Institutions and policies (WP3)

Objectives

– Develop and upgrade new modelling tools for energy, the environment and related costs and benefits. 

– Develop circular economy foundations for climate- and energy-related material flows in a sustainable economy.

– Integrate original approaches to environmental investment and finance to achieve a significant qualitative improvement in the evaluation of emission reduction pathways and carbon pricing;

– Improve understanding of new ways to accelerate the decarbonisation of economies through international trade.

– Define the limitations of international and domestic climate policies and institutions in innovative ways.

Task 3.1: Impact assessment, CBA|RIA, CGE, energy system modelling 

This task will enhance the optimisation of energy systems by improving the technology, spatial and temporal granularity. The aim is to hybridise macro-structural economic models in order to better represent their technological component. Our coverage includes general equilibrium and sector optimisation models, as well as other modelling frameworks, in both theory and policy applications. Policy design and evaluation are important considerations here. Our focus is on emerging and newly developed markets, as well as deep decarbonisation transitions. Particular attention is paid to integrated and hybrid models, including linked bottom-up and top-down models such as CGE-TIMES and WITCH energy optimisation growth models. In the context of industrial organisation and general equilibrium modelling, we examine the transportation sector, further developing the applications and theoretical aspects of these models, including computable and dynamic general equilibrium. This task involves the development and application of operations research, energy engineering and mathematical programming techniques.

Task 3.2: Sustainable/circular economy 

This task focuses on the paradigm shift from the linear to the circular use of resources, encompassing economic production and consumption within ecological systems. Life-cycle assessment and multi-regional environmentally extended input-output modelling are used to quantify environmental footprints, including the environmental impact of international and domestic trade (emissions, land use, water use and ecosystems). Linking this evaluation tool to household consumption data enables us to analyse the environmental impact of different household groups. Investigating the economic behaviour of households is therefore an important part of this task. This task is one of the most interdisciplinary in the M4G project. It connects environmental sciences and engineering with behavioural sciences and economics, contributing to the methodological development of these fields. (It is particularly related to Task 3.4.) It also has links to finance and financial economics modelling and applications, such as the use of circular economies in real estate valuation.

Task 3.3: Sustainable finance and carbon pricing

This task is related to the fields of financial economics and financial risk management. It reflects the fact that financial institutions and the financial system must manage the risks and opportunities associated with the transition to global environmental sustainability. The theoretical development and applications of financial economics in various areas are therefore covered in this task. These include private-sector risk-management strategies, risk assessment, tools to reduce risk and avoid vulnerability lock-ins, insurance and banking, and the roles of law and litigation. The environment, sustainability and governance (ESG) and green assets are covered from behavioural and asset pricing perspectives. Behavioural flaws in risk perception and market failures (e.g. adverse selection and moral hazard) necessitate policy interventions. The key problem in climate change economics, carbon pricing, is investigated here from theoretical and applied policy perspectives. This involves measuring the social costs of carbon, identifying optimal carbon emission reduction trajectories, and determining the most effective carbon pricing strategies, including the EU Emissions Trading Scheme (ETS). In connection with WP1, we are improving methods for quantifying the ancillary benefits of reducing carbon, particularly the health effects associated with reducing air pollutants from emissions. The theoretical and applied development and testing of quantitative economic and risk modelling tools is complemented by a political science analysis of publicly acceptable options and programmes, as well as public finance.

Task 3.4: Trade flows and footprints

This task reflects the interconnectedness of the global economy through international and regional trade, emphasising the spatial theory of trade. Policies related to energy efficiency and the security and climate change implications of global trade flows are considered, as well as the implications of trade for carbon and total consumption footprints. We explore the potential of international trade to promote the decarbonisation of the global economy. In collaboration with Task 3.2, this involves life cycle assessment modelling and modelling policies that reduce the climate footprint of the food system. Alongside the analysis of other topics in international economics research, this task also involves analysing international cooperation and agreements, in collaboration with Task 5.

Task 3.5: Institutions, cooperation, negotiations 

We examine negotiations and coordination between international commitments on greenhouse gas (GHG) emissions and national policies. Using game theory and the expertise of political scientists and behavioural experts in public policy and diplomacy, we investigate the possibilities for and hindrances to cooperation in international environmental negotiations. M4G also considers voluntary climate commitments at non-state and subnational levels. We examine the public acceptability of policies, as well as their design and evaluation. We pay special attention to the interaction between economic development and climate policies. Therefore, the utilisation of development economics methodology and approaches is important for this task. This task also involves examining the political economy requirements for regional acceptance of climate change and energy transition policies. We model the regional impact of these policies. It is necessary to develop techniques for emission observations and verification that are used globally. This task uses insights from economic models and meta-analyses dealing with the behaviour of institutions and economic agents in a range of situations.