Overview
Macroeconomic models, essential for decision making and federal budget planning, may not appropriately consider the wide breadth of climate-related impacts that potentially have large macroeconomic significance. Challenges integrating climate factors into macroeconomic analyses can stem from the complexity of macroeconomics, climate science, policy instruments, and their interactions. Although economists have made progress in developing tools to understand climate-related impacts on the macroeconomy, much of the climate and macroeconomic research has historically been conducted in disciplinary silos that can limit a holistic understanding of climate-related impacts on the macroeconomy.
The National Academies of Sciences, Engineering, and Medicine, under the auspices of the Roundtable on Macroeconomics and Climate-Related Risks and Opportunities, convened a workshop on June 14–15, 2023, to consider current macroeconomic models and suggest opportunities that may improve the incorporation of climate-related factors into macroeconomic modeling. Through panels of invited speakers and an interactive breakout discussion, the workshop explored an array of macroeconomic models and potential pathways to integrate some of the physical and transition effects of climate change. Additionally, they discussed the financial impacts of the clean energy transition and public and financial responses to climate change that may have macroeconomic impacts.
Invited experts discussed their models and approaches ranging from federal macroeconomic forecasting models—specifically, those produced by the Office of Management Budget and the Council of Economic Advisers, as well as the Congressional Budget Office—to research models. Other panels of invited experts included discussions on the use of economic models to inform policy decisions, shortfalls in current climate policies to meet target emission reductions, the limitations of increased investments in the electric power sector, and an interest in improving the representation of feedbacks among sectors in the economic models. Invited experts also discussed the role of risk information for household decision making, the potential for local impacts to propagate into macroeconomic impacts (e.g., migration and insurance), and interconnected and amplified risks across time, sector, and region.
Several common threads arose as issues of broad interest in the workshop discussions. Many workshop participants noted the challenge of limited historical data, especially for extreme events as well as the fact that the past may not be a good predictor for the future as climate change itself is changing underlying risks of these extremes, and the missing elements in macroeconomic modeling (e.g., supply-side factors such as migration). Some expressed the difficulty but importance of more accurately capturing these elements. Several participants also emphasized the importance of regional, sectoral, and distributional
perspectives in addressing climate change, which may not be adequately captured in macroeconomic models. Some participants discussed the importance of more flexible models that can provide a comprehensive understanding of climate impacts, including emerging approaches such as embedded and agent-based models. Several participants also suggested a comprehensive multimodel approach rather than relying on a single macroeconomic model.
Several workshop participants discussed the trade-offs in the energy transition (e.g., the decrease in the value of fossil fuel assets versus workforce reallocation) as well as the importance of distinguishing between expected and unexpected consequences. Moreover, a few workshop participants acknowledged the geopolitical power dynamics resulting from the energy transition and stressed the benefit of considering both domestic and global policy risk in modeling.
Another common theme throughout the workshop was the consequences of the physical and transition effects of climate change that have broader societal, environmental, and cultural implications. Several workshop participants stressed the importance of a holistic approach that considers the well-being and resilience of communities, emphasizing the benefit of proactive resilience-building efforts.
Lastly, many of the workshop discussions surrounded opportunities for research and coordinated efforts to improve macroeconomic modeling to better consider climate change. Some areas for future research discussed included updating model parameters; incorporating climate feedbacks into models; better understanding of stranded assets and labor market responses to the decline in fossil fuel usage; global dynamics of the energy transition; and consideration of nonmarket impacts. Finally, a few participants highlighted the opportunity for cross-disciplinary collaboration using a portfolio of specialized models and advancing interdisciplinary and holistic approaches.
