SPRU - Science Policy Research Unit

TRansit - Modelling transition risk

Climate scientists now agree that we need a whole-scale transition of the economy away from fossil fuels towards low carbon technologies, infrastructure and supply chains to avert climate breakdown. The concept of a ‘net zero’ carbon economy has been gaining political traction, but there are disagreements on how quickly we need to achieve this target. According to the UK Committee on Climate Change, achieving a net zero target by 2050 is ‘necessary, feasible and cost-effective’. Others are calling for more urgency. This will require structural change in economic systems, massive shifts in investment and significant changes to ‘normal’ patterns of economic behaviour. The Governor of the Bank of England, Mark Carney, has highlighted the resulting transition risks (and opportunities) for the financial system and the stability of the macroeconomy.

The ‘TRansit - Modelling transition risk’ project,aims to develop a modelling approach capable of understanding the macro-economic implications of the transition to a net-zero carbon economy. It will draw together three existing approaches and integrate them into a novel macroeconomic model of transition risk.

Methodology

To explore the risks and opportunities associated with the transition to a net-zero carbon society, it is crucial to understand the interactions between structural change, behaviour and the financial system. The model developed by TRansit will seek to represent these three factors in a novel macro-economic model of transition risk, which will, for the first time, incorporate three existing approaches:

(1) agent-based modelling, drawing on insights from evolutionary economics;

(2) stock-flow consistent macroeconomics as developed in the post-Keynesian tradition;

(3) input-output framework employed frequently by ecological and environmental economics.

The project is a collaboration between Centre for the Understanding of Sustainable Prosperity (CUSP) at the University of Surrey, SPRU at the University of Sussex and the University of L’Aquila in Italy. It will combine expertise on agent-based modelling on the SPRU side and on stock-flow consistent modelling on the CUSP side.

TRansit aims to develop a model that allows the incorporation of several critical components of the transition to net zero carbon economies such as structural change between sectors; technological change within sectors; household behaviours in relation to shifting final energy demand as well as others. Given the dynamic nature of the model and its multiplicity of agents and behaviours, the project team will work towards identifying emergent nonlinear changes and tipping points as they arise under different economic, financial and policy conditions.

Impact and Outreach

While the principal aim of the project is methodological, the model will have an extensive range of applicability as well as policy implications. The initial application of the model will focus on the question of asset stranding. Stranded assets in the fossil fuel sector refer to investments in fossil fuel reserves that will need to be left in the ground in order to achieve ‘net zero’. TRansit will model the macroeconomic and financial effects of stranded assets, with a particular focus on how they will affect the economy as a whole, rather than just those directly involved.

The project team will work with non-academic stakeholders to disseminate findings through a policy brief, meetings with relevant individuals as well as online dissemination through blog articles discussing implications for ongoing policy debates. A key output from the project will be an open-source model, incorporating the key components of the approach to be made available online for others to use.

Project team

University of Sussex

University of Surrey

University of L’Aquila

 

The project is funded by the Sustainable Economy Hub of the ESRC Rebuilding Macroeconomics network, which aims to transform economics back into a useful and policy-relevant social science. The project runs from July 2019 to October 2020.