Advancing macroeconomic modeling for the energy transition: harnessing production networks models

• One advantage of production network models is that they provide closed-form approximations for decomposing the welfare impacts of policy and price shocks, addressing the “black box” criticism often leveled at traditional large-scale multi-sectoral models such as CGE models.
• Production network models also allow the simultaneous analysis of several critical aspects of the energy transition, including sectoral reallocations of employment and activity, inflationary impacts of carbon pricing with sticky prices, investment needs (via explicit capital dynamics), and distributional effects.
• These models do not currently include the core components of the low-carbon transition, such as greenhouse gas emissions or energy consumption, and their calibration does not necessarily align with the requirements of climate policy assessment tools. Hence, more work is needed before they can be used for MoF climate policy assessments.

Future work that is required includes the integration of the following features: hybrid calibration that reconciles monetary national accounts with physical energy and emissions data; explicit modeling of links between physical entities and monetary macroeconomic aggregates; precise sectoral calibration compatible with energy transition scenarios; use of recent national accounts for calibration; and a flexible calibration that allows regular updates. Integrating these features would enable the development of a new generation of macroeconomic models that offer insights into the complex dynamics of the energy transition, providing policymakers with more detailed and thus more useful information.