Earth4All

The European Green Deal requires a renewed economic modelling toolbox

More than 200 economists called on the European Commission to overhaul the way it calculates its core economic forecasts and better integrate critical environmental factors into its baseline models in an open letter.

The open letter was signed by Earth4All executive chair Sandrine Dixson-Declève and science chair Per Espen Stoknes, as well as members of the Earth4All Transformational Economics Commission Kate Raworth, Robert Constanza, Maja Göpel, Otto Scharmer and Tim Jackson.

The open-letter is below:

Our contemporary societies are marked by a major environmental, social, economic, geopolitical polycrisis, both worldwide and in Europe. Faced with the scale of the polycrisis, bringing about a profound transformation of Europe’s economy is becoming imperative. One step towards such a structural transformation has been taken with the European Green Deal and its ambitious climatic goals. Yet, reaching those goals will require a substantial amount of forward-looking analysis and modelling. For decades, the perspective of the ecological transition has fostered the development of a very dynamic community of researchers in the field known as Ecological Economics. Several models of this field have now reached a sufficient level of maturity to be used directly by EU institutions. Such models indeed present comparative advantages for addressing policy questions such as:

  • What are the redistributive effects of transition policies? How to integrate social inequalities in the design of green policies, to improve their acceptability?
  • How can the risks of financial instability emerging both from environmental degradation and the transition (e.g. sunset industries) be included in policy design?
  • How can disequilibria and inflation influence or emanate from the ecological transition policies?

Currently, models of the field of Ecological Economics are practically not used by the European Commission for macroeconomic analysis in the light of the ecological transition. It still relies mostly on Dynamic Stochastic General Equilibrium (DSGE) and Computable General Equilibrium (CGE) models. Yet, performing analyses and projections with new tools from Ecological Economics would significantly enhance the modelling capabilities of the European Commission. This is argued in detail in the recent work of Souffron and Jacques (2024).

Given the complexity and variety of domains affected by the ecological shift, a variety of models must be used, reflecting a plurality of views and methodologies. This is a democratic issue. Indeed, the choice of model to inform decision-making is clearly non-neutral. This theoretical choice will from the very start determine part of the outcome of the recommendations emanating from the model used. Some model structures and core assumptions naturally tend to favour market-based solutions over regulation-based solutions. Besides, by construction, some models’ classes will systematically advocate against European expansionary policy packages and large-scale investments required to reach carbon neutrality.

We therefore strongly argue for diversification: diversification of the model classes used and the underlying assumptions to benefit from each class’s specificities and comparative advantages. This call is an invitation to scientific and institutional collaboration for equipping the European Commission and European Union with a renewed modelling toolbox. Building up such analytical capability is essential to design and implement ecological transition policies that are economically sound, environmentally sustainable, and socially just. This endeavour, while challenging, is fundamental for the European Union to navigate the intricate and evolving landscape of ecological transition in the 21st century.

Initiators

Pierre Jacques, PhD Candidate, UCLouvain, Belgium

Camille Souffron, Ecole Normale Supérieure (ENS Paris), France

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