Modelling innovation and the macroeconomics of low-carbon transitions: theory, perspectives and practical use

This is the author accepted manuscript. The final version is available from Taylor & Francis (Routledge) via the DOI in this record.Energy and climate policies may have significant economy-wide impacts, which are regularly assessed based on quantitative energy-environment-economy models. These tend to vary in their conclusions on the scale and direction of the likely macroeconomic impacts of a low-carbon transition. This paper traces the characteristic discrepancies in models’ outcomes to their origins in different macro-economic theories, most importantly their treatment of technological innovation and finance. We comprehensively analyse the relevant branches of macro-innovation theory and group them into two classes: ‘Equilibrium’ and ‘Non-equilibrium’. While both approaches are rigorous and self-consistent, they frequently yield opposite conclusions for the economic impacts of low-carbon policies. We show that model outcomes are mainly determined by their representations of monetary and finance dimensions, and their interactions with investment, innovation and technological change. Improving these in all modelling approaches is crucial for strengthening the evidence base for policy making and gaining a more consistent picture of the macroeconomic impacts of achieving emissions reductions objectives. The paper contributes towards the ongoing effort of enhancing the transparency and understanding of sophisticated model mechanisms applied to energy and climate policy analysis. It helps tackle the overall “black box” critique, much-cited in policy circles and elsewhere

Bridging analytical approaches for low-carbon transitions

Low-carbon transitions are long-term multi-faceted processes. Although integrated assessment models have many strengths for analysing such transitions, their mathematical representation requires a simplification of the causes, dynamics and scope of such societal transformations. We suggest that integrated assessment model-based analysis should be complemented with insights from socio-technical transition analysis and practice-based action research. We discuss the underlying assumptions, strengths and weaknesses of these three analytical approaches. We argue that full integration of these approaches is not feasible, because of foundational differences in philosophies of science and ontological assumptions. Instead, we suggest that bridging, based on sequential and interactive articulation of different approaches, may generate a more comprehensive and useful chain of assessments to support policy formation and action. We also show how these approaches address knowledge needs of different policymakers (international, national and local), relate to different dimensions of policy processes and speak to different policy-relevant criteria such as cost-effectiveness, socio-political feasibility, social acceptance and legitimacy, and flexibility. A more differentiated set of analytical approaches thus enables a more differentiated approach to climate policy making