Fclim 04 785136

ORIGINAL RESEARCH
published: 25 April 2022

doi: 10.3389/fclim.2022.785136
Analyzing the Macro-Economic and

Employment Implications of
Ambitious Mitigation Pathways and
Carbon Pricing
Panagiotis Fragkos* and Kostas Fragkiadakis
E3 Modelling, Athens, Greece
The recent EU Green Deal puts forward ambition climate targets aiming to make the
EU the first climate neutral continent by mid-century while ensuring a just transition.
This requires a large-scale transformation of the EU and global energy and economic
systems induced by both regulatory and market-based policies, in particular carbon
pricing. Macro-economic models currently used for the analysis of climate policy impacts
need improvements to consistently capture the transition dynamics and challenges. The
Edited by:
study presents the methodological enhancements realized in general equilibrium model
Ramazan Sari, GEM-E3-FIT (including enhanced energy system representation, low-carbon innovation,
Technical University of
clean energy markets, technology progress, policy instruments) to improve the simulation
Denmark, Denmark
of the impacts of ambitious climate policies. The model-based analysis shows that high
Reviewed by:
Alessandro Antimiani, carbon pricing has limited negative impacts on the EU GDP and consumption, while
European Research Area, Belgium leading to an economy transformation toward a capital-intensive structure triggered by
Ebru Voyvoda,
Middle East Technical
increased investment in low-carbon technologies and energy efficient equipment. Global
University, Turkey decarbonization to achieve the well-below 2◦ C goal of the Paris Agreement will modestly
*Correspondence: impact total employment, but its effects are pronounced on specific sectors which are
Panagiotis Fragkos
impacted either negatively (e.g., supply of fossil fuels, energy intensive industries) or
panagfragkos@gmail.com
positively by creating additional jobs (e.g., low-carbon manufacturing, electricity sector).
Specialty section: Keywords: GEM-E3-FIT, climate policies, macro-economic assessment, employment impacts, EU Green Deal
This article was submitted to
Climate Law and Policy,
a section of the journal
Frontiers in Climate
INTRODUCTION
Received: 28 September 2021 Climate change is high on the political agenda of major economies worldwide, as demonstrated
Accepted: 29 March 2022
by the implementation of climate policies aiming to reduce emissions, improve energy
Published: 25 April 2022
efficiency and expand renewable energy. In the 21st Conference of Parties (COP21) in Paris,
Citation: governments agreed to limit the increase in global average temperature to levels “well-
Fragkos P and Fragkiadakis K (2022)
below 2◦ C” relative to the pre-industrial levels (United Nations Framework Convention on
Analyzing the Macro-Economic and
Employment Implications of Ambitious
Climate Change, 2015) and to pursue efforts to limit it further to 1.5◦ C, combined with
Mitigation Pathways and Carbon an ambition to peak emissions as soon as possible. In the run-up to COP21, a large
Pricing. Front. Clim. 4:785136. majority of countries submitted national climate action plans known as Nationally Determined
doi: 10.3389/fclim.2022.785136 Contributions (NDCs), outlining their post-2020 climate actions (Fragkos et al., 2018).
Frontiers in Climate | www.frontiersin.org 1 April 2022 | Volume 4 | Article 785136

Fragkos and Fragkiadakis Assessing Macro-Economic Impacts of Paris
The EU has adopted ambitious climate targets, aiming to related to low-carbon and energy-efficient technologies that
reduce its GHG emissions by at least 40% in 2030 relative to are mainly domestically produced. This substitution is an
1990 levels. Recently, as part of the EU Green Deal and its 2030 investment-intensive and technology-intensive process that
Climate Target Plan, the EU has raised its emission reduction requires economic restructuring away from fossil fuels and
target to 55% in 2030 and aims to achieve climate neutrality by toward a more capital-intensive structure. Depending on low-
mid-century (European Commission, 2020). The EU has already carbon technology costs, this process may be costly in the short-
made progress toward its goals, as its GHG emission levels in term, thus increasing the average price of energy services, but in
2019 were 24% below 1990 levels. However, climate action must the long-term the transformation may bring positive externalities
accelerate as progress in key sectors including transportation, driven by technology progress and industrial maturity dynamics
buildings and agriculture is lagging behind. In addition, the as well as environmental benefits (e.g., reduced climate damages
EU has increased its share of renewables and improved energy and air pollution). These elements can result in socio-economic
efficiency, but current policies are not sufficient to reach the new benefits, at least for some sectors and countries, especially if
2030 EU targets as outlined in the Fit for 55 package (European the size of the clean energy market is sufficiently large (to
Commission, 2021). These include at least a 55% reduction achieve economies of scale and allow innovators to recover
in GHG emissions from 1990, a 40% share of renewables their high upfront costs) and there is adequate, low-cost
in final energy consumption and a 36–39% improvement availability of finance (Karkatsoulis et al., 2016), given that low-
in energy efficiency. Implementing ambitious climate policies carbon investments are more capital intensive relative to fossil
would have profound implications for economic growth, labor fuels (Polzin et al., 2021). As financing of new products and
markets, financial requirements, workers’ income, and industrial technologies is not available at uniform interest rates, the supply
competitiveness. In response, the EU Green Deal suggests of finance depends on the risks of new technologies (i.e., limited
that Europe will be transformed toward a clean, sustainable, financial resources for high risk capital).
and circular economy based on the protection of industrial The EU has introduced market-based policy instruments to
competitiveness in global markets (through implementation of reduce emissions; the EU-wide Emissions Trading System (ETS)
Carbon Border Adjustment Mechanism-CBAM), the provision was introduced in 2005 as the world’s first cap-and-trade market,
of low-cost finance and the Social Climate Fund, which will use while EU countries have also introduced regulatory and tax-
ETS revenues to mitigate decarbonization impacts on vulnerable based measures to stimulate emissions reductions. The EU’s early
households and regions and support low-carbon investment implementation of ETS market has provided useful examples for
(European Commission, 2021a). the creation of subsequent ETS in China, South Korea, Canada,
The study aims to assess the socio-economic implications of Japan, New Zealand, and Switzerland. EU climate policies may
ambitious EU and global climate policies. We use the global raise competitiveness risks for businesses, especially if non-EU
multi-sectoral Computable General Equilibrium (CGE) GEM- competitors do not adopt strong climate policies. In the existing
E3-FIT model, which can analyze energy-economy-environment policy context, free emission allowances are issued to domestic
interactions within a consistent unified framework built on producers in energy-intensive sectors that are susceptible to
verifiable assumptions. Using GEM-E3-FIT with innovative competition from countries with lower environmental standards.
methodological improvements, the study provides novel insights As part of the Fit for 55 package, the CBAM is introduced
into the activity, labor market and trade impacts of climate to reduce carbon leakage and protect domestic industrial
policies and explores the challenges and opportunities induced production from relocating to non-abating countries.
by decarbonization for specific sectors and countries. In recent years, several studies explored the socio-economic
The study is structured as follows: section Context presents an impacts of decarbonization. The projected effects vary depending
overview of the policy context and related literature on macro- on the modeling methodology and assumptions used, e.g.,
economic effects of climate policies, while section Materials technology costs and availability, global fossil fuel prices, policy
and Methods introduces the GEM-E3-FIT model and the ambition, financing availability, etc. Most studies argue that
methodological improvements. section Results presents the key decarbonization will deliver limited socio-economic impacts
economic, employment, industrial and environmental impacts of relative to the Business-as-usual scenario, while having clear
ambitious climate policies. section Discussion concludes. environmental benefits. The consistent quantification of socio-
economic impacts of mitigation is a challenge for current
modeling tools as it requires addressing simultaneously a
CONTEXT multitude of interconnected factors the dynamics of which are
complex and difficult to capture, including technology progress,
The transition to a low carbon economy is a complex and low-carbon innovation, sectoral transformation dynamics,
lengthy process that requires high uptake of low-carbon interactions between energy and economic systems and the
technologies, innovation, sufficient financial resources, and finance sector, etc.
coordination of market players, including policy makers, Most mitigation studies using global modeling tools assume
industrial manufactures, R&D providers, the finance sector, that a global target on temperature or cumulative emissions
infrastructure developers, and final consumers. Energy system is imposed. However, there are multiple potential pathways to
decarbonization involves the substitution of fossil fuels (which achieve these targets, which differ due to model choices on
are imported in most EU countries) by products and services technology costs, temporal profile of emission reduction effort,

