WP3 - Macroeconomic Analysis
Work Package 3 (WP3) analyses the behavioural transition towards a green economy by providing an assessment of the enabling conditions, dynamics, and macroeconomic impacts of the innovation and diffusion of low-carbon and adaptation technologies. The three main interrelated tasks are concisely outlined below.
Technological innovation and diffusion
Innovation and diffusion of green technology that makes traditional products and processes more environmentally friendly is crucial for addressing climate change. In particular, appropriate economic and policy measures are needed to accelerate the transition to a low-carbon economy. For this purpose, a network-based approach is used to empirically assess the speed and spread of green technologies. Taking a network-based perspective is important since adopting a technology involves the acquisition of knowledge often arising from interactions with other agents and the incentives to innovate and adopt may be affected by other agents, which can change the way technology diffuses. Gaining a better understanding of the dynamics of the diffusion process will help to identify technologies that are most likely to be adopted, provide insights on how to make the process more rapid, and evaluate ways in which networks can be upgraded to improve the propagation of renewable energy sources. This is essential to reduce dependency on fossil fuels and ultimately contribute to paving the way to green growth pathways.
Since green growth requires large-scale investments, the main aim is to characterize the financial architecture that is conducive to technology development and diffusion. Specifically, it will be examined under which conditions the necessary increase in investment in low-carbon and adaptation technologies can be implemented. A representation of the two main determinants of investment- financial constraints and expectations- is introduced. For financial constraints, the sector and region specific availability and conditions (e.g. interest rates) of financing allows to represent the impacts of regulation and/or instruments (e.g. green bonds) that target funding towards low-carbon and adaptation technologies. The representation of international financial flows will be improved to account for foreign direct investment and global financial imbalances to better quantify the impacts of green growth investments. For expectations, there will be a shift from myopic to adaptive expectations, where firms will no longer base their investment decisions on prevailing market conditions, but will account for the impact of their and others’ decision on future market conditions to investigate the coordination of expectations on a green growth path.
It is also imperative to pay attention to the macroeconomic impacts and the goal of this task is to discover opportunities that are economically attractive, as well as environmentally and socially sustainable. For this purpose, GEM-E3-WIN, a General Equilibrium Model for the Economy, Energy and the Environment, developed specifically for the GREEN-WIN project, will be used to quantify and assess green growth scenarios in terms of welfare, employment, GDP, prices, production, international trade, technological change and other indicators related to the sustainable development goals (GEM-E3-WIN is based on the GEM-E3 model, that is used extensively by the European Commission and national authorities for energy and climate policy impact assessment). Assessment of alternative scenarios with less or more ambitious climate policies will provide insights on the main risks and opportunities associated with different mitigation pathways.
E3-Modelling, EEP PSE, UCL, IASS