Policy simulation is an important part of medium-term economic planning and policy coordination between countries.
The coordination cycle of the EU and its National Recovery and Resilience Plans all benefit from policy modeling for informing and assessing policy decisions. In Spain, modeling for exercises such as assessing energy mix objectives are primarily based on DSGE models calibrated to the Spanish economy, namely EREMS, REMS, and QUEST R&D.
- DSGE models aim to capture relations between economic agents (households, companies, public fiscal and monetary authorities, and the rest of the world) by defining their behavior and interactions in key markets (goods, labor, capital). They consider endogenous responses from all agents, as well as market clearing conditions in long-run equilibrium, providing an advantage over models based on constant multipliers or inputoutput analysis.
- In DSGE models, policies are represented via shocks to exogenous variables and parameters. The models then estimate the reaction of endogenous variables such as prices, employment, and GDP to such shocks.
- The energy mix objective of reducing dependency on fossil fuels, described in the Spanish National Integrated Climate and Energy Plan, has been analyzed from a macroeconomic perspective and a case-by-case policy perspective.
- The macroeconomic perspective involved modeling the associated policies as parameter shocks: first, a positive total factor productivity (TFP) shock as a result of decreased dependency on imported fossil fuels, which reduces firm costs, increases external competitiveness, and thus increases productivity; and second, a temporary increase in the depreciation rate of capital, due to fossil-fuel-dependent capital becoming obsolete. In conjunction, these shocks have a demand-driven positive impact in the short run due to increased investment in green capital, as well as a positive structural, long-term impact due to higher TFP.
- The case-by-case policy perspective uses administrative data and surveys to study the exposure of companies and families to price and income changes due to green policies. DSGE simulations are sometimes used for this but should become more precise in the future.
Work is underway to better understand the macroeconomic impacts of exposure to climate change. This includes studying the macroeconomic impact of increased uncertainty from climate volatility and the implications for investment in obtaining information and insurance. A particular concern is identifying markets where market failures prevent adequate responses to climate change, and where policy intervention may thus be needed.
Keywords
energy pathwaysmodelsphysical riskpolicy simulationtransition
