Macroeconomics for Net-Zero
A mapping of U.S. material and energy flows
About
Dynamic modeling is key. To explain a transition from the high-carbon economy of today to the net-zero carbon economy over the course of decades, economic models must solve for the continual changes over time, across a host of important variables, that are necessary to realistically and self-consistently describe the impacts from transitioning to low-carbon technologies and policies.
Outcomes & Deliverables
The members of this research effort have expertise in macroeconomic theories, frameworks, modeling structures, and data (energy, materials, finance) required to understand the economic and physical impacts of phasing out unabated fossil fuel consumption for a net-zero economy. Our goal is to enable a long-term relationship among an international cohort of modelers that continue working together to develop and put into practice macroeconomic models that are fit-for-the-purpose of studying economy-wide decarbonization.
We Integrate the Following Areas of Expertise:
- Stock and flow consistent macroeconomic modeling
- Energy systems, net energy, and energy efficiency
- Industrial ecology and material flow analysis
- Energy and climate policy
- Finance and banking
Funding For the Research Effort Enables Workshops in Which Participants Discuss:
- The relative strengths and weaknesses of known macroeconomic models and paradigms;
- Whether existing macroeconomic models are sufficient to inform a fossil fuel phase down; and
- If not, what work may be required to develop credible macroeconomic model(s) for understanding the phase down of unabated fossil fuels
The research effort will result in deliverables including a review paper summarizing existing economic literature that analyzes a global phase out of fossil fuels (abated and otherwise) and a paper summarizing what types of macroeconomic models would be applicable for studying the economic impacts of a fossil fuel phase out. Following this initial effort, a team of international collaborators will add novel features to existing models and create a new model that integrates the expertise above to enable capabilities not present in current models.
Background & Motivation
During the 28th meeting of the Conference of Parties (COP28) in 2023, over 100 climate scientists signed the following statement convened by Future Earth and World Climate Research Programme:
“As assessed by the IPCC, reaching net zero carbon dioxide emissions by 2050 is required to stand a chance of holding global warming to 1.5°C this century. Net zero means that all anthropogenic carbon dioxide emissions are balanced by anthropogenic carbon dioxide removals. Scenarios consistent with this goal require a complete phase-out of coal by 2050 and rapid phase-down of oil and gas (halved every decade).”[1]
Sultan Al Jaber of the United Arab Emirates, pushed back on language relating to the “phase-out” of fossil fuels, stating:
“There is no science out there that says that the phase-out of fossil fuel is what’s going to achieve 1.5 C.” and “Please help me, show me the roadmap for a phase-out of fossil fuel that will allow for sustainable socioeconomic development, unless you want to take the world back into caves.”[2]
To translate “scenarios” into “roadmaps” we use macroeconomic models. Macroeconomic models inform policies (taxes, incentives), and these policies affect investment (e.g., low-carbon infrastructure), socioeconomic outcomes (e.g., economic growth, wages and inequality), and carbon emissions.
Unfortunately, there are significant gaps in macroeconomic modeling capability. These deficiencies are not limited to understanding the role of energy in the economy, but became more apparent after the Global Financial Crisis of 2007-2008 in which even the Queen of England asked “Why did nobody notice it [the approaching financial crisis]?”[3] Eight months after her question, a group of economists answered Queen Elizabeth that it “… was principally a failure of the collective imagination of many bright people … to understand the risks to the system as a whole.”
These economists were admitting that most widely-used macroeconomic modeling paradigm is not "fit-for-the-purpose” of understanding growth and economy-wide decarbonization.
The good news is that there are alternatives to the economic paradigm that led most economists to have a “failure of collective imagination”. These alternative paradigms are sufficient to address not only the Queen’s question, but also the question of whether phasing out fossil fuels can enable sustainable socioeconomic development versus sending the world “back into caves.” They are sufficient because they inherently include focus on a few principles that are lacking in the usual economic frameworks:
- Post-Keynesian Economics: Endogenous money (the tracking of debt as money creation when banks make loans) and modeling companies and households as having potentially distinct behaviors,
- Complexity Economics: Nonlinearities and non-equilibrium dynamic simulation (rather than reliance on equilibrium approaches that assume perfect foresight, fully rational consumers, and optimization),
- Ecological Economics: Integration of physical principles describing materials and energy efficiency as key to understanding economic “productivity” (or technological change) that is not normally attributed to energy.
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Principal Investigator
Carey King
Assistant Director, Research Scientist, Energy Institute
For questions or support enquiries please reach out to careyking@energy.utexas.edu
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