How Do We Achieve a Sustainable Economy?
Modelling Transition Risk
Modelling Transition Risk (TRansit): Towards an Agent-based, Stock-flow Consistent, Input-output Framework
Principal Investigator: Professor Tim Jackson
Tim Jackson is Director of the Centre for the Understanding of Sustainable Prosperity (CUSP), and Professor of Sustainable Development at the University of Surrey. He’s served as an advisor on sustainability to commercial, government and intergovernmental organisations, including Economics Commissioner on the UK Sustainable Development Commission from 2004-2011. From 2010 to 2014 he was Director of the Sustainable Lifestyles Research Group (SLRG), which aimed to develop evidence-based advice to policy makers about realistic strategies to encourage more sustainable lifestyles.
Co-Investigators: Andrew Jackson (Surrey), Tim Foxon (Sussex) and Tommasso Ciarli (Sussex)
Climate scientists now agree that averting climate breakdown requires a whole-scale transition of the economy away from fossil-fuels to achieve net-zero carbon emissions before the middle of this century. The UK Government has now formally adopted a ‘net zero’ target for 2050. Given the historical responsibility for climate change and the need for economic expansion in the poorest countries in the world, there is a strong argument for developed countries to adopt earlier targets and several developed economies have already done so, some as early as 2035.
The challenge of achieving such a transition is formidable. It demands replacement of entire technologies, supply chains and infrastructures of provision (e.g. for energy, food, and transport) within a timescale considerably shorter than the average asset life associated with these sectors. Such replacement will require directed (or incentivised) investment at a scale usually seen during periods of war or rapid urbanisation, rather than at a scale typical of mature, post-industrial economies. It will also entail widespread changes in the behaviours of households, consumers, producers, investors, shareholders and savers that go well beyond any historically accepted ‘normal’.
These three features of the transition – rapid structural change, massive investment shifts and ‘post-normal’ behaviours – impose a variety of complex demands on any attempt to understand the macro-economic implications. Our aim in this project is to develop a modelling approach capable of achieving this. To do this, we will draw together three existing approaches and integrate them into a novel macroeconomic model of transition risk (TRansit) designed to identify and explore the risks and opportunities in a zero carbon transition. Specifically, the approaches we are using will include: 1) agent-based modelling, drawing on insights from evolutionary economics; 2) stock-flow consistent macroeconomics as developed in the post-Keynesian tradition; and 3) the input-output framework familiar to ecological and environmental economics.
Each approach is well-enough known within its own area of the economic literature. Some of them have been applied to transitions in technological systems. To our knowledge this would be the first time that all three elements are incorporated into a macro-model aimed at exploring the risks and opportunities associated with the transition to a net-zero carbon society. How these opportunities and risks play out will depend crucially on the non-linear interactions between structural change, behaviour, and the financial system that we aim to represent in the model.
The overall aim of the project is methodological. But we also want to be able to illustrate the relevance and importance of this framework to policy-makers, regulators, investors and asset managers by applying the framework to specific problems and challenges. For example, we aim model the risks associated with the stranding of fossil fuel assets. We also intend the framework to be useful in exploring the dynamic implications of changes in the energy return on energy investment as technology (and resource quality) changes. Finally, we hope to apply the TRansit model to the task of exploring the financial and distributional implications of large-scale investment efforts such as the ‘Green New Deal’.