Hector Pollitt

The dynamics of technology diffusion and the impacts of climate policy instruments in the decarbonisation of the global electricity sector

This paper presents an analysis of climate policy instruments for the decarbonisation of the global electricity sector in a non-equilibrium economic and technology diffusion perspective. Energy markets are driven by innovation, path-dependent technology choices and diffusion. However, conventional optimisation models lack detail on these aspects and have limited ability to address the effectiveness of policy interventions because they do not represent decision-making. As a result, known effects of technology lock-ins are liable to be underestimated. In contrast, our approach places investor decision-making at the core of the analysis and investigates how it drives the diffusion of low-carbon technology in a highly disaggregated, hybrid, global macroeconometric model, FTT:Power-E3MG. Ten scenarios to 2050 of the electricity sector in 21 regions exploring combinations of electricity policy instruments are analysed, including their climate impacts. We show that in a diffusion and path-dependent perspective, the impact of combinations of policies does not correspond to the sum of impacts of individual instruments: synergies exist between policy tools. We argue that the carbon price required to break the current fossil technology lock-in can be much lower when combined with other policies, and that a 90% decarbonisation of the electricity sector by 2050 is affordable without early scrapping.

Modelling complex systems of heterogeneous agents to better design sustainability transitions policy

This article proposes a fundamental methodological shift in the modelling of policy interventions for sustainability transitions in order to account for complexity (e.g. self-reinforcing mechanisms, such as technology lock-ins, arising from multi-agent interactions) and agent heterogeneity (e.g. differences in consumer and investment behaviour arising from income stratification). We first characterise the uncertainty faced by climate policy-makers and its implications for investment decision-makers. We then identify five shortcomings in the equilibrium and optimisation-based approaches most frequently used to inform sustainability policy: (i) their normative, optimisation-based nature, (ii) their unrealistic reliance on the full-rationality of agents, (iii) their inability to account for mutual influences among agents (multi-agent interactions) and capture related self-reinforcing (positive feedback) processes, (iv) their inability to represent multiple solutions and path-dependency, and (v) their inability to properly account for agent heterogeneity. The aim of this article is to introduce an alternative modelling approach based on complexity dynamics and agent heterogeneity, and explore its use in four key areas of sustainability policy, namely (1) technology adoption and diffusion, (2) macroeconomic impacts of low-carbon policies, (3) interactions between the socio-economic system and the natural environment, and (4) the anticipation of policy outcomes. The practical relevance of the proposed methodology is subsequently discussed by reference to four specific applications relating to each of the above areas: the diffusion of transport technology, the impact of low-carbon investment on income and employment, the management of cascading uncertainties, and the cross-sectoral impact of biofuels policies. In conclusion, the article calls for a fundamental methodological shift aligning the modelling of the socio-economic system with that of the climatic system, for a combined and realistic understanding of the impact of sustainability policies.

A new economics approach to modelling policies to achieve global 2020 targets for climate stabilisation

This paper explores a Post Keynesian, ‘new economics’ approach to climate policy, assessing the opportunities for investment in accelerated decarbonisation of the global economy to 2020 following the Great Recession of 2008–2009. The risks associated with business-as-usual growth in greenhouse gas (GHG) concentrations in the atmosphere suggest that avoiding dangerous climate change will require that the world’s energy-economy system is transformed through switching to low-carbon technologies and lifestyles. Governments have agreed a target to hold the increase in temperatures above pre-industrial levels to at most 2°C and have offered reductions by 2020 in GHG emissions or the carbon-intensity of GDP. The effects of policies proposed to achieve pathways to 2020 towards this target are assessed using E3MG, an Energy-Environment-Economy (E3) Model at the Global level. E3MG is an annual simulation econometric model, estimated for 20 world regions over 1972–2006 adopting a new economics approach. Additional low-GHG investment of some 0.7% of GDP, with carbon pricing and other policies, is sufficient to achieve a pathway consistent with a medium chance of achieving the long-term target. GDP is above reference levels because decarbonisation reduces world oil prices and increases investment. Employment is some 0.9% above reference levels by 2020 and public finances are almost unaffected.

The role of money and the financial sector in energy-economy models used for assessing climate and energy policy

ABSTRACT This article outlines a critical gap in the assessment methodology used to estimate the macroeconomic costs and benefits of climate and energy policy, which could lead to misleading information being used for policy-making. We show that the Computable General Equilibrium (CGE) models that are typically used for assessing climate policy use assumptions about the financial system that sit at odds with the observed reality. These assumptions lead to ‘crowding out’ of capital and, because of the way the models are constructed, negative economic impacts (in terms of gross domestic product (GDP) and welfare) from climate policy in virtually all cases. In contrast, macro-econometric models, which follow non-equilibrium economic theory and adopt a more empirical approach, apply a treatment of the financial system that is more consistent with reality. Although these models also have major limitations, they show that green investment need not crowd out investment in other parts of the economy – and may therefore offer an economic stimulus. Our conclusion is that improvements in both modelling approaches should be sought with some urgency – both to provide a better assessment of potential climate and energy policy and to improve understanding of the dynamics of the global financial system more generally. POLICY RELEVANCE This article discusses the treatment of the financial system in the macroeconomic models that are used in assessments of climate and energy policy. It shows major limitations in approach that could result in misleading information being provided to policy-makers.

