Modelling innovation and the macroeconomics of low-carbon transitions

What is it about?

Energy and climate policies are regularly assessed and informed by sophisticated energy-environment-economy models. These models however tend to generate contradictory outcomes and interpretations in relation to possible macroeconomic impacts of such policies. This paper aims to explain the sources of these conflicting messages put forward by different types of models. We trace these differences in models' outcomes primarily to their theoretical underpinnings, in particular their assumptions on the workings of the financial sector and the nature of money, and of how these interact with processes of low-carbon energy innovation and technological change. The paper argues that all modelling studies used to back policy should state clearly their underpinning theoretical school and their treatment of finance and innovation.

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Why is it important?

A strong recommendation is given to model developers to render their energy-environment-economy models more realistic, when representing interactions between finance, investments, and technological innovation, and when providing credible scientific evidence to policy makers. The paper compares two contrasting modelling approaches deployed in the economics literature, and contributes to an enhanced transparency of the assumptions that modellers deploy when assessing or estimating the likely economic impacts of energy and climate policies.

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