Macroeconomic Modelling of Climate Policy Impacts

Macroeconomic modelling of climate policy impacts examines how measures to reduce greenhouse-gas emissions—such as carbon pricing, subsidies for low-carbon technologies and regulatory standards—affect aggregate variables including output, employment, investment, trade balances and income distribution. These models range from computable general equilibrium (CGE) frameworks, which assume optimum allocations and market clearing, to macroeconometric and non-equilibrium approaches, which rely on empirical time-series relationships and capture path-dependency, agent heterogeneity and feedbacks between economic and financial systems. Hybrid integrated assessment models (IAMs) combine detailed representations of energy technologies with macroeconomic projections to evaluate policy scenarios against climate targets. Recent advances have sought to incorporate uncertainty in technology costs, behavioural biases in consumer and investor decision-making, the role of the financial sector in mobilising green investment and the dynamic interactions between sectors and regions. Such models inform policy by quantifying transition risks and opportunities, assessing the distributional effects of climate action and identifying cost-effective pathways to achieve temperature or emissions objectives. Their global significance lies in guiding the design of policy mixes that steer economies towards low-carbon growth while maintaining macroeconomic resilience.

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Macroeconomic Modelling of Climate Policy Impacts publication trend

The graph below shows the total number of articles in macroeconomic modelling of climate policy impacts across all publications each year (not limited to Nature Index journals).

Technical terms

Computable General Equilibrium (CGE) model: A framework assuming all markets clear through price adjustments and agents optimise utility or profit, used to assess policy impacts under full-rationality assumptions.

Macroeconometric model: An empirical, time-series based representation of the economy that estimates relationships among aggregate variables and allows for non‐equilibrium dynamics and historical data constraints.

Integrated assessment model (IAM): A modelling platform that links economic, energy and climate modules to simulate how policy scenarios influence emissions, technology pathways and global temperature outcomes.

Non-equilibrium modelling: An approach that permits persistent imbalances, path-dependency and multiple trajectories, capturing real-world frictions, agent heterogeneity and feedback loops.

Technology diffusion: The process by which new low-carbon technologies are adopted across sectors and regions, influenced by costs, policies, network effects and behavioural factors.

Carbon pricing: An economic instrument that internalises the cost of carbon dioxide emissions, typically via a tax or emissions trading scheme, to incentivise low-carbon investment and consumption.

References

1. Environmental impact assessment for climate change policy with the simulation-based integrated assessment model E3ME-FTT-GENIE. Energy Strategy Reviews (2018).
2. The role of money and the financial sector in energy-economy models used for assessing climate and energy policy. Climate Policy (2017).
3. Risk-opportunity analysis for transformative policy design and appraisal. Global Environmental Change (2021).