Florent McIsaac

The Paris Agreement established that global warming should be limited to “well below” 2 C and encouraged efforts to limit warming to 1.5 C. Achieving this goal presents a challenge, especially given (a) adjustment costs, which penalize a swift transition away from fossil fuels owing to, for example, skilled labor scarcity, and (b) climate uncertainty that complicates the link between emissions reductions and global warming. This paper presents a modeling framework that explores optimal decarbonization investment strategies with adjustment costs and climate uncertainty. The findings show that climate uncertainty impacts investment in three ways: (a) the cost of policy increases, especially when adjustment costs are present; (b) abatement investment is front‐loaded relative to a scenario without uncertainty; and (c) the sectors with the largest changes in investment are those that are “hard‐to‐abate”, such as heavy industry and agriculture, each of which have high investment costs and annual emission rates. The longer learning about climate uncertainty is delayed, the more these impacts are amplified. Each of these effects can be traced back to the carbon price distribution inheriting a “heavy tail” when climate uncertainty is present. The paper highlights how climate uncertainty and adjustment costs combined lead to heightened urgency for near‐term investments in decarbonization.

In 2022 the World Bank Group launched a new core diagnostic tool: the Country Climate and Development Report (CCDR). Published for 42 economies so far, CCDRs use resilient and low-emission development scenarios to identify synergies and tradeoffs between development and climate objectives. There are several modeling challenges associated with the analysis of the macroeconomic consequences of these development pathways, including those related to the nonmarginal nature of the required transformation, the role of technologies, and the replacement of fossil fuel-based assets with greener ones. To address some of these challenges, several CCDRs have used a hybrid modeling approach that combines a set of sectoral analyses with macroeconomic models. Specifically, sectoral techno-economic models are employed to construct resilient and low-emission development trajectories in key sectors. The macroeconomic implications of these sectoral transitions are then assessed by linking the sectoral models with two macroeconomic frameworks: a multisector general equilibrium framework and an aggregate macrostructural model. This hybrid approach combines the advantages of multiple tools and captures the various dimensions of the transition, including the need to tackle multiple market failures, beyond the emissions externality; analyze price and nonprice policies and their interactions; represent explicitly the replacement of assets and infrastructure; assess the macroeconomic feasibility of the sectoral transitions and the required investments. This paper uses the case of Turkey to describe the methodological approach and summarizes the results of the CCDRs that have been published to date. Findings suggest that, despite large investment needs, the transition can contribute positively to economic growth, especially when indirect mitigation benefits are taken into account, but only if structural challenges can be managed, climate and development policies are well designed, and negative impacts on some sectors or communities are mitigated.

This paper surveys integrated assessment models applied to Brazil. We show that these models belong to the environmental economics literature that fails to consider some of the most important aspects of the modern macroeconomic dynamics in Brazil. These features include monetary and financial balances, income distribution, and physical limits to growth. We argue that the most suitable framework for modeling a low-carbon Brazilian economy would incorporate both Post-Keynesian and ecological economics principles. This new modeling method would strengthen our understanding of environmental mitigation action consequences and would allow us to explore new climate-policy packages.

To what extent can worldwide carbon pricing foster the transition towards a low-carbon economy and mitigate the effects of global warming? We address this question by assessing the financial impacts and macroeconomic implications of carbon pricing and public subsidies. More specifically, we evaluate the extent to which such policies are sustainable by computing the probability of remaining below two thresholds that we argue to be indicative of the stability of our current economy and climate: (1) a temperature anomaly above +2°C (a commonly acknowledged target, including in the 2015 Paris Agreement, to potentially avoid nonlinearities in the climate system) and (2) a large global debt-to-output ratio of 270%. Key policy insights