The OECD is engaged in an effort to use conceptual and quantitative models to guide policymaking in the climate space, as current approaches lack a framework for how to use climate-related tools to achieve policy goals within short- to medium-term horizons (up to five or ten years).
The OECD’s research and its development of a macroeconomic model explicitly consider key market failures, such as labor market mismatches, missing demand externalities, and learning-by-doing externalities, that are often overlooked in existing approaches.
- Climate science has made progress in estimating the economic impacts of climate change via CGE models and IAMs, though these tend to focus on long time horizons. This does not necessarily align with the shorter time frames relevant for Ministries of Finance.
- Many macroeconomic models that integrate climate only do so in a limited manner. Climate damages are often treated as ad hoc, and feedback loops between economic policies and climate outcomes are inadequately captured. Nonlinear effects (including tipping points), uncertainties, and structural changes are also often overlooked.
- Some studies account for complexities such as labor market frictions, green innovation, and green technology adoption, though these are still rare and fragmented.
- The framework and general equilibrium macroeconomic model under development by the OECD will consider the macroeconomic and structural impacts of climate policies, provide baseline projections of investment, growth, and fiscal trajectories under various climate policies, integrate market failures, and, crucially, consider climate mitigation and adaptation strategies simultaneously. This model thus allows policymakers to evaluate the economic impacts and interactions of policy alongside potential damages from climate change.
- By endogenizing choices for green innovation and investment in a dynamic framework, the model can capture policy mixes that allow green investment to surpass a critical threshold beyond which the economic trajectory is one of high green investment and growth with low climate impact.
The framework under development will add to existing tools at the OECD, including its country-level model for producing long-run economic scenarios and its existing dynamic CGE model ENV-Linkages. The aim is to help OECD member countries better understand and factor in the costs of climate change and the impacts of various policy options on decision-making.
Keywords
investment needsmodelsphysical riskpolicy mixtechnology
