In 2020, Uruguay put into law that the Executive Branch should incorporate national climate change adaptation and mitigation objectives into the analysis and design of economic policy and planning of public finances.
This called on the Ministry of Economy and Finance (MEF) to play a role in the design, evaluation, and implementation of public policies on climate change. As part of this process, the MEF worked with the Ministry of Environment and other sectoral ministries to study the macroeconomic impact and cost-effectiveness of measures included in the first Nationally Determined Contribution (NDC) and new measures proposed in the second NDC.
- As part of the development of Uruguay’s second NDC, the MEF developed a DSGE model that would, for the first time, provide information on the economic impacts of climate policies aimed at mitigating greenhouse gas emissions for consideration in the process. Model development, parameterization, and calibration were led by Serafín Frache from the University of Montevideo.
- To prepare the data required for the modeling exercise, the MEF worked closely with technical experts from other government ministries as well as experts in Chile that were involved in a similar exercise for Chile’s Long- Term Climate Strategy.
- Initially, the model was used to evaluate 12 mitigation measures presented in the second NDC by modeling baseline, low-investment, and high-investment scenarios for the two most relevant sectors in terms of national emissions: one measure corresponded to the land use, land-use change, and forestry (LULUCF) sector, and eleven to the energy sector.
- While the estimated GDP initially decreases relative to the baseline in both investment scenarios, it increases above the baseline in these scenarios at a later stage. By 2030, the projected GDP is projected to be 0.57% and 0.52% higher than the baseline under the low- and high-investment scenarios, respectively, highlighting the positive economic impact of mitigation measures.
- Coordinated work between the MEF and other ministries also resulted in the development of greenhouse gas abatement cost curves. Challenges such as limited cost quantification and imprecise definitions of policy measures highlighted the need for continuous analysis and for updated studies to refine data. One use case of the resulting data was an MEF-led proposal to move the urban bus subsidy scheme from diesel to electric buses, which was implemented in 2024.
Key conclusions include the following: (1) it is important to apply different economic exercises and tools to compare results; (2) applying macroeconomic models is knowledge-, time-, and resource-intensive and requires collaboration between MoFs, research institutions and multilateral institutions; and (3) given the tight timeframes in policymaking, tools other than macroeconomic models such as marginal abatement cost curves (MACCs) and cost-benefit analysis (CBA) have a role to play.
Keywords
capacity buildingdatamitigationmodelspolicy process
