EUROGREEN is a system dynamics, ecological macroeconomics model that simulates policies and scenarios for low-carbon transition with social equity based on initial values and parameters of the French economy (2014-2050) due to data availability, particularly on the distribution of wealth. Moreover, the reactions to different policies are likely to reflect, to a great extent, what we would expect for the EURO area in general.
Climate change and increasing inequality have emerged as the main challenges facing our societies over the past few decades. Their impact is highly visible and well recognized by overall civil societies way beyond the academic circles that first alerted us of these concrete threats to contemporary standards of living, peace and democracy. A wide range of public policies from basic income programs to radical decarbonization plans, usually as bold and massive as the challenges they aim to overcome, have been proposed, questioned and not rarely deemed economically and politically unfeasible. The EUROGREEN model explores the viability, effectiveness and possible synergies between alternative policy options to low-carbon transition and social justice.
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Climate change and increasing inequality have emerged as the main challenges facing our societies over the past few decades. Their impact, as of 2018, is highly visible and well recognized by overall civil societies way beyond the academic circles that first alerted us of these concrete threats to contemporary standards of living, peace, and democracy. A wide range of public policies from basic income programs to radical de-carbonization plans, usually as bold and massive as the challenges they aim to overcome, have been proposed, questioned and not rarely deemed economically and politically unfeasible.
This report discusses the viability, effectiveness and possible synergies between alternative policy options for low-carbon transition and social jus- tice based on simulation scenarios from the EUROGREEN model. We argue that the flexibility and comprehensiveness of this system dynamics simulations allow us to envision eventual trade-offs between income distribution and GHG reduction as well as unexpected policy effects due to interactions among different industries and heterogeneous agents that would go unnoticed in more traditional macroeconomic models without similar feedbacks among socio-economic and environmental variables.
∗Department of Economics and Management, University of Pisa, Italy
Recently, macro-economists began to explicitly include environmental and social variables in their models in order to properly investigate the trade-off between economic growth and physical and social constraints. Among the efforts to contribute to this task is the ongoing development of the so called “Ecological Macroeconomics” (Victor, 2008b; Røpke, 2016; Hardt and O’Neill, 2017; Jackson, 2016).To a large extent, the development of ecological macroeconomics draws upon an ongoing convergence between Post-Keynesian and Ecological Economics, which are also the foundation of the “EURO- GREEN model of Job Creation in a Post-Growth Economy”.
This model, thought to be a tool to simulate policies for low-carbon transition with social equity, relies on a demand–driven economy. Changes in wages, wealth, propensities to consume, taxes, and benefits have direct and indirect effects on the total production, through an Input-Output productive structure. On the supply-side, investment decisions depend on industry demand level and its effects on capacity utilization, but are limited by accumulated profits that must finance a fixed proportion of industry investments together with private debt. However, investments boost the adoption of labour and/or energy saving technologies that, in turn, have subsequent impacts on employment, wages, profits, and greenhouse gases (GHG) emissions.
In what follows, we briefly summarize the main features of the model which aims to capture the complexity of an interconnected macroeconomic system:
System-dynamics modelling approach to analyze the interconnections and feedbacks among socio-economic and environmental variables.
Dynamic Input-Output approach with ten industries1 that provides a consistent economic framework, coherent with the official national accounts, to study inter-industry trade. Additionally, innovations in energy efficiency affect the composition of intermediate trade in the two energy industries: the fossil fuel and the electricity and gas sup- ply sectors. An increase in the energy efficiency (i.e., output per unit of energy), by any of the ten industries considered, results in a reduction of the shares of intermediate purchases from the two energy industries.
Assessment of the energy flows, that arise from industry and house- hold energy demand, produced with five different sources – nuclear, renewable, gas, coal, and oil – to evaluate environmental sustainability issues, such as the greenhouse gas emissions, from the implementation of alternative policies.
Heterogeneous households classified according to their economic status: employed, unemployed, inactive, and retired.