the allocation of climate effort to specific sectors and countries, enhanced version of GEM-E3. The model is built on the
technology availability, socio-economic assumptions, etc. Despite neo-classical school of economic thought, but it has been
those differences, Kriegler et al. (2015) and Rogelj et al. (2015) improved to overcome methodological inefficiencies (e.g., rigid
argue that mitigation pathways have the following features: (i) representation of labor and capital markets); incorporate
emissions should peak the latest by 2025 or 2030, (ii) energy new cutting-edge methodological insights (e.g., low-carbon
supply should be fully decarbonized by mid-century, (iii) energy innovation and spillovers) and represent policy instruments with
efficiency has a central role, especially in buildings and industries, real-world realism. Further enhancing GEM-E3-FIT is crucial for
(iv) large-scale electrification of energy services is required strengthening the evidence base for policy making and gaining
based on decarbonized electricity, and (v) negative emissions a consistent picture of economic impacts of climate targets. By
technologies are essential for meeting the 1.5◦ C target. focusing on recently announced targets (including EU Green
The literature exploring the socio-economic effects of Deal and new EU NDC target for 2030) ensures that the analysis
decarbonization argues that its GDP impacts are limited, but is policy relevant, grounded in real world and can be used by
there are large shifts in sectoral activity and employment as policy makers to design low-carbon strategies.
shown in Paroussos et al. (2020). For instance, Fragkos et al.
(2018) based on a multi model inter-comparison find that MATERIALS AND METHODS
economic growth is only marginally affected by climate action.
Using multiple modeling results, the IPCC 5th Assessment The GEM-E3-FIT Modeling Framework
Report estimated global consumption losses of 2–6% in 2050 to The GEM-E3-FIT model is a multi-sectoral, recursive dynamic
limit global warming to <2◦ C by 2100 (IPCC, 2014). Fragkos CGE model, which simultaneously represents 46 regions
et al. (2017) show that the implementation of EU decarbonization (including all EU countries) and 51 sectors linked through
goals incurs relatively limited GDP losses amounting to 0.6% bilateral trade (E3-Modelling, 2017). It is a comprehensive
by 2050 from Reference scenario, which is in line with several model of the global economy, covering interlinkages
other model-based analyses, e.g., Riahi and Kriegler (2015) between productive sectors, consumption, price formation
and Capros et al. (2014). Paroussos et al. (2019) showed that of commodities, labor and capital, trade, and investment
the socio-economic impacts of decarbonization depend on the dynamics. GEM-E3-FIT formulates the supply and demand
assumed low-carbon technology progress and access to low- behavior of economic agents with market derived prices to clear
cost finance. (Kober and Summerton, 2016) showed that GDP markets, allowing for a consistent evaluation of distributional
effects of mitigation depend crucially on the modeling paradigm effects of policies. The model is driven by accumulation of capital,
used, with CGE models reporting a limited reduction in GDP equipment and knowledge, features equilibrium unemployment,
(∼0.4%) whereas macro-econometric models report GDP gains energy efficiency standards and carbon pricing and can quantify
(∼0.2%) for ambitious emission reductions. In “Clean planet the socio-economic impacts of policies ensuring that in all
for all” strategy (European Commission, 2018), GDP losses scenarios the economic system remains in general equilibrium.
of decarbonization are limited and depend on the modeling Industries operate within a perfect competition market
framework used, with CGE models showing more negative regime and maximize profits. Production functions consider the
impacts than those based on the neo-Keynesian approach. These possibilities of substitution between capital, labor, energy, and
differences highlight the importance of the modeling approach materials in each sector and allow for price-driven derivation
and specific model assumptions on low-carbon innovation and of intermediate consumption and the services from capital
technology uptake, labor, and financial markets. and labor. Households demand, savings and labor supply are
The interlinkages between energy system decarbonization and derived from utility maximization using a linear expenditure
macro-economic structural change are complex; they include system (LES) formulation. Households receive income from
risks and opportunities for economic activity (Antosiewicz labor supply and from holding shares in companies. Investment
et al., 2020; Probst et al., 2020), employment (Fragkos et al., by sector is dynamic depending on adaptive anticipation of
2018), industrial competitiveness (Karkatsoulis et al., 2016), capital return and sectoral activity growth. All regions and
trade patterns (Paroussos et al., 2015), embedded emissions sectors are linked through endogenous bilateral trade flows.
(Meng et al., 2018), and low-carbon innovation (Mercure et al., Total demand in each country and sector is optimally allocated
2019; Fragkiadakis et al., 2020). On the one hand, low carbon between domestic and imported goods, under the hypothesis that
finance and technological innovation can lead to the emergence they are imperfect substitutes (Armington, 1969): at the upper
of new economic sectors, productivity growth and enhanced level, firms decide on the optimal mix between domestically
competitiveness as well as reduced energy imports. On the produced and imported goods; at the next level, demand for
other hand, a rapid transformation implies substantial challenges, imports is split by country of origin depending on transportation
which are reflected in systemic financial risks (Polzin et al., costs, prices and consumer preferences (captured by statistics
2021), higher costs of production, carbon leakage as well as risks on trade). GEM-E3 is calibrated using the GTAP dataset that
of social dislocation created by structural change and negative provides a comprehensive and self-consistent accounting of
distributional impacts to vulnerable households (Fragkos et al., firms’ production structures, households’ consumption, trade,
2021). gross fixed capital formation and sectoral value added (Figure 1).
Our analysis improves the understanding of macro-economic GEM-E3-FIT includes features that go beyond conventional CGE
and employment implications of climate policies using the approach, described in detail below.

