Embed climate, nature and equity into economic analysis

Policies aimed at climate, nature and equity have major implications for traditional economic goals, and vice versa. However, the economic analysis toolkit used to understand the economy and evaluate policies is only beginning to incorporate them.

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.

Transforming Finance

Current investments and financial flows remain off track to protect people, nature and biodiversity. Watch this webinar recording to learn more.

Tracking progress on global outcomes

2826: Governments with central economic planning agencies mainstreaming climate, nature and equity into macroeconomic modeling

Status: Insufficient Data

Several emerging macroeconomic modeling approaches can be used or strengthened to advise central economic planning agencies seeking to support sustainable and low-carbon economic transitions. These approaches aim to tackle existing shortcomings of commonly applied modeling approaches when it comes to capturing the complexity of human behavior, processes of innovation and structural change, climate risks and damages, and distributional and environmental impacts.

There are several ongoing initiatives working to inform policymakers and improve their analytical approaches. For example, the Coalition of Finance Ministers for Climate Action, a coalition of fiscal and economic policymakers from 90 countries, released a framework and guide for ministers and ministries of finance to improve their economic analytical capabilities and mainstream climate action.

In 2024, five organizations working on systems change — Metabolic, EIT Climate-KIC, Systemiq, The Club of Rome and World Resources Institute — initiated the “Systems Transformation Hub” to provide strategic and systematic support to European Commission member states for the development of policies that better address climate change, biodiversity loss and equity issues. The hub will focus on economic modeling that integrates systems dynamics, while crafting a progressive new economic narrative and increasing stakeholder engagement.

However, much more needs to be done to generate evidence of which economic modeling approaches work across country contexts, and there is currently no publicly available data tracking the use of these approaches.

2827: Countries that are mainstreaming climate, nature and equity considerations into policy appraisal tools

Status: Insufficient Data

In addition to macroeconomic analysis, governments use a range of analytical tools to evaluate the detailed impacts of specific policy options. Policy appraisal tools are used across multiple government agencies and include, for example, cost-benefit analysis, cost-effectiveness analysis, multi-criteria analysis, impact assessments and risk-opportunity analysis. These tools can be used at any stage of the policymaking process.

Many current policy appraisal tools are focused heavily on the goal of efficient resource allocation and distill decisions into simple cost-benefit terms. However, many costs and benefits related to a decarbonization transition, addressing biodiversity loss and equity issues are not knowable with confidence or are not easily quantified or valued in a marketplace. Additionally, policy appraisal tools are often limited by a lack of consideration of important factors such as climate risks, ecosystem service values and value perspectives, human health impacts and distributional impacts across population types.

Governments can better integrate climate, nature and equity considerations into policy appraisal tools by improving central policy appraisal guidance documents issued to governmental agencies for these tools and requiring government agencies to apply this guidance to screen public policies and investments. There is no publicly available data tracking this integration.

2828: Countries adopting green budgeting

Status: Insufficient Data

Governments have a mandate to responsibly manage fiscal and financial sustainability. National budgets are a primary tool for governments to demonstrate their plans for achieving economic and development goals and priorities. Generally, budgeting in most countries focuses on preparing annual plans for revenues and spending.

Governments, typically through ministries of finance, use various budgetary frameworks, policies and tools to manage national budgets. Mainstream budgetary tools, however, lack consideration of climate, nature and equity dimensions, despite the potential for devastating impacts on national spending and revenues from climate change, nature and biodiversity loss, and rising inequalities on a country’s spending needs, and the need for expenditures to support decarbonization efforts.

Increasingly, countries are starting to realize the value of improving budgetary and fiscal frameworks, policies and practices through green budgeting measures. Green budgeting, according to the OECD, “refers to the use of budgetary policy-making tools to better understand environmental impact of spending choices, and ensure public budgets are aligned with climate and environmental objectives.” Green budgeting tools include using the shadow price of carbon in budgeting, green budget tagging, regular reviews of environmentally harmful tax expenditure and subsidies, green spending reviews and environmental impact assessments.

As of 2022, 24 out of 36 OECD countries surveyed were implementing green budgeting practices. Only 20 of these countries were implementing green budgeting in line with their national climate or environmental strategies, and 16 of them aligned with their nationally determined contributions at the time. Additionally, most countries were implementing green budgeting through administrative practices like budget circulars, while very few required green budgeting through legal requirements (11 countries) or constitutional requirements (0 countries).

2829: International financial institutions that are integrating climate, nature and equity into macroeconomic modeling

Status: Insufficient Data

Several emerging macroeconomic modeling approaches can be used or strengthened to advise international financial institutions (IFIs) like the World Bank and International Monetary Fund in decision-making to support sustainable economic transitions. These approaches aim to tackle existing shortcomings of commonly applied modeling approaches when it comes to capturing the complexity of human behavior, processes of innovation and structural change, climate risks and damages, and distributional and environmental impacts.