Definition of three kind of employed workers by skill – low, middle, and high – defined by the maximum educational attainment of the working age population.
Realistic welfare system with a detailed tax and benefits account that allows to model of the budgetary consequences of alternative policy instruments over time.
Innovation processes driven by input-cost ratio for energy and labour. Each industry selects a combination of old and new technologies (that emerges randomly) to minimize the joint labour and energy costs. A higher investment rate guarantees a faster adoption of innovations due to the renovation of their capital stock, while higher labour or energy costs slightly increase the probability of labour and energy saving innovations, respectively.
Empirical estimation of unavailable parameters to provide realistic and consistent results.
The current version of the model is based on the French economy, whose structure is reflected on the tax-benefit system modelled on the 2014 initial values used in the simulations.
The EUROGREEN model aims at proposing an alternative viewpoint, from the so-called “orthodox” approach, in order to promote concrete solutions to climate change and socio–economic inequalities. The main novelty is the modelisation of the main the main relations among the ecological and socio–economic dimensions, which compose a complex system. Its main task is to build reliable scenarios to assess the aftermaths of alternative policies and to identify and evaluate eventual trade-offs and undesired effects that could emerge from the application of single and specific policies, due to the presence of interconnection in the real economic system. Moreover, it is a tool to define and develop more refined policies which include a mix of intervention that are able to, at least partially, offset the undesired effects of a single policy.
This Report presents the scenarios coming out from the alternate application of six single policies and identifies its pros and cons. In a second step, these single policies are combined in order to evaluate the aftermaths of three policy mixes. The purpose is to balance the contrasting tendencies that could result from myopic intervention (e.g., a Basic Income policy might improve income distribution at the cost of increasing GHG emissions; Working Time Reduction might increase employment and the labour share but is less effective than other policies to reduce income in- equality, higher technological progress reduces GHG emissions at the expense of employment and income distribution).
In what follows, we briefly describe six alternative single policies and the three policy mixes which are compared to a reference scenario (the Baseline) characterized by the maintenance of the contemporary social welfare system and the current trends in the main macroeconomic and environmental variables. The six single policies are:
New Productive Revolution (NPR): models a higher rate of labour and energy saving due to technological progress, with greater advances in labour productivity and energy efficiency induced by in- vestments in R&D and technology.
Basic Income (BI): introduces a basic income program with annual benefits that amount to €5, 580 to all working age adults. The basic income either substitutes or reduces other public transfers such as unemployment and sickness and disability benefits.
Job Guarantee (JG): the public sector hires unemployed workers at the minimum hourly wage up to a maximum intake of 300,000 workers/year. Those are assumed to contribute either to public and care services or to the maintenance and installation of environmental friendly infrastructure.
Working Time Reduction (WTR): that is set in order to gradually reduce from about 35 to 30 weekly working hours.
Energy Mix (EnM): the share of non-renewable sources in electricity production is gradually reduced over a period of 30 years: Gas (from 2.3% to 0.8%), Coal (from 2.9% to 0%), Oil (constant at 0.4%), Renewable (from 17% to 75%), and Nuclear (from 77.5% to 24%). Moreover, an “electrification” process is modelled to gradually increase the share of electricity in the total energy demand of all industries.
Carbon Tax and Border Carbon Adjustment (BCA): includes the car- bon tax per ton of GHG emissions until 2030 – on the base of the French National “Energy Transition for Green Growth” program – together with additional increases of the carbon tax from the 2030s on, and a border carbon adjustment intervention that applies similar tax rates according to the GHG content of imports.
The combination of a subset of these policies allow us to build three policy-mix scenarios that reflect alternative viewpoints to face social, economic, and environmental issues. Namely:
Green Growth (GG): the combines the implementation of New Productive Revolution, Energy Mix, and Carbon Tax and Border Carbon Adjustment policies. This scenario simulates a transition to a low-carbon production driven by fast technological innovations and green investments that also sustain economic growth.