FIGURE 1 | GEM-E3-FIT structure.
Modeling Enhancements including capital costs (CAPEX),1 Operation & Maintenance

Conventional CGE models lack a detailed representation of (O&M) expenditures, carbon costs and costs to purchase fuels,
the energy system and related technologies, as they commonly while meeting constraints (e.g., technology potentials, resource
represent the energy sectors using aggregate production availability, policy constraints, system reliability). Thirteen power
functions and they fail to capture crucial sector characteristics technologies are included (coal, oil, gas and biomass-fired,
reducing the credibility of their simulations. To overcome this, nuclear, hydro, PV, wind onshore, wind offshore, geothermal,
top-down CGE models are often combined with bottom-up Carbon Capture and Storage- CCS- with coal, gas, and biomass)
models which have a rich representation of energy technologies and compete based on their Levelized Cost of Electricity to meet
(Böhringer and Rutherford, 2008; Helgesen, 2013). Two electricity requirements in each time segment. The decision to
methods are used: (i) a hard link approach where the CGE invest in power technologies depends on their relative costs,
model is extended to include detailed representation of the barriers and potentials, while various policy instruments may
energy system and (ii) a soft link approach where the two influence the electricity system evolution, e.g., ETS prices, phase-
models are linked through specific variables and an iterative out policies, renewable subsidies, etc.
process to ensure models’ convergence. GEM-E3-FIT includes GEM-E3-Power calculates investment in new power plants,
a detailed representation of energy system and technologies, which are influenced by sectoral electricity demand, load curves,
thus enhancing the credibility of CGE modeling for climate decommissioning of old plants and policy measures. The
policy analysis as the substitution patterns in energy supply and modeling includes non-linear cost-supply curves for fossil fuels,
demand are based on ‘true’ technologies rather than restrictive renewables, and nuclear plants, which capture exhaustion of
functional forms. renewable energy potential, take-or-pay contracts for fuels, the
promotion of domestically produced fuels, social acceptability of
technologies, difficulties to develop CO2 storage areas, policies
regarding nuclear site development, etc. (Polzin et al., 2021). The
Electricity Production non-linear cost-supply curves are included in the optimization of
GEM-E3-FIT adopts a bottom-up approach for electricity capacity expansion and system operation of GEM-E3-Power.
sector with power producing technologies treated as separate
production sectors. GEM-E3-Power module (Polzin et al.,
2021) calculates the optimal investment and operation of 1 Data for investment and operating costs were extracted from the PRIMES
electricity system in order to minimize total production costs, database (https://e3modelling.com/modelling-tools/primes/).

Transport consumer’s decision to purchase durable goods depends on the

GEM-E3-FIT includes a bottom-up representation of passenger cost of buying and using the energy equipment (i.e., fuel costs).
and freight transport, simulating the choice of (public and At the first level of the heating bundling, households decide
private) transport modes and technologies and the way of using between district heating and the use of private heating appliances
transport equipment. Mobility is split between using private through a CES function depending on the costs of competing
transport means (e.g., cars) and purchasing transport services options. At the second level, households decide on the operation
from transport suppliers (public transport). Private mobility is of existing appliance stock and the purchase of new appliances.
derived from consumption by purpose of households under Finally, new appliances are split into options based on the
the income constraint. The use of private transport involves fuel used (coal, oil, gas, biomass, electricity, solar thermal)
purchasing of durable goods (vehicles) considering three car and technologies (conventional and advanced) characterized by
types with different capital and fuel consumption features; in different cost structures in terms of purchase and operation costs.
particular conventional Internal Combustion Engine (ICE), plug- Their competition is modeled as a “Weibull” function (similar
in hybrid vehicles and battery electric cars (EVs). Each car type to cars), with fuel choice depending on their total costs. The
uses a different mix of fuels, with ICE cars using diesel, gasoline, purchase and use of electric appliances follow the same logic as
gas and biofuels, EVs using electricity, and plug-in hybrids using heating and cooking appliances.
electricity, oil products and biofuels. The shares of the three car
types (r) in new car registrations are calculated based on the Representation of the Decarbonization Process
Weibull discrete choice representation (Karkatsoulis et al., 2017), GEM-E3-FIT captures both energy- and process-
as below: related GHG emissions. The emission abatement
potential depends on substitution possibilities among
swt fuels and between energy and capital. In the model,
pcar
shcarr,t · pcar0r,t the internalization of environmental externalities is
xshcarr,t = P r,t swt (1) achieved either through taxation or system constraints –
pcarr,t
r shcar r,t · pcar0 global, regional, or sectoral-, the shadow cost of which
r,t
(e.g., carbon price) affects the decisions of economic
xshcarr,t represents the share of car types in new car registrations. agents. Emission reductions in GEM-E3-FIT are
shcarr is the scale parameter used to calibrate enabled through:
technology shares.
1) End-of-pipe abatement technologies for non-CO2 emissions
pcarr,t is the price by car type (reflecting total cost).
are formulated by bottom-up Marginal Abatement Cost
swt is the elasticity of substitution between car types.
Curves (MACCs) that differ among countries, sectors, and
Mobility of private consumers is translated into demand for
pollutants (Harmsen et al., 2019). Marginal costs of abatement
specific car types, which in turn is related to demand for specific
are increasing functions of the degree of abatement.
goods via the consumption matrix that links consumption
2) Substitution of fuels toward low-emission energy carriers and
by purpose to demand for specific goods. The technology
technologies: The decision of firms to purchase inputs is
and fuel mix in transport changes endogenously because of
influenced by carbon pricing, which increases the cost of
carbon pricing and other policy instruments, while fuel shares
fossil fuel inputs and causes a shift in firms’ demand away
in households’ consumption matrix can be modified. Public
from fossil fuels toward low-emission technologies. Therefore,
transport is provided by land, air, and maritime transport. Each
an imposed cost on emissions (e.g., a carbon price) drives
transport sector produces a homogenous service using inputs
substitution toward less emission intensive inputs, e.g., from
from capital, labor, materials and energy, based on endogenous
coal to gas or renewable energy.
choice of firms toward cost minimization. The demand of
3) Energy efficiency improvements, modeled through specific
other production sectors for transport services derives from
investment that enable the substitution of fuel consumption
cost minimization of their production input mix. Substitutions
with capital and/or technology equipment (e.g., advanced
are possible between transport modes and between transport
home appliances, improved thermal insulation, energy
and non-transport inputs depending on relative prices of goods
management in industries, more efficient equipment). Thus,
and services.
climate policies will drive a substitution away from energy
to capital.
Energy Use in Households
4) Decrease of production: The imposition of climate-related
Energy demand for households is divided into Heating and
constraints causes an additional cost to production, linked
cooking demand and Electric Appliances (Figure 2). Useful
to the costs of substitution or installation of abatement
energy for heating depends on households’ income and on
equipment. An increasing production cost would drive a
the total cost of heating that includes the purchase and the
reduction in demand, production and emissions for carbon-
operational costs for energy equipment. The purchase and use
intensive products, combined with potential substitution
of energy services by households derives from their utility
toward activities with lower carbon intensity.
maximization (under income constraint). The use of durable
goods (cars, heating systems and electric appliances) involves The environmental tax is paid by the polluting firm to the
demand for non-durable goods, mainly fuels and electricity. The government and thus the tax affects the firms’ decisions on

