The role of money and the financial sector in energy-economy models used for assessing climate and energy policy
By H. Pollitt, Jean-François Mercure. 2015
116 citations recorded by the source corpus.
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.
Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment
View Paper: https://www.semanticscholar.org/paper/5075282e57b186541e9c752389410fd2bfe99522
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In Economics and Econometrics
In Renewable Energy, Sustainability and the Environment
Citations in the corpus
- Macroeconomic impact of stranded fossil fuel assets (2018, background): “Recent discussions of the implications on results of the choice of an economic model for assessing the impacts of energy and climate policies are given in [ 29,35 ].”