Modelling helps policymakers understand the types of policies and level of ambition needed to tackle some of the world's most pressing environmental problems, from climate change to air pollution and unsustainable resource use. The OECD guides a range of stakeholders in member countries and emerging market economies through quantitative and qualitative analysis. OECD models make projections about what the world might look like in the future. This involves developing 'what-if' scenarios to understand the potential effects of policies. The environment-economy modelling work of the OECD uses the ENV-Linkages model. ENV-Linkages is a global dynamic general equilibrium model that quantifies the key drivers behind environmental problems and assesses the corresponding economic consequences, across sectors and regions.
Environment-economy modelling and outlooks
Policies are crucial to preserving and protecting the environment, but their economic and environmental implications are not always clear. The OECD has a long history using economic models and quantitative assessments to inform policymakers of the costs, benefits and potential tradeoffs of environmental policies.
Key messages
The OECD uses a distinct model to project economic growth as a driver of environmental pressures. This model, called ENV-Growth, makes projections about GDP and per capita income levels for all major world economies. These projections provide input to the ENV-Linkages model and to the broader research community. Economic projections are needed to explore the evolution of major environmental challenges, including climate change, plastics pollution, and materials use.
The ENV-Growth model is based on the main drivers of economic growth: labour, human capital, physical capital, natural resources and total factor productivity.
The economy and the environment are closely linked. Activities such as fossil fuel use, high levels of resource extraction, agriculture and land use change put pressure on the environment, through greenhouse gas or air pollutant emissions, deforestation or pollution. These pressures ultimately drive environmental degradation, if not regulated by policies.
The OECD's modelling work investigates how changes in economic activity will affect environmental change, how changes to the environment feed back to the economy and how governments can balance economic and environmental priorities. The OECD assesses whether the economy is on a sustainable track through several flagship publications, called Outlooks.
To set out ambitious targets and design corresponding policies, a clear understanding of the economic costs of environmental degradation is key to inform policymakers. The OECD uses the ENV-Linkages model to construct future projections under the assumption that current policies to address environmental issues remain in place. This helps visualise the repercussions of technological, demographic and economic trends under current policies over the next several decades. In doing so, the OECD informs policymakers on the economic consequences of the environmental challenges ahead.
A current-policy trajectory serves as a reference point against which to compare other, more ambitious policy scenarios. This comparison allows the OECD to assess the impact of policy action. Assessments can help measure the potential socio-economic and environmental impacts of policies across regions, sectors and households. The OECD provides modelling assessments across sectors and thematic areas. The Inclusive Forum on Carbon Mitigation Approaches (IFCMA) modelling work estimates the impact of policies on greenhouse gas emissions with the aim to help countries optimise the global impact of emissions reduction efforts around the world. Model-based assessments can also unveil the consequences of the green transition for labour markets and employment. The OECD's work helps to identify sectors and occupations that are most affected – either positively or negatively – on the path to net zero.
Context
A comprehensive policy package is required to tackle climate change
Policymakers' choice of instruments will affect progress towards net-zero. OECD modelling work shows that emissions reductions from all sectors are required to reach Net Zero. Notably, there is a strong potential for emissions reductions in the power sector. Further, an inclusive policy mix of different instruments – such as regulation and carbon pricing – is essential to contribute to mitigation efforts.
Climate change and air pollution threaten to erode GDP growth
Failure to address climate change and air pollution implies a substantial economic cost. In 2060, the projected costs of inaction could reach 1% of global GDP due to air pollution. While near-term impacts of air pollution are large, they may be overtaken by economic damages related to climate change in the mid to long run. Regional climate damages will be particularly severe for Sub-Saharan Africa and South and South-East Asia. In contrast, non-OECD Europe and Asia as well as the Middle East and North Africa are projected to suffer the largest air pollution-related economic impacts.
Co-ordinated policies can tackle multiple environmental problems
The OECD's modelling work demonstrates the value of tackling multiple environmental problems together. Climate change mitigation policies and plastics policies influence plastics lifecycle greenhouse gas emissions through different channels – the greenhouse gas intensity of plastics production for the former, and the decrease in plastics use for the latter. If policymakers implement plastics and climate policy packages jointly, they could reduce greenhouse gas emissions from the plastics lifecycle by two-thirds compared to business-as-usual. Both policy agendas need to be implemented to address the environmental crisis: climate mitigation policies cannot be used as a substitute for plastics policies and plastics policies cannot replace dedicated climate mitigation action.
Latest insights
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