FIGURE 2 | Decision tree of households, including energy and mobility services.
the use of production factors. In GEM-E3-FIT, the installation Representation of Markets for Low-Carbon
of low-emission and energy efficient technologies is considered Technologies
as an intermediate input and not as investment demand Most Integrated Assessment models do not represent the
of the firms, as, e.g., the purchase of a more efficient air- “upstream” industrial implications of decarbonization and the
condition will not increase the firm’s capital stock but will potential domestic industry effects for global technology leaders
create additional intermediate demand. Firms and households (De Cian et al., 2013). The inclusion of multiple economic sectors
decide on the optimal level of abatement driven by the (in particular those that manufacture low-carbon equipment) can
carbon tax,2 with emissions reduced up to the level that the drastically improve simulation properties of models with regard
cost to abate the last ton of emissions equals the carbon to industrial, trade and distributional impacts of climate policies
price. CO2 emissions can be mitigated through efficiency (Karkatsoulis et al., 2016).
improvements, uptake of low-emission technologies and fuel GEM-E3-FIT represents the manufacturing of low-carbon
substitution away from fossil fuels. In GEM-E3-FIT, a climate equipment as separate production sectors and can capture
policy can be implemented either through the imposition of growth and competitiveness effects driven by low-carbon
an exogenous carbon tax, or through an exogenous emission innovation and industrial activities induced by decarbonization.
cap, with tax level endogenously estimated to achieve the The model database has been extended to represent producers
emission target ensuring the clearing of demand and supply for for PV, wind, Evs, Batteries, and biofuels. As GTAP database
emission permits. does not separate the manufacturing of low-carbon technologies,
supplementary data sources are used to provide estimates for the
2 Or carbon price in the form of opportunity cost for the firm and/or household to size, structure and trade flows of these sectors. For the transport
emit less. sector, the demand and manufacturing volumes of Evs for each

country is derived from (IEA, 2020) and Transport Environment, indicates the reduction in costs for each doubling of cumulative
2017, respectively, while the manufacturing volumes of batteries R&D expenditure, triggered by accelerated innovation dynamics.
by country are based on IEA (2019a) and base year prices In conventional CGE modeling, productivities are set
for Evs and batteries on Fragkiadakis et al. (2020). Combining exogenously in Baseline scenarios, while in the new GEM-E3-FIT
these costs with the manufacturing volumes, the production of version, total factor productivity (TFP) includes an endogenous
Evs and batteries are estimated in economic terms. Then, we and an exogenous part. The former represents innovation-
used (Fries, 2017) to determine the inputs required to produce induced endogenous growth and is composed of: (i) learning by
Evs (equipment, metals, plastics, etc.), which have a different doing, (ii) learning by research (public and private R&D), (iii)
cost structure relative to ICEs. Finally, we force the production knowledge spillovers, and (iv) the human capital stock measure.
of Evs and conventional to sums up to the GTAP sector 43. Each firm decides to spend on R&D to maximize its profits
“Manufacture of motor vehicles, trailers and semi-trailers”. A whereas public R&D is set exogenously. R&D expenditures
similar process was developed for PV and wind turbines, with generate a stock of knowledge that is linked to productivity
data on manufacturing volumes from Navigant Research (2017) growth, through the following equations, where RDPrivate
j is the
and Freiburg (2018), sales from IEA (2019b), production cost optimal demand of firms for R&D, θjrd is the value share of R&D
from Clean Energy Manufacturing Analysis Centre (2016) and expenditures in production costs, Qj represents total sales of the
cost structure inputs from Garrett-Peltier (2016), and IRENA firm, PQj is selling price and PRD is the unit cost of R&D.
(2020). The above data are consistently integrated in GEM-E3-
FIT to produce balanced Input-Output tables that represent the rho
PQj

low-carbon technologies as separate sectors.
RDPrivate
j = θjrd • Qj • (2)
PRDj
Representation of Hydrogen
The new GEM-E3-FIT model version represents the production
RDPublic

and demand of green hydrogen, which is triggered by ambitious j = Exogenous (3)
climate policies (e.g., high carbon pricing). In line with recent
literature (European Commission, 2018; van Soest et al., 2021),
hydrogen is assumed to be produced mostly from renewable- RDTotal = RDPrivate + RDPublic (4)
j j j
based electricity. Green hydrogen is mostly used in sectors
which are difficult to be fully electrified, e.g., in steel making Learning by doing and learning by research increase TFP in the
(hydrogen-based Direct Reduced Iron-DRI), in chemicals and low-carbon producing industrial sectors (Equation 5), where Yj,t
other industries, and in specific transport segments (including represents the production in the case of learning by doing and the
road freight transport, navigation, aviation). The production of R&D expenditures in the case of learning by research and bbtec is
hydrogen has been inserted as a separate production sector in the corresponding learning by doing or learning by research rate
GEM-E3-FIT, in the same way as the manufacturing of low- of technology tec that is linked one-to-one with the firm j.
carbon equipment (see above). The inclusion of green hydrogen
enables GEM-E3-FIT to reach very ambitious decarbonization P !−bbtec
targets, like those outlined in the Paris Agreement, as it offers t Y j,t
TFPj = (5)
a new, important mitigation option to decarbonize hard-to- Yj
abate and hard-to-electrify sectors like steel making and freight
transport. The calibration of hydrogen production was based Each sector optimizes resource allocation in R&D simultaneously
on the techno-economic assumptions from the EC, Reference with decisions about acquiring capital, labor, energy, material,
scenario 20203 . based on its production function and the share of R&D
expenditures in intermediate demand. The R&D expenditures
Representation of R&D and Technology Progress in accumulate in a knowledge stock and improve the quality and
GEM-E3-FIT reduce the costs of the produced goods and services. As resources
Low-carbon innovation and economies of scale play a key role are limited in the CGE framework, R&D expenditures may exert
in reducing low-carbon technology costs (Verdolini et al., 2018). a crowding out effect on investment temporarily, but in the
Therefore, technology progress is endogenously represented in longer term, the innovation-induced productivity growth implies
GEM-E3-FIT depending on learning by doing, public and private more efficient use of economic resources inducing long-term
R&D expenditure and spill-over effects. The learning by doing growth. GEM-E3-FIT differentiates between public and private
component corresponds to the productivity gained through R&D, as they have different nature with the former focusing on
cumulative production (i.e., learning from experience and basic high-risk research and novel, immature technologies with
economies of scale) for low-carbon technologies with learning uncertain market value (Wene, 2008). In contrast, private R&D is
rates from Paroussos et al. (2019). The R&D learning rate closer to industrial activities and is commonly directed to mature
technologies with limited risk (Paroussos et al., 2019).
3 https://energy.ec.europa.eu/data-and-analysis/energy-modelling/eu-reference- Literature indicates that knowledge is diffused to other regions
scenario-2020_en#:~:text=The%20EU%20Reference%20Scenario%20is, and sectors with knowledge spillovers affected by geographical
framework%20in%20place%20in%202020 proximity, distance to technological frontier, absorptive capacity,

