detailed strategies, pathways, and policies, within a macroeconomic framework, which is necessary for the MoF to finance the transition pathways, manage trade-offs across sectors, and develop consistent economywide strategies that account for economic and financial feasibility constraints.

Four key ideas underly the approach:

  • The analysis is separated into sectoral and general equilibrium components, meaning complexity can be captured without losing transparency and tractability.
  • The approach explores feasible pathways that are consistent with each country’s climate and development targets rather than being too prescriptive about what an optimal pathway looks like.
  • The use of sectoral models can capture the complexity and diversity of climate policies beyond (but including) carbon pricing (which, in contrast to other policies, is readily implemented in macroeconomic models).
  • The use of sectoral models allows more market and governance failures to be captured.

A recent application of the approach to Türkiye by Hallegatte et al. (2024) considers the pathway to net zero by 2053 (the government target) using sectoral technoeconomic models for power, transportation, buildings, and forest landscapes; more simplified roadmaps for industry and agriculture; and two macroeconomic models (MANAGE, a single-country computable general equilibrium [CGE] model, and MFMod, an aggregate macrofinancial model). Empirical results indicate the resilient and low-emissions pathway could contribute positively to Türkiye’s economic growth despite substantial redirection of investment, especially if co-benefits are considered. However, this result is contingent on no crowding out of other investments.