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OECD Workshop “Climate transition scenarios: integrating models into risk assessment under uncertainty and the cost of delayed action” (6 July 2022) - Session 1, Baptiste Boitier, SEURECO

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Implementation of NGFS Climate Scenarios in France with four
multisectoral models
-
OECD WORKSHOP ON CLIMATE TRANSITION SC...

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Objectives
12/07/2022
2
What is « Finance ClimAct »?
• A EU LIFE project coordinated by ADEME that aim at
implementing sus...

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Methodology
12/07/2022
3
Use four macroeconomic models for France:
• IMACLIM-R France (CIRED): Imaclim-R France is a dynam...

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OECD Workshop “Climate transition scenarios: integrating models into risk assessment under uncertainty and the cost of delayed action” (6 July 2022) - Session 1, Baptiste Boitier, SEURECO

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Presentation from the OECD Workshop “Climate transition scenarios: integrating models into risk assessment under uncertainty and the cost of delayed action” (6 July 2022) - Session 1, Baptiste Boitier, SEURECO

Presentation from the OECD Workshop “Climate transition scenarios: integrating models into risk assessment under uncertainty and the cost of delayed action” (6 July 2022) - Session 1, Baptiste Boitier, SEURECO

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OECD Workshop “Climate transition scenarios: integrating models into risk assessment under uncertainty and the cost of delayed action” (6 July 2022) - Session 1, Baptiste Boitier, SEURECO