TABLE 1 | Learning by doing and R&D rates used in GEM-E3-FIT. in GEM-E3-FIT. Depending on the local content of the PV
manufacturing (which is based on data and is described above),
Learning by doing Learning by research
the additional demand is directed to either domestic production
Biofuels 0.10 0.11 or imported PV equipment, with endogenous bilateral trade
Advanced electric 0.10 0.10 flows depending on PV cost development by region and initial
and heating data. In each country, a production function links PV production
appliances with inputs from capital, labor, energy, materials (intermediate
Equipment for 0.12 0.10 inputs), and R&D with R&D expenditure derived from IEA
wind power (2019b) statistics for all low-carbon technologies. The increased
technology
R&D expenditure leads to higher productivity (TFP) for the PV
Equipment for PV 0.23 0.12
equipment sector through the learning by research rate, while
panels
the increased PV manufacturing also improves the sectoral TFP
Equipment for 0.11 0.11
CCS power through the learning by doing rate.
technology
Electric vehicles 0.10 0.20 Representation of Labor Markets
GEM-E3-FIT represents imperfect labor markets, simulated
by an empirical labor supply equation that links wages and
unemployment through a negative correlation. To adequately
human capital, property rights policy, etc. (Verdolini et al., 2018). capture real-world conditions in labor markets, GEM-E3-
Conventional CGE models capture spillovers only through the FIT represents involuntary unemployment, moving beyond
exchange of efficient products and trade. In addition to this, conventional CGE modeling assuming perfect labor markets.
GEM-E3-FIT includes technology transfer matrices based on GEM-E3-FIT represents labor market imperfections and
patent citation data, linked to absorptive capacity, with data from frictions, so that employees enjoy a premium on top of the
the EU and national Patent offices and R&D expenditure on wage rate that would correspond to equilibrium between
low-carbon technologies (IEA, 2019b). potential labor supply and labor demand. The premium leads
Knowledge spillovers are represented as positive externalities to a displacement to the left of the potential labor supply
leading to higher productivity of R&D expenditure. Cross- curve, which corresponds to effective labor supply, with
sectoral and cross-country spillovers are proxied by applying equilibrium unemployment determined as the difference
the bilateral imports shares to R&D expenditures by country between potential and effective labor. In GEM-E3-FIT the
to approximate the knowledge absorption from the innovations efficiency wage approach (Shapiro and Stiglitz, 1984) is selected
produced in other countries. Productivity generated through to represent involuntary unemployment because of its empirical
R&D is diffused to other sectors and countries according to a validation and simplicity, assuming a negative correlation of
patent citation4 matrix approach with spillovers calculated in unemployment levels with wages.
Equation (6). Climate policies have differentiated impacts across skills and
can cause a mismatch between labor demand and supply for
specific skills. Conventional CGE models do not differentiate
TFP_SPILLi,j,r,s = TFPi • spilloveri,j,r,s (6)
between skills and assume that labor markets are fully flexible,
Public R&D increases the global stock of knowledge (perfect so that workers can easily migrate to new jobs and industries and
spillovers), while private R&D is diffused partially (through are therefore not well-suited to assess the skill impacts of policies.
knowledge spillovers), reflecting Intellectual Property Protection, To capture these effects, GEM-E3-FIT has been expanded with
costly replication of patents, obstacles for knowledge diffusion a representation of five distinct labor skills combined with
and potential limitations in infrastructure, human capital, the endogenization of households’ decision for education that
institutions, regulation, industrial and innovation base influences the level of its future skills and wages. The five
(Paroussos et al., 2019). Table 1 includes the learning by skill levels correspond to GTAP classification: unskilled workers,
doing and R&D rates for clean energy technologies used in service and shop workers, technicians, clerks and managers.
GEM-E3-FIT, as described in Fragkiadakis et al. (2020) based on GEM-E3-FIT represents labor productivity differentials across
a wide literature review. countries and labor skills through modeling the links between
The enhanced GEM-E3-FIT version includes an enhanced human capital, knowledge spillovers and absorptive capacity.
representation of the complex interactions and dynamics These affect the growth potential of new high value-added
between low-carbon R&D, climate policies, and uptake of clean activities requiring increased labor skills and tertiary education.
energy technologies. The 2DEG scenario results in additional The optimal schooling years are decided by the households
capacity investment in low-carbon technologies (e.g., in solar depending on the interplay between higher skills (and wages)
PV) to replace the use of coal and gas in electricity production. obtained from tertiary education and education costs, including
This leads to additional demand for PV equipment, which should the cost of schooling and the lost income during schooling years.
be manufactured by the specific sector, which is represented Households decide on the optimal amount of education based
on wage and unemployment rate differentials between different
4 For the exact description of the approach see Paroussos et al. (2019). skill levels. The choice on education affects the number and skill

distribution of the working age population that in the period t TABLE 2 | NDC emission targets included in the Reference scenario (submitted
is added to the labor force. For each skill category the demand- until 2020).
supply mismatch results into a skill specific unemployment Country NDC emission Energy-related NDC
rate. The model assumes full labor mobility across sectors for targets targets
each skill type. The supply of each labor skill is determined
via an empirically determined wage curve linking wages with EU28 −40% GHG in 2030 32% RES in gross final
unemployment rate (with a wage elasticity of −0.1) consistent relative to 1990 demand
with the efficiency wages approach described above. China −60% (−65%) CO2 20% Non-fossil in
intensity in 2030 rel. primary energy
2005
India −33% (−35%) CO2 40% Non-fossil in
Representation of Policy Instruments intensity in 2030 rel. power capacity
2005
Various energy and climate policy instruments are represented
USA −26% (−28%) GHG in
in GEM-E3-FIT. Policies are analyzed as counterfactual
2025 relative to 2005
scenarios and are compared against the Business-as-Usual
Canada −30% GHGs in 2030
scenario. Policies are evaluated through their impact on from 2005
growth, employment, income distribution, competitiveness, and Japan −26% GHGs in 2030 44% low carbon
welfare. GEM-E3-FIT can assess the impacts of market-oriented from 2013 electricity in 2030
instruments, such as carbon taxes and investigates market-driven Brazil −43% GHGs in 2030
structural changes, as well as the re-structuring of economic from 2005
sectors, income and re-location of industrial activities induced by Russia 25–30% below 1990
climate policies (Paroussos et al., 2015). The model can support levels by 2030
the analysis of social and distributional effects of climate, energy
and economic policies, both among countries and among income
classes within each country (Fragkos et al., 2021). GEM-E3-FIT
• Analyzing measures to mitigate negative competitiveness
can assess the allocation of climate efforts over different countries
impacts of climate policies on trade-exposed industries, e.g.,
and sectors with subsequent effects on growth, capital, and labor
CBAM, changes in industrial tariffs, etc.
allocation as well as compensating measures to alleviate negative
impacts on vulnerable regions and households.
Climate policies would drive the expansion of renewable
Scenario Descriptions
The study analyses two scenarios with different climate
energy, energy efficiency and electrification of energy services.
policy ambition.
GEM-E3-FIT includes several mitigation options, including a
The Reference scenario is a projection for the global economic
variety of renewable technologies, Evs, advanced biofuels, heat
and energy system evolution based on historical and current
pumps, building retrofits, CCS, fuel substitution toward low-
trends related to activity growth, technical progress, fossil
emission energy carriers and uptake of efficient equipment. The
resources, and climate policies. Socio-economic developments
model endogenously decides on the optimal mix of mitigation
of the Reference scenario (population and GDP) replicate (IEA
options to achieve the climate target, choosing first the options
World Energy Outlook, 2019) assumptions and are consistent
with lower abatement costs. The uptake of specific technologies
with the SSP2 scenario widely used by the IPCC and the climate
depends on the availability of other mitigation options, i.e.,
modeling community. The GDP projections incorporate the
competition between biofuels and EVs to decarbonize transport.
short-term impacts of COVID-19 on activity and investment
GEM-E3-FIT captures the complex interlinkages among sectors
patterns, by changing GDP data for 2020 and short-term
and mitigation options, e.g., the uptake of EVs depends
projections until 2023 based on Rochedo et al. (2021) and World
on the provision of green and cheap electricity from the
Bank (2021).
electricity sector.
The Reference scenario assumes that already adopted climate
GEM-E3-FIT can support analysis of structural features of
policies, including the Nationally Determined Contributions
growth related to low-carbon innovation and technology and
(NDCs) -as submitted by November 2020- are implemented
evaluate the socio-economic implications. It puts particular
by 2030 (Table 2). After 2030, no additional efforts to reduce
emphasis on:
emissions is assumed for non-EU countries. In modeling terms,
• Assessing climate-related market instruments, such as energy this means that the carbon prices resulting from NDC policies in
or carbon taxes, subsidies to low-carbon technologies, 2030 are kept constant until 2050 demonstrating lack of climate
regulations, efficiency standards, etc. ambition, while most countries do not establish carbon pricing
• Exploring the distributional consequences of policies, regimes (with the exception of EU ETS). Overall, the Reference
including social equity and employment for vulnerable scenario of GEM-E3-FIT is comparable to respective scenarios
regions and low-income classes. developed in model inter-comparison studies, like (McCollum
• Assessing policy instruments related to low-carbon et al., 2018) and (van Soest et al., 2021). The costs of power
innovation, labor market or industry and their interactions generation technologies are calibrated to IRENA (2020), while
with decarbonization. technology progress is included for low-carbon technologies.

