Embed climate, nature and equity into economic analysis

The role of economic analysis in sustainable development

Governments and international financial institutions (IFIs) have a mandate to responsibly manage fiscal and financial sustainability and balance multiple economic and development goals. Economic analysis — involving a diverse toolkit of models, decision-support tools and frameworks — is necessary to help them explain and forecast the functioning of the economy, conduct scenario analysis and design and evaluate public policies, investments and decarbonization pathways.

Decision-makers need good information to answer a broad range of questions at the intersection of climate, nature, equity and the economy. How will climate risks or low-carbon transition policies impact macroeconomic factors like growth, jobs, trade dynamics and tax revenues? What are the environmental, social and economic costs and benefits of industrial development strategies or trade policies? What technology and policy mix is best for creating jobs, increasing competitiveness and reducing greenhouse gas emissions? Without good information to help to answer these questions, there is a risk of developing or keeping policies that are poorly designed, marginally effective, or even counterproductive for achieving climate, nature, equity and economic goals.
 

Common economic models and tools used by governments and IFIs

Governments and IFIs use many different types of models, tools and frameworks to understand the economy and evaluate policies, such as:

• Policy appraisal tools such as cost-benefit analysis, cost-effectiveness analysis and risk-opportunity analysis.
• Macroeconomic models that monitor economic conditions, forecast economic impacts of policies and test “what if” scenarios.
• Sector models that look at sector-specific costs and benefits.
• Integrated assessment models that analyze the economic and technological feasibility of climate policies and the resulting emission pathways.
• Biophysical and ecological-economic models that link changes in policies to changes in ecosystem health and ecosystem services.
   

Integrating climate, nature and equity into economic analysis

The analytical approaches used in economically-oriented ministries and IFIs were not originally designed to consider interactions between the economy, climate, nature and equity. Because of this, economic policymakers struggle to find information to inform their decisions. They are also often faced with the outputs of analytical approaches which assume that low-carbon, nature-preserving economic transitions will impose a net economic cost.

However, new research using more novel analytical methods highlights potentially considerable economic gains that can be achieved through innovation, competition and reduced climate impacts, as well as increased costs from inaction. Similarly, a decade of analysis led by the Organisation for Economic Co-Operation and Development (OECD) found that environmental policies have resulted in significant environmental gains without negatively impacting the economy.
 

The need to strengthen economic decision-making tools

Recent reports further highlight the inadequacies of today’s economic analytical toolkit. The Coalition of Ministries of Finance has emphasized a need to strengthen economic decision-making tools and models to better integrate climate action. The Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services (IPBES) values assessment report, the Dasgupta Review on the economics of biodiversity commissioned by the UK Treasury, and the Economics of Energy Innovation and System Transition (EEIST) project have all identified ways to improve policy appraisal analysis and ecosystem service valuation to better account for climate, nature and equity.

When decision-makers have access to economic analytical approaches that capture factors that are essential for low-carbon, nature-preserving and equitable economic development pathways, they can design the policies and investments needed for a more sustainable and prosperous future.