  1. 1. Implementation of NGFS Climate Scenarios in France with four multisectoral models - OECD WORKSHOP ON CLIMATE TRANSITION SCENARIOS 6th of July 2022 Paris Baptiste Boitier (SEURECO) on behalf of ADEME, Banque de France and CIRED This project has received funding from the European Union’s LIFE Integrated Project 2019 program 12/07/2022 1
  2. 2. Objectives 12/07/2022 2 What is « Finance ClimAct »? • A EU LIFE project coordinated by ADEME that aim at implementing sustainable finance in France and Europe National Low- carbon Strategy of France Action Plan for Sustainable Finance Contributing to the implementation of • One key lever is the climate risks management and stress-testing: Finance ClimAct helps the development of technical capacity to conduct climate stress-tests by supervisors and financial institutions • Within the framework of the NGFS scenarios and assumptions (Phase II, June 2021), we aim at:  Highlighting key assumptions that drives transition shocks and the main theoretical limitation of the modelling  Analysing macro and sector economic impacts and identifying key mechanisms at stake in the modelling tools explaining the results and their potential divergence between models  Proposing modelling improvements and identifying standard characteristics to run climate stress tests  Assessing multi-sector models capability to draw disruptive financial shocks at macro and sector level.
  3. 3. Methodology 12/07/2022 3 Use four macroeconomic models for France: • IMACLIM-R France (CIRED): Imaclim-R France is a dynamic, recursive, multi-sector macroeconomic model of the French economy. At the macroeconomic level, it consists of a Computable General Equilibrium framework impaired by short-term constraints related to imperfect foresight and markets imperfections, including equilibrium unemployment and idle productive capital. At the sectoral level, the model incorporates technical modules providing explicit descriptions of infrastructures, equipment and technologies. • NEMESIS (SEURECO): NEMESIS is a sector detailed macro-economic model for each EU member state (+UK, NO and IS), short-term economic dynamic is driven by demand whereas in longer-term, supply properties matter. NEMESIS is mainly used for socio-economic impact assessment of structural policies (climate, energy, fiscal, innovation, etc.). For climate/energy analysis, the model uses a detailed energy-demand and electricity production module. • NiGEM (Banque de France): NiGEM (National institute Global Econometric Model) is a global macroeconomic model consisting of individual country models of New Keynesian structure. Each country/region is modelled through a dynamic set of equations where agents are generally assumed to have rational expectations and there are nominal rigidities that slow the process of adjustment to external shocks. In modelling the NGFS scenarios, NiGEM is coupled with REMIND-MAgPIE, which is a comprehensive IAM framework that simulates, in a forward-looking fashion, the dynamics within and between the energy, land-use, water, air pollution and health, economy and climate systems. • Three-ME (ADEME/OFCE): ThreeME is a neo-Keynesian macroeconomic model developed by ADEME and OFCE since 2008. It describes the French economy in 37 sectors, including 17 for energy. Since it is an hybrid model, energy consumption depends on vehicles fleets and building stocks and their future evolutions. Taking into account a sub-optimal equilibrium situation, it shows the possible double dividend of a transition policy.
  4. 4. Methodology 12/07/2022 4 We defined a set of common assumptions for all models: • Model drivers: Population and French labour productivity (baseline) • IEA WEO (2021) projections for fossil fuels prices (“Stated Policy” scenario for the “Baseline” scenario and the “Sustainable Development” scenario for “NZE 2050”, “Delayed” and “Divergent” scenarios) • Recycling scheme: revenues from carbon tax are redistributed to households (50%) and firms (50%) • Use changes in NiGEM international prices and demand for alternative scenarios • Monetary policy in NiGEM (price-level targeting rule) • Implement the carbon prices from Remind for the NGFS scenarios: “Baseline”, “NZE 2050”, “Delayed” and “Divergent”. It implies different emissions reductions in the different models but it ensures that the initial economic burden is similar in all models
  5. 5. NZE – 2050 : GDP and components deviation (w.r.t baseline) 12/07/2022 5 • Models’ response to carbon prices shocks differs and is explained by divergence in modelling assumptions about: 1. The extent of the crowding-out effect of “green investments” on other productive investments 2. The way on how this crowding-out effect arises in the models 3. How public consumption is modelled 4. Rest of the World response through the competitiveness and demand channels Annual GDP components deviation w.r.t. the baseline scenario (in GDP ppt) Caution: scale is different by model (Preliminary results)
  6. 6. All scenarios: GDP and components deviation (w.r.t baseline) 12/07/2022 6 • Almost all models show negative impacts on GDP of more adverse transition scenarios due to: • Lower net investments in all models in both adverse scenarios • Higher loss of competitiveness in NEMESIS and NiGEM in the Delayed scenario • Lower private consumption in the Divergent scenario in NEMESIS, NiGEM and Three-ME 2020-2050 GDP components deviation w.r.t. the baseline scenario (in GDP ppt) (Preliminary results)
  7. 7. Concluding remarks 12/07/2022 7 Our models show different potential impacts of the climate transition in France: • But the extent is limited: +1.5% to -1% of GDP, over the period 2020-2050, far from expected long-term costs of physical risks • Theoretical backgrounds on how the models represent the functioning of the economies impact the results, especially: • The monetary policy • The crowding-out effect of green investments on other productive investments • The debt capacity of economic agents Keys limitations • Our methodology do not ensure that climate objectives are reached • Short-term volatility representation is limited in our models • Explore impacts of potential transition risks’ channels: labour market, stranded assets, etc. • Sensitivity analysis will help better understand models’ behaviours
  8. 8. Synthesis 12/07/2022 8 Macroeconomic impacts Meeting climate targets Used explicitly by the NGFS Used explicitly by the Banque de France (trail exercise) Carbon price Limited Strong Yes Yes Fossil fuels prices Medium Strong Yes Yes Technological innovations Limited Medium Partially Partially Carbon fiscality recycling scheme Strong Limited Yes Yes Monetary policies Medium / Strong Limited Yes Yes Crowding-out in capital markets Strong Limited Partially Partially Regulatory measures (other than carbon price) Medium Strong No No Stranded assets Strong Medium No No International economic demand Strong Medium Yes Yes
  9. 9. 12/07/2022 9 THANK YOU FOR YOUR ATTENTION baptiste.boitier@erasme-team.eu

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