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Economics

Embed climate, nature and equity into economic analysis

Evangaline Shaw via Unsplash

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

Key enablers and barriers to change

Data challenges

Currently, there are no data sources that track which countries and international financial institutions (IFIs) are adjusting their economic analytical approaches to mainstream climate, nature and equity. This is fundamentally tied to the need for governments, businesses and IFIs to establish and track indicators and goals for these aspects. Measuring how much they mainstream these aspects is also made more difficult by the varying perceptions of what constitutes “mainstreaming.” A survey approach such as that used by the OECD to track green budgeting practices, however, could be employed.

No international targets have been established for 2030 or 2050 for these indicators. However, ideally, all countries’ economic planning agencies and relevant IFIs are moving to ensure that they use the most fit-for-purpose analytical approaches for addressing complex questions around climate change, nature and biodiversity loss and improving equity. In some cases, countries may need to test which analytical approach is best suited for their national context. Ideally, all IFIs will also use the most fit-for-purpose macroeconomic models to inform development financing decisions.

There are also important enabling factors for promoting improved analytical approaches by governments. The Coalition of Ministries of Finance for Climate Action conducted a survey of ministries of finance and identified the following bottlenecks: 1) limited awareness of climate change issues; 2) lack of economic tools and models and associated skill sets; and 3) the need for increased financing and technical capacity to test and improve analytical approaches over time.

Governments can also improve analytical approaches by stimulating the academic and research community to strengthen economic theory on, for example, understanding processes of innovation and structural change and capturing diverse values and worldviews associated with nature. We identified proxy indicators for these enablers which focus on awareness and training or skill sets for economists.

Limited awareness of climate change issues can be reflected by both the economic analysis approach used and by research in mainstream economic journals that might inform analysis approach selection or awareness of global challenges. Lack of economic tools and associated skillsets is reflected by indicator NE-6, which assumes economics curricula in universities enhance economists’ skill sets and awareness of how major global challenges impact the economy. No datasets are available to track these two indicators, though we list initiatives and one-off research efforts that identified the importance of these enabling factors. A survey of relevant stakeholders could be deployed to track progress on these enablers.

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