Several ongoing initiatives are working to inform policymakers and improve the analytical approaches that can be considered by IFIs. For example, the Coalition of Finance Ministers for Climate Action, a coalition of fiscal and economic policymakers from 90 countries, has released a framework and guide for ministers and ministries of finance to improve their economic analytical capabilities and mainstream climate action.

Despite these initiatives, there is no comprehensive global data tracking the integration of climate, nature and equity by international financial institutions.

Key enablers and barriers to change

2824: Universities embedding diverse economic schools of thought into introductory economic coursework

The economic theories and schools of thought taught in universities are critical for equipping economists who will work across public, private and civil society sectors with the tools they need to inform economic analysis, economic progress indicators and policy decisions.

Numerous economic schools of thought have been developed, and others are expanding their analytical toolkit, to better address global challenges around climate change, biodiversity loss and social inequality issues. Students require core microeconomic and macroeconomic courses that include applications to understand complex global challenges. It is also important to teach economics as an innovative science, with diverse, competing and testable hypotheses to explain current patterns, and where proposed policy solutions are contrasted with evidence about their performance.

Some universities are beginning to integrate programs or adjust curricula to address these gaps, though there is no publicly available data tracking how many are doing so. Some initiatives, such as CORE Economics and Rethinking Economics, are taking particular approaches to creating alternative curricula. Other efforts reside in economics departments and faculty groups, making sure existing analytical tools have applications to climate, equity and nature challenges and that these skills are taught to students.

2825: Articles published in major economic journals on the climate, nature and biodiversity loss, and equity crises

Journals serve as an important outlet for academics, research institutes and civil society organizations to publish their research findings and theories. These publications help translate scientific research into public policy applications and justify data and assumptions used for economic analysis and policy design.

Today’s most-cited mainstream economic journals do a poor job of directly discussing climate change. A recent article by two prominent economists, Nicolas Stern and Andrew Oswald, found that the most cited general economics journals like the Quarterly Journal of Economics and Econometrical have rarely published anything on climate change.

While general analytical tools and approaches presented in these journals can be applied to understanding complex global challenges and solutions, mainstream economics journals can give more space to direct applications and theoretical innovations contributing to the understanding of solving critically important global issues.

There is no publicly available data tracking and synthesizing how often climate, nature and equity topics appear in these publications.

There are two large data-related challenges pertaining to this shift. One is a lack of widely accepted criteria at the global level to determine what constitutes environmental and social harms in the context of resource extraction and harvesting. Setting such criteria requires identifying what harms are significant and relevant to a wide range of activities of resource extraction, as well as determining and often quantifying the level of resource governance so as to avoid the harms of concern practically. An International Resource Panel report, “Mineral Resource Governance in the 21st Century,” and a scientific paper reviewing 25 sustainability certification programs were a good starting point for us to select indicators in this shift. Still, what exactly qualifies as sustainable and responsible manners of resource extraction remains a topic for further research.

The other challenge is to obtain the data that links environmental and social harms with resource-related activities. These harms usually occur far away from producers, retailers and consumers. Moreover, it is difficult to track such linkages on a country-by-country basis because these are linked along supply chains. Concerted actions to overcome this challenge are necessary.

Actions to measure the state and performance of resource governance are also important, requiring budget and effort as well as collaboration with the resource extraction sector.

Other shift Other shifts needed to transform the system

Economic growth, measured primarily by GDP, has long been a central goal of economic planning and policymaking. While GDP growth has supported positive trends such as poverty reduction, it has been accompanied by societal costs like climate change, environmental degradation and increasing inequality.

Governments use economic policies to meet national development goals, and fiscal policies in particular are critical to address climate change, protect biodiversity and promote equity. Governments can better tax environmental harms and invest in the green economy.

Embed climate, nature and equity into economic analysis

The role of economic analysis in sustainable development

Common economic models and tools used by governments and IFIs

Integrating climate, nature and equity into economic analysis

The need to strengthen economic decision-making tools

Transforming Finance

Tracking progress on global outcomes

Key enablers and barriers to change

Data challenges

Other shift Other shifts needed to transform the system

Integrate new prosperity metrics into economic planning and policymaking

Transform economic policies to accelerate action for climate, nature and equity

The role of economic analysis in sustainable development

Common economic models and tools used by governments and IFIs

Integrating climate, nature and equity into economic analysis

The need to strengthen economic decision-making tools

Transforming Finance

Tracking progress on global outcomes

2826: Governments with central economic planning agencies mainstreaming climate, nature and equity into macroeconomic modeling

2827: Countries that are mainstreaming climate, nature and equity considerations into policy appraisal tools

2828: Countries adopting green budgeting

2829: International financial institutions that are integrating climate, nature and equity into macroeconomic modeling

Key enablers and barriers to change

2824: Universities embedding diverse economic schools of thought into introductory economic coursework

2825: Articles published in major economic journals on the climate, nature and biodiversity loss, and equity crises

Other shift Other shifts needed to transform the system

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