Summary of emerging and new approaches to modeling the economic case for climate action: lessons from New Climate Economy for Ministries of Finance and future model development agenda

• Uncertainties and the complexity of climate impacts render tools and methods used by Ministries of Finance increasingly unsuitable for policy analysis. Reasons include models’ inability to capture nonlinear and threshold effects; a failure to consider the impacts of depletion and degradation of natural capital on the provision of environmental goods and services; an inadequate understanding of climate-related risks; a general disregard of both the role and magnitude of externalities; inadequate representation of climate damages and of the benefits of adopting low-carbon, climate-resilient technologies; and uncertainties regarding transition costs.
• The System Thinking framework is generally applied with system dynamics tools that can be integrated with other methods and tools typically used by MoFs, including CGE models. Several country representations, referred to as Green Economy Models, were produced under such a framework using system dynamics tools as part of NCE country support.
• The System Thinking framework enables policymakers to integrate climate impacts under alternative global warming and national climate action scenarios. It also enables a comprehensive assessment of climate policy packages, transitional effects, costs of interventions, and medium- and long-term benefits, including monetary and non-monetary metrics of well-being.
• Models developed under the NCE are fully owned by the client institution(s) to which the NCE provided implementing support, without any copyright involvement. These models generally incorporate publicly available and peer-reviewed data and are advanced under a consultative research process.

Two conclusions from the NCE approach, apart from the benefits of a participatory process, include the superior benefits from a low-carbon paradigm, despite transitional challenges, and the realization that, especially for developing countries, there are large financing needs that exceed countries’ fiscal space, highlighting the need for financing support from international financial institutions as well as country measures for green finance mobilization and boosting revenues.

Lessons and recommendations in terms of the modeling domain include the need to integrate tools traditionally used by MoFs with ones that incorporate climate impacts, highlight interactions with natural capital, and incorporate a diverse set of mitigation and resilience policies; the desirability of participatory processes for modeling, bringing in experts from different disciplines, facilitating information exchange, and reconciling policy questions, assumptions, data, methods, and scenarios; and prioritizing capacity-building and peer exchange to overcome knowledge constraints and increase transparency.