An Assessment of Japanese Carbon Tax Reform Using the E3MG Econometric Model

This paper analyses the potential economic and environmental effects of carbon taxation in Japan using the E3MG model, a global macroeconometric model constructed by the University of Cambridge and Cambridge Econometrics. The paper approaches the issues by considering first the impacts of the carbon tax in Japan introduced in 2012 and then the measures necessary to reduce Japans emissions in line with its Copenhagen pledge of −25% compared to 1990 levels. The results from the model suggest that FY2012 Tax Reform has only a small impact on emission levels and no significant impact on GDP and employment. The potential costs of reducing emissions to meet the 25% reduction target for 2020 are quite modest, but noticeable. GDP falls by around 1.2% compared to the baseline and employment by 0.4% compared to the baseline. But this could be offset, with some potential economic benefits, if revenues are recycled efficiently. This paper considers two revenue recycling scenarios. The most positive outcome is if revenues are used both to reduce income tax rates and to increase investment in energy efficiency. This paper shows there could be double dividend effects, if Carbon Tax Reform is properly designed.

GDP and employment effects of policies to close the 2020 emissions gap

Four policies might close the gap between the global GHG emissions expected for 2020 on the basis of current (2013) policies and the reduced emissions that will be needed if the long-term global temperature increase can be kept below the 2 °C internationally agreed limit. The four policies are (1) specific energy efficiency measures, (2) closure of the least-efficient coal-fired power plants, (3) minimizing methane emissions from upstream oil and gas production, and (4) accelerating the (partial) phase-out of subsidies to fossil-fuel consumption. In this article we test the hypothesis of the International Energy Agency (IEA) that these policies will not result in a loss of gross domestic product (GDP) and we estimate their employment effects using the E3MG global macro-econometric model. Using a set of scenarios we assess each policy individually and then consider the outcomes if all four policies were implemented simultaneously. We find that the policies are insufficient to close the emissions gap, with an overall emission reduction that is 30% less than that found by the IEA. World GDP is 0.5% higher in 2020, with about 6 million net jobs created by 2020 and unemployment reduced. Policy relevance The gap between GHG emissions expected under the Copenhagen and Cancun Agreements and that needed for emissions trajectories to have a reasonable chance of reaching the 2 °C target requires additional policies if it is to be closed. This article uses a global simulation model E3MG to analyse a set of policies proposed by the IEA to close the gap and assesses their macroeconomic effects as well as their feasibility in closing the gap. It complements the IEA assessment by estimating the GDP and employment implications separately by the different policies year by year to 2020, by major industries, and by 21 world regions.

Environmental impact assessment for climate change policy with the simulation-based integrated assessment model E3ME-FTT-GENIE

A high degree of consensus exists in the climate sciences over the role that human interference with the atmosphere is playing in changing the climate. Following the Paris Agreement, a similar consensus exists in the policy community over the urgency of policy solutions to the climate problem. The context for climate policy is thus moving from agenda setting, which has now been mostly established, to impact assessment, in which we identify policy pathways to implement the Paris Agreement. Most integrated assessment models currently used to address the economic and technical feasibility of avoiding climate change are based on engineering perspectives with a normative systems optimisation philosophy, suitable for agenda setting, but unsuitable to assess the socio-economic impacts of a realistic baskets of climate policies. Here, we introduce a fully descriptive, simulation-based integrated assessment model designed specifically to assess policies, formed by the combination of (1) a highly disaggregated macro-econometric simulation of the global economy based on time series regressions (E3ME), (2) a family of bottom-up evolutionary simulations of technology diffusion based on cross-sectional discrete choice models (FTT), and (3) a carbon cycle and atmosphere circulation model of intermediate complexity (GENIE-1). We use this combined model to create a detailed global and sectoral policy map and scenario that sets the economy on a pathway that achieves the goals of the Paris Agreement with >66% probability of not exceeding 2

Macroeconomic analysis of the employment impacts of future EU climate policies

^\circ

Macroeconomic impact of stranded fossil fuel assets

C of global warming. We propose a blueprint for a new role for integrated assessment models in this upcoming policy assessment context.

Climate-carbon cycle uncertainties and the Paris Agreement

This article gives a detailed account of part of the modelling that was carried out for the assessment of the EUs proposed energy and climate targets for 2030. Using the macro-econometric simulation model, E3ME, and drawing on results from the PRIMES energy systems model, it shows that a 40% reduction in GHG emissions (compared to 1990 levels) could lead to an increase in employment of up to 0.7 million jobs in Europe. Furthermore, if the same GHG reduction target was combined with targets for renewables and energy efficiency, the net increase in jobs could be as high as 1.2 million. Both results are in contrast to the standard findings from computable general equilibrium (CGE) models, reflecting the different underlying assumptions (e.g. labour supply) to the modelling approach. Additional sensitivity testing shows that the ways in which the energy efficiency and renewable measures are funded are important factors in determining overall economic impact. Policy relevance In recent years there has been much debate as to whether the European Union should have a single GHG reduction target or a set of targets that also cover renewables and energy efficiency. This paper elaborates on part of the modelling that was carried out for the official assessment of the European Unions proposed energy and climate targets for 2030. Using an empirical, model-based approach, it compares a scenario where there is a single 40% GHG reduction target to a scenario that also includes a 30% renewables target and stricter energy efficiency standards. The model results show that the large investment stimulus needed to meet the combined targets leads to higher levels of GDP and employment. This suggests that there could be medium-term economic and social benefits to including all three targets in the future energy and climate package.