Policies for Social Equity (PSE): this scenario considers a mix of environmental and social policies for a low-carbon with social justice. It combines Job Guarantee, Working Time Reduction, Energy Mix, Car- bon Tax and Border Carbon Adjustment and a higher rate of technical progress on energy efficiency only.
De-Growth (DG): this policy mix adds to the PSE the effects of de- growth in private consumption and exports, together with an increase of a wealth tax up to ≈ 1.5% in average.
Relevant Policy Issues and Summary of Results
Mainstream policy recommendations often tend to ignore the interweaves of social, economic and environmental domains and, at the same time, the EU governance architecture reflects this separation. Our study, in contrast, supports the necessity of a holistic vision in order to define the most effective set of social policies.
Taking this broad perspective, our approach highlights that meeting highly ambitious environmental, social, and economic targets (e.g. GHG emissions reduction, EU’s implementation of the SDGs) requires severe societal changes. The “EU Climate Action” is a paradigmatic case of how well-established institutions seem to minimize the necessity of radical change. The achievement of at least 80% reduction of GHG emissions by 2050, with respect to 1990 levels, entails a structural change of our societies which involves productive structure, labour market institutions and welfare systems. Moreover, the widespread degree of technological optimism tends to overestimate the capacity of technology to solve environmental issues, sur- passed only by the current technological pessimism towards employment and automation.
We challenge this viewpoint and argue that there are no simple win-win solutions and that linear cause-and-effect relationships are undermined by the dynamic feed-backs among social, economic, and environmental variables. Indeed, the simulation results presented in this Report suggest that all the policies considered have benefits and significant drawbacks, either economic or environmental. Still, when policies that entail more radical change in our societies are put forward, orthodox answers tend to highlight the risks, usually deeming these policies not viable or economic unsustainable. This line of thinking is advocated by the De-Growth critique which argues in favor of policies that directly aim at reducing income inequality and social injustice. For instance, in the de-growth community, three socio- economic policies are often discussed: Basic Income, Job Guarantee, and Working Time Reduction.
Simulations and scenario analysis make it possible to understand and analyze the root causes of the adverse, often unexpected, consequences of each single policy and to draw more complex research questions, such as:
(i) What is the best policy to avoid the negative environmental effects (i.e., more GHG emissions) of a Universal Basic Income? (ii) Are top-down policies (e.g., Basic Income or Job Guarantee) and technological innovations sufficient to attain environmental targets with social equity or do they re- quire bottom-up initiatives from the society (e.g., voluntary consumption reduction)?
Simulation results highlight that Ecological Macroeconomics and, to some extent the EUROGREEN model, have the potential to question established single policies and, alternatively, the possibility to visualize the joint effects and interactions of mixed policies. Indeed, more complex policy mixes – as the three suggested below – are likely better suited to overcome the massive challenges that our societies must face, namely: transitioning to low-carbon emission with social equity. The EUROGREEN model, based on the policy simulation outcomes, supports heterodox approaches in promoting the debate on (radically) alternative social and environmental solutions.
The main results from the simulated policies are summarized in what follows. Starting from NPR, the simulations show that relying exclusively on technological progress is not sufficient to achieve the target of 80% reduction in GHG emissions in 2050, despite a significant fall in total emissions.5 Moreover, unbridled technological progress determines high social costs – in terms of reduced consumption and production that follows major increases in unemployment – because higher labour productivity (i.e., automation) supersedes human work. Indeed, the comparison with the Baseline scenario shows that the minimal increase in GDP per capita – associated to NPR – is paired with higher unemployment rates and income inequality. Such a path might be unsustainable from a social perspective and not highly convenient from the economic side.
REMARK 1. Technological progress alone fosters the reduction of GHG emissions but it aggravates unemployment and inequality.
This statement holds even when the Green Growth policy mix (i.e., NPR + EnM + BCA) is applied because the same social contradictions emerge – in terms of unemployment and income inequality.
