The OECD has been using economic models and quantitative assessments since the late 1980s to inform policy makers of the costs, benefits and potential tradeoffs of environmental policies and climate change mitigation scenarios. The main environmental-economic modelling work of the OECD rests upon the in-house models ENV-Linkages, a dynamic general equilibrium model and ENV-Growth, a macroeconomic growth model based on a conditional convergence framework. This modelling work is aimed to assist governments in identifying least-cost policies or policy mixes to reduce greenhouse gas (GHG) emissions, and assesses the cost and impacts of environmental feedbacks, among other applications.
- The ENV-Linkages model is a recursive dynamic neo-classical general equilibrium model (GE). It is a global economic model built primarily on a database of national economies (GTAP V8 Database). In its current form, the model represents the world economy in 25 countries/regions, each with 35 economic sectors.
- The baseline projection as used for the Environmental Outlook to 2050 describes an internally consistent set of trends of all economic and environmental variables of the model. The baseline assumes no new policies for the environmental issues addressed and thus provides a benchmark against which policy scenarios can be assessed.
- The ENV-Growth model is a two-sector model that aims at projecting GDP and per capita income levels for all major economies in the world (currently more than 185 countries). The model is based on conditional convergence between countries in the main drivers of economic growth: labour, human capital, physical capital, natural resources and total factor productivity.
- ENV-Growth is used in the construction of baseline projections for ENV-Linkages. Furthermore, ENV-Growth is applied to construct macroeconomic projections for the so-called Shared Socioeconomic Pathways (SSPs) for climate change. Results of these projections are reported in the journal article “Long-term economic growth projections in the SSPs” (Global Environmental Change, 2016); the underlying projections are available here.
- An overview of the OECD ENV-Linkages Model (2014) presents a summary description of the OECD ENV-Linkages General Equilibrium model. The paper provides a brief description to the structure of the ENV-Linkages model and of its main equations, and describes the calibration method.
- An Economic Projection to 2050: The OECD ENV-Linkages Model Baseline (2011) describes possible future developments and is not a prediction of the future. Rather, it provides an internally consistent set of trends of all economic and environmental variables of the model. The baseline assumes no new policies for the environmental issues addressed and thus provides a benchmark against which policy scenarios can be assessed.
Environmental Outlooks and the Costs of Inaction and Resource Scarcity: Consequences for Long-term Economic Growth (CIRCLE)
- The project “Costs of Inaction and Resource scarcity: Consequences for Long-term Economic growth” (CIRCLE) aims at looking at the feedbacks from environmental challenges on economic growth. In ortder to assess the feedbacks from climate change, air pollution and other environmental issues, modelling tools used projecting future pathways of economic activity need to be able to assess how different environmental impacts affect various elements of the economic system on an on-going, iterative basis. This is the ambition of the OECD’s CIRCLE project. The modelling tools underlying the analyses in this project contribute to this ambition by quantifying the full cycle of economy and environment linkages for selected environmental issues. This allows a much more elaborate quantitative assessment of the economic consequences of these environmental issues.
- The OECD has produced a series of Environmental Outlooks to help policy makers understand the most urgent environmental challenges as well as the economic and environmental implications of the policies that could be used to address these challenges.
- The latest Outlook, the OECD Environmental Outlook to 2050: The Consequences of Inaction (2012) provides model-based future-oriented analyses of economic and environmental trends in the coming decades. The economic and environmental projections are made possible by combining the ENV-Linkages model at the OECD Environment Directorate with the comprehensive environmental modelling framework of the IMAGE (Integrated Model to Assess the Global Environment) suite of models run by the Netherlands Environmental Assessment Agency (PBL).
Major CIRCLE publications
- The Economic Consequences of Outdoor Air Pollution – This report provides a comprehensive assessment of the economic consequences of outdoor air pollution in the coming decades, focusing on the impacts on mortality, morbidity, and changes in crop yields as caused by high concentrations of pollutants. Unless more stringent policies are adopted, findings point to a significant increase in global emissions and concentrations of air pollutants, with severe impacts on human health and the environment. The impacts of outdoor air pollution are projected to lead to significant economic costs, which are illustrated at the regional and sectoral levels, and to substantial annual global welfare costs.
- The Economic Consequences of Climate Change – This report provides a new detailed quantitative assessment of the consequences of climate change on economic growth through to 2060 and beyond. It focuses on how climate change affects different drivers of growth, including labour productivity and capital supply, in different sectors across the world. The sectoral and regional analysis shows that while the impacts of climate change spread across all sectors and all regions, the largest negative consequences are projected to be found in the health and agricultural sectors, with damages especially strong in Africa and Asia.
More about the CIRCLE project and other CIRCLE publications
More about the OECD Environmental Outlooks
Climate change mitigation
- The ENV-Linkages model, with its general equilibrium structure, is a powerful tool to analyse the impacts of climate change mitigation policies. Analytical work based on the ENV-Linkages model development spans over a wide range of issues dealing with the interlinkages between environment and the economy: costs and effectiveness of carbon markets, linking of carbon markets, climate change mitigation and employment, climate change mitigation policies and energy policies such as the removal of fossil fuel subsidies.
Highlights of model results
Source: ENV-Linkages Model (2011).
- Carbon Markets
More about OECD Work on Carbon Markets
- Climate change mitigation policy and employment
- Policies for cost-effective mitigation
More about Economics of Climate Change Mitigation
Distributional impacts of environmental policies
- The costs of environmental policies may significantly differ across households, though such policies can give opportunities to reduce poverty and inequalities if combined with appropriate redistribution of the revenues they raise. In order to investigate the impact of environmental policies on poverty and inequalities, the ENV-Linkages model, which in its core specification relies on a single regional representative household, is extended to include – for some regions – an explicit representation of various households groups, differentiated by preferences and incomes sources. This version of the model is used to provide an assessment of the distributional impacts of policy packages where energy subsidy or green tax reforms are implemented.
- Modelling of distribution impacts of energy subsidy reforms: An illustration with Indonesia, Environment Working Paper No. 86, provides, in the case of Indonesia, an assessment of the economic, environmental and distributional impacts of fossil fuels consumption subsidy reforms. The study is based on the context that pertained until mid-2014, when international oil prices where high and before the recent phase out of Gasoline and Diesel subsidies by the Indonesian authorities. This work is based on a version of ENV-Linkages that includes over 10 000 Indonesian household groups.
- Main findings – The simulated GDP impacts of the fossil fuel subsidy phase out is positive, ranging from 0.4% to 0.7% in 2020 with respect to a baseline with no phase out. The GHG emissions reductions are between 8% and 10%. The distributional effects depend on the type of redistribution schemes used. Cash transfers make the reform progressive. However, when redistribution is based on labour income, it become regressive because it targets formal sector workers only, who are in general better off that the rest of the population. The food subsidies make the reform slightly progressive, but create inefficiencies which partly offset the beneficial effect of the subsidy reform on GDP.