The 2DEG scenario is also examined, which is a scenario from 5.5% in 2015 to 4.6% in 2050 converging toward—but not
consistent with the 2◦ C Paris Agreement goal. In line with reaching- the natural rate of unemployment.
(McCollum et al., 2018) and (IPCC, 2014), a global CO2 budget of We assume that the global economy will become increasingly
1,000 GtCO2 over 2010–2050 is used as proxy for the temperature interconnected over the coming decades through a steady
target. A universal carbon price is implemented across regions increase in the ratio of trade-to-GDP, which is induced by the
and sectors from 2020 onwards to reach the cumulative CO2 gradual tariff reduction, diminished transportation costs and
budget by 2050, ensuring that the well-below 2◦ C Paris goal digitalization of the economy. In terms of sectoral production,
is met. The carbon price is increased up to the level where the world economy will become more services oriented and
the global emission target is met. As the stringency of the go through a process of dematerialization (less use of primary
mitigation effort increases constantly, the global carbon price raw materials, increased resource and energy efficiency, lower
grows from 80$/tnCO2 in 2030 to about 350$/tnCO2 in 2050, share of energy-intensive manufacturing). Services will dominate
in line with (McCollum et al., 2018). The contribution of each global value added, whereas the primary sector share continues
country in global emission reductions is determined by equal to decline following historical trends and increased standards of
marginal abatement costs and uniform carbon price across living in developing countries.
countries. Thus, 2DEG represents the solution that meets the In the Reference scenario, economic activity and emissions are
global carbon budget constraint with the minimum costs through expected to gradually decouple (Figure 4), following historical
equalization of marginal abatement costs in regions and sectors. trends and adopted climate policies and NDCs. The global
We assume that carbon revenues are recycled through the public emission intensity will decline, as GDP grows at a faster pace
budget. The 2DEG scenario requires a deep restructuring of (2.7% annually by 2050) than emissions (0.7% annually) due to
the global energy and economic systems with massive uptake increasing deployment of renewable energy, improving energy
of low- and zero-carbon technologies and accelerated energy efficiency, reduction in low-carbon technology costs and fuel
efficiency improvements. The transition is triggered by effective switching. Full decoupling of GHG emissions and economic
coordination of market players and actors (i.e., industries shifting growth is evident in major developed economies (USA, Japan,
to clean technologies, consumers changing behavior, policy and Canada) as a result of their climate policies and ambitious
makers implementing strong climate policies), the removal of NDCs. The energy intensity of GDP is projected to decline by
non-market barriers, and technological innovation and uptake 1.3%/year on average implying that energy resources are used
of variables renewables and storage facilitating electrification more efficiently, through dematerialization of the economy and
of end-uses. uptake of energy efficient equipment, technologies and energy
carriers. The emission intensity of primary energy also improves
RESULTS because of increasing deployment of low-carbon technologies.
The main policy driver used in Reference scenario to meet
The section presents the energy system and socio-economic the NDC targets is the carbon price, which is differentiated by
impacts of mitigation policies. region/country. The level of the carbon price demonstrates the
policy effort required to meet the NDC targets, and thus it is
The Reference Scenario higher for the EU, USA and Canada (increasing to more than e45
Based on the global economic outlook implemented in GEM- by 2030), while other countries (e.g., India, Saudi Arabia, Russia)
E3-FIT Reference scenario, the global economy is projected to have zero carbon price indicating that the NDC constraint is not
grow 2.7% annually until 2050, while the average annual growth binding5 and is achieved without the need for further policies.
for the EU is 1.5% in line with the official EU Aging report
(European Commission, 2021b) as a result of aging population Emission Impacts of Global
with the share of EU population above 65 years increasing Decarbonization
from the current 20–50% in 2050. Among major economies, The Reference scenario would lead to modest increase of global
China and India will register high GDP growth rates of 4% and GHG emissions from 46 Gt in 2015 to 59 Gt in 2050, driven
6.1% annually over 2015–2050, with their share in global GDP by GDP and population growth, rising standards of living in
increasing from 20% in 2020 to 30% in 2050 and China becoming developing economies and the lack of ambitious climate policies.
the world’s largest economy surpassing the EU and USA. The These result in increased fossil fuel consumption in the energy,
growth in developing economies is considerably higher relative transport and industrial sectors which is not in line with Paris
to developed, with the share of the latter declining from 50% in goals to limit global warming to well-below 2◦ C and pursue
2020 to 37% in 2050 (Figure 3). Each country follows a different efforts toward 1.5◦ C (van Soest et al., 2021). In contrast, the
pattern of growth, with some based on the accumulation of 2DEG scenario assumes that the goal of staying well-below
capital and knowledge, others on enhanced competitiveness or on 2◦ C is met through a global carbon price to constrain global
increasing labor supply. The outlook assumes that a sustainable cumulative CO2 emissions over 2010–2050 to 1,000 GtCO2 . The
growth path is adopted by countries where excessive surpluses global carbon tax increases from 80$/tnCO2 in 2030 to about
or deficits are reduced. Population projections are derived from 350$/tnCO2 in 2050 reflecting the increasing mitigation effort
United Nations (2019), showing the global population will reach
9.7 billion by 2050, increasing on average by 1.1% annually over 5 The constraint is not restrictive as the model solution already goes beyond the
2020–2050. The global unemployment rate is assumed to decline constraint.