From the environmental side a remarkable reduction in GHG emissions is attained because, in this case, the technological progress is combined with a marked change in the energy mix in favour of cleaner energy sources. These outcomes suggest that the two pillars of the Green Growth paradigm (i.e., technological optimism and economic efficiency) produce relevant social problems. Hence, policy makers should consider and de- bate before electing this as the unique viable path towards low-carbon transition. As an alternative to GG, we define the so-called Policies for Social Equity mix (i.e., JG + WTR + EnM + BCA + Energy Efficiency) which achieves similar environmental results. Indeed, the projected emissions of the latter reach the 25% of the the 1990 levels in 2050, while the former is expected to reduce greenhouse gases up to about 26% of the 1990 emissions level. PSE also yields far better social outcomes, with very low un- employment rate (less than 2%) and a fairer income distribution. As expected, these results require a stronger public intervention to sustain both the JG and the WTR. Indeed, the deficit-to-GDP in PSE floats around 3.5% throughout the whole simulation time-window, while in GG, it falls to less than 1% by 2050.
REMARK 2. The joint introduction of JG and WTR together with environmental policies significantly reduces emissions while improving income distribution and employment.
The last policy mix considered takes into account the effects of De- Growth proposals, specifically reducing private consumption and exports while increasing wealth taxes together with the Policies for Social Equity. The addition of a substantial (voluntary) consumption reduction further improves the positive environmental impact projected in the scenario to a reduction of GHG emissions down to about 18.5% of 1990 levels by 2050. In order to achieve this target and keep low both unemployment rates and income inequality, the DG scenario is characterized by a remarkable in- crease in public expenditure compensated by higher wealth taxes. This entails a deficit-to-GDP ratio that oscillates in the range 3.5–4.5.% in the whole period. Note that, in a context of decreasing GDP the increase of this ratio does not imply an increase of public debt. Indeed, if the public debt decreased at a slower pace with respect to GDP, the ratio would increase.
REMARK 3. The De-Growth policy mix generates improvements in social equity and is the only scenario to achieve the GHG reduction goal by 2050 combining bold public policies (i.e., PSE + wealth taxation) with a voluntary social choice to reduce consumption.
A take-home message of this study is that Ecological Macroeconomic models, like EUROGREEN, might envision and highlight the unexpected, non-trivial trade-offs and adverse effects of myopic policies. These draw- backs can be overcome by fine-tuned policy designs. Although the post- growth society entails significant changes in the productive structure and in the distribution of economic rewards, the EUROGREEN model shows the presence of dynamic complementarities between social and environ- mental policy goals. Identifying and exploiting these opportunities is necessary to address the multitude of crises, but also to guarantee the survival and the flourishing of our democratic institutions (Beddoe et al., 2009; Piketty, 2018). Finally, the EUROGREEN model encourages further investigations and innovative policy proposals which need a supporting network of field specialists to evaluate the impact of alternative policies and compare them with previous experiences, a process where organized civil society plays a crucial role.
The report contains two major Parts. Part 1 consists of three Chapters; Chapter 1 introduces the topic providing an overview of the model and a brief description of the methodology and of the main results. Chapter 2 provides a detailed description of six single-target policies and of the three proposed policy mixes. Chapter 3 discusses the results of the numerical simulation on the main economic, social, and environmental indicators. Part 2 consists of Chapter 4 which presents the building blocks of the model, explaining the drivers of the main variables and their reciprocal relations and feedbacks. It also contains an Appendix with a sensitivity test for the random innovation process, to check the robustness of the model. Supplementary Material and the list of the equations, parameters can be found at the following link Supplementary Material. Finally, an interactive and user-friendly version of the model which allows interested users to create personalized scenarios is available at The Eurogreen Website (https://forio.com/app/simone_dalessandro/eurogreen/#start~txt.html).
This research was commissioned by Bas Eickhout, Philippe Lamberts, Florent Marcellesi, and Terry Reintke – Greens|EFA Group at the European Parliament.