FIGURE 3 | Share of major economies in global GDP in 2020 and in 2050.
FIGURE 4 | Evolution of GDP, emissions, and primary energy in the Reference scenario.
and the limitations of low-cost abatement possibilities, mainly uptake of low-carbon and energy efficient technologies and the
in sectors with limited mitigation options, like heavy industry gradual phase out of fossil fuels. The 2DEG scenario leads
and freight transport. High carbon prices would trigger large to a decline of global GHG emissions from Reference levels
emission cuts in all regions and sectors, induced by increased by 25% in 2030 and 72% in 2050, while the decline across

economies ranges between 7–39% in 2030 and 35–79% in 2050. uptake of low-carbon technologies. There are four major pillars
Highest reductions projected for developing economies with to achieve decarbonization.
limited climate action in Reference scenario, including South Restructuring of power generation toward low-carbon
Africa, Russia and India. Uniform carbon pricing leads to higher technologies, especially renewable energy, but also nuclear and
mitigation effort in developing economies, due to their higher CCS. The imposition of high carbon prices would drive a massive
carbon and energy intensities relative to developed countries decline in coal-fired generation with the share of coal in global
and the lack of policy ambition in the Reference scenario. On electricity production rapidly reducing from 39% in 2015 to
the other hand, ambitious Reference climate policies, and low 20% in 2030 and 1% in 2050. Gas-fired power plants continue to
energy intensity of developed economies (EU, Japan) implies that operate in the medium term and provide flexibility and balancing
the mitigation effort is relatively lower than the global average to the power system to enable massive expansion of intermittent
(Figure 5). RES. However, the increasing carbon price after 2030 renders the
The distribution of the global GHG mitigation effort across continuation of gas-fired plants uneconomical in most regions,
gases and sectors is shown in Figure 6. More than 70% and thus the share of gas-fired generation declines from 26%
of the total mitigation effort is achieved through reducing in 2030 to 8% in 2050 (Figure 8). After 2040, the required
CO2 emissions from energy combustion, while non-CO2 balancing and flexibility services are increasingly provided by
GHGs account for 23% of the effort and CO2 emissions Combined Cycle gas-fired plants combined with CCS. Some
from industrial processes represent about 5%. The electricity countries expand their nuclear capacities (Japan, Korea, China,
sector is the main contributor to emission reductions in and Russia), but the massive uptake of renewable energy is the
most economies driven by the massive uptake of renewable most important option to transform the electricity supply sector,
energy (mostly PV and wind) that replace fossil fuel-fired with the share of PV and wind increasing from 5% in 2015 to 46%
power plants. The transport sector achieves large emission in 2050. Wind and PV benefit the most as a result of accelerated
cuts largely driven by the expansion of Evs, efficiency technological progress through learning-by-doing, and their
improvements, modal shifts to less polluting modes and increased cost competitiveness vis-à-vis conventional power
deployment of advanced biofuels in freight transport and plants, combined with limitations in hydroelectric potential and
aviation. Large emission reductions are also projected for nuclear power in several major emitters. Bioenergy combined
buildings and industries, driven by fuel substitution, energy with CCS can produce net negative emissions, but its deployment
efficiency improvements, electrification of end-uses and the is limited until 2050 mostly in countries targeting near-zero
uptake of green hydrogen. emissions to offset emissions from hard-to-abate sectors. The
Energy efficiency improvements in end-use sectors (buildings, expansion of renewable energy differs across countries, with
industries, transport) play a crucial role in achieving the the RES share in primary energy demand projected to increase
Paris mitigation goal, as they contribute to about 55% from the current global average of 14% to more than 50%
of the cumulative emission reduction achieved by 2050, in several economies, which have high market potential and
while carbon intensity reductions account for 45% of the concrete plans for expansion of renewable energy, ambitious
total mitigation effort (triggered by the increased uptake of climate policies, and limitations in other options, like nuclear,
renewable energy sources). The 2DEG scenario shows a rapid CCS and hydro power. The system transformation is even more
decoupling of GHG emissions from economic growth, with pronounced in the EU, with a rapid coal phase-out by 2040,
large emission reductions in all countries combined with massive deployment of PV and wind (onshore and offshore) and
GDP growth (Figure 7) even in countries with high emission a nearly emission-free electricity production before mid-century.
growth in the Reference scenario like India, Saudi Arabia, Electrification of energy services. As the power sector
and Indonesia. The decoupling is driven by the large-scale decarbonizes by 2050, the increased electricity use in mobility,
expansion of renewable energy in the electricity sector and heating, and industries becomes an increasingly important
in energy end-uses, electrification of energy services, extensive strategy to reduce emissions (Figure 9). Electrification of
energy efficiency improvements, the uptake of CCS and fuel energy uses in buildings and industries has been a long-
switching to low-emission fuels, including advanced biofuels standing trend, as appliances, lighting, refrigeration, air
and hydrogen. conditioning, industrial uses and other services are already
provided primarily by electricity. This trend is projected to
accelerate in 2DEG scenario driven by high carbon pricing
Impacts on Energy System Restructuring that penalizes the direct use of fossil fuels; the share of
In the 2DEG scenario, low-carbon technologies are massively electricity in global final energy consumption is projected to
deployed to substitute fossil fuel use, while their costs improve increase from 20% in 2015 to 36% in 2050 (22–54% across
because of accelerated learning-by-doing and economies of countries). Electricity increasingly penetrates in buildings
scale. The wide coverage of low-carbon options in GEM-E3- and in industrial processes, such as raising steam and direct
FIT (renewable technologies, Evs, advanced biofuels, energy process heat, while the uptake of Evs offers a key option to
efficiency, electrification, heat pumps, hydrogen, CCS) enables decarbonize road transport driven by technological progress
a rigorous assessment of interlinkages between the alternative in batteries and high carbon pricing. Electrification combined
options (e.g., electrification and RES-based electricity) and can with a low-emission power mix is a prominent strategy in
assess the complex energy system dynamics, innovation and most G20 economies, as it provides a low-cost strategy to

FIGURE 5 | GHG emission reductions from Reference scenario across economies.
FIGURE 6 | Distribution of the GHG mitigation effort in the 2DEG scenario by sector.
decarbonize end-use sectors, including industries, buildings currently high energy intensity. Globally, energy intensity is
and transport. projected to decline by 2.2%/year on average over 2015–2050,
Energy efficiency provides a means to deliver the required showing a clear acceleration of historical trends of about
energy services, while reducing energy needs and associated CO2 0.8% annual reduction. This is driven by: (i) substitution
emissions. In the 2DEG scenario, the global energy intensity toward more efficient energy carriers (i.e., electricity instead
per unit of GDP would decline by about 54% over 2015– of oil products), (ii) stock turnover encompassing uptake of
2050 (Figure 10). The reduction in major economies ranges energy-efficient equipment and appliances, (iii) investment in
between 33% (in large hydrocarbon producers like Russia) thermal insulation of buildings especially in colder countries,
and 73% in fast-growing economies like China and India, (iv) high carbon pricing that increases the cost of energy
driven by the fast turnover of their capital stock and their services, and (v) lifestyle changes, e.g., transport modal shifts

FIGURE 7 | Evolution of GDP and GHG emissions in major economies in the 2DEG scenario.
toward less-polluting modes. Reduced energy consumption Macro-Economic Effects of the

implies lower requirements for energy supply investment (e.g., Low-Carbon Transition
power plants, oil refineries), thus saving emissions. Developing The imposition of carbon pricing drives energy system
economies have a high potential for energy savings, due transformation toward a more capital-intensive structure, with
to: (a) their current high energy intensity as they largely increased investment to renewable energy, energy efficiency
depend on the inefficient use of coal, (b) their high activity projects, and Evs. Decarbonization would lead to increased
growth enabling fast turnover of equipment stock, and (c) the upfront capital expenditures and lower energy purchasing costs
projected changes in their economic structure away from energy- in the long term. GEM-E3-FIT (as CGE model) assumes full
intensive manufacturing. and optimal use of available capital resources in Reference
Reduced carbon intensity of energy fuels. The combination scenario under financial closure. Therefore, the reallocation
of renewable energy, energy efficiency and electrification can of investment toward low-carbon, energy efficient technologies
drive a substantial reduction of carbon emissions. However, induced by high carbon pricing in the 2DEG scenario puts
as not all energy end-uses can be cost-efficiently electrified pressure on the capital markets and leads to “crowding-
(e.g., high-temperature industrial applications, aviation, freight out” effects; firms and households finance their clean energy
transport), low-carbon fuels should be deployed to decarbonize investment by spending less on other (non-energy) commodities
these sectors. Advanced biofuels can play a critical role in and investment purposes.6
reducing emissions in transport modes, like aviation and High carbon prices increase the cost of energy services for
navigation, while green hydrogen and synthetic fuels derived firms and households and hence production costs throughout
from RES-based electricity can be used in transport segments the economy and have a depressing effect on consumption
that cannot be easily electrified (i.e., heavy vehicles). However, and GDP, which is partly alleviated by increased low-carbon
the development of these fuels is costly as it requires new investment. The Paris goals would have only a limited impact
hydrogen production facilities -stressing also renewable energy
6 Crowding-out effects can diminish in case a favorable financing scheme is
potentials-, expansion of hydrogen refueling infrastructure hubs
assumed, as illustrated in (E3Mlab, 2016). This study shows that if firms and
and radical changes in industrial processes (e.g., in high-
households can borrow in capital markets without facing increasing unit costs of
temperature furnaces to decarbonize steel-making and other funding, GDP impacts of decarbonization are minimal and even positive (in the
heavy manufacturing activities). short term).

FIGURE 8 | Power generation mix in major economies in the 2DEG scenario.
on economic activity with global cumulative GDP declining representation of technological progress in GEM-E3-FIT implies
by 1.4% from Reference levels over 2020–2050 (Figure 11), that the imposition of ambitious climate policies in the 2DEG
even without quantifying the benefits related to avoided climate scenario would result in accelerated cost reduction for low-
impacts, air quality and human health (Rauner et al., 2020). carbon technologies, as a result of both learning-by-doing (driven
Many macroeconomic models that have computed the costs by large increases in the capacity of clean technologies) and
of decarbonization provide evidence of net mitigation costs; innovation, as low-carbon R&D also increases in the case of
the modeling results reported in the IPCC 5th Assessment high carbon and energy prices. The 2DEG scenario impacts
Report (IPCC, 2014) estimated global consumption losses on the low-carbon technology costs are shown in Figure 11,
of 2–6% in 2050 for scenarios limiting global warming to indicating the large cost reductions induced by ambitious
<2◦ C. Our model-based projection lies in the lower range decarbonization policies on wind, solar PV, EV batteries,
of these estimates, due to the endogenization of technology and advanced energy-efficient equipment and appliances.
learning and innovation which leads to reduced costs for Endogenous technical change would reduce the price effects from
low-carbon technologies and creates new industries for clean carbon pricing (as low-carbon and energy-efficient technologies
products (Fragkiadakis et al., 2020). In particular, the detailed become increasingly cheaper), thus mitigating crowding out

FIGURE 9 | Share of electricity in final energy consumption in the 2DEG scenario.
FIGURE 10 | Development of energy intensity of GDP in major economies in the 2DEG scenario.
effects in the CGE context and weakened competitiveness in costs projected by GEM-E3-FIT relative to IPCC estimates
international markets; thus, resulting in reduced mitigation and conventional CGE models, which commonly show GDP

FIGURE 11 | Low-carbon technology costs in the 2DEG scenario (indexed to 2015).
and consumption losses of 2–6% in scenarios compatible with annual growth rates declining by 0.03–0.3% from Reference
Paris goals. over 2015–2050, implying compatibility of decarbonization with
The economic impacts of 2DEG scenario differs across robust economic growth.
countries, largely depending on their economic structure, their Investment in low-carbon technologies and energy efficiency
position in international trade (especially for fossil fuels and increase in the 2DEG scenario, which may pose challenges for
low-carbon technologies) and the mitigation effort relative to identifying and directing available funds. This implies a potential
Reference; GDP losses commonly increase when mitigation “crowding-out” effect (as discussed), leading to a small reduction
effort is higher. Macro-economic impacts also depend on in global investment levels from Reference levels due to stresses
assumptions about the costs and availability of mitigation options in capital markets and declining economic activity. Looking at
and country-level specificities (domestic energy production, regional impacts, the limited GDP reduction in EU combined
system structure). with the scale-up of investment for renewable energy, EVs and
energy savings would lead to zero impact on investment volumes.
• Major fossil fuel exporters, like Russia, Saudi Arabia and
In contrast, private consumption drops more than GDP in most
Energy Producers, would face large negative economic impacts
economies, as production costs and prices increase due to carbon
due to the reduced revenues from fossil fuel exports and their
pricing and the reallocation of resources compared to Reference.
high carbon intensity per unit of GDP.
Global private consumption declines by 2% from Reference by
• Mitigation costs in large developing countries (China and
2050, with the most pronounced impacts projected in large fossil
India) are high, as the universal carbon price leads to higher
fuel exporters. Figure 12 decomposes the changes in global GDP
relative mitigation effort for developing countries, which
over 2030–2050 in 2DEG scenario compared to Reference into
are negatively impacted due to their currently high carbon
the main GDP components. The decline in consumption is
intensity and reliance on coal.
the major factor influencing GDP reduction, as it accounts for
• The macro-economic impacts in developed economies are
more than 80% of GDP losses in 2DEG over 2030–2050. On
limited, on average <1% of their GDP. Mitigation costs
the other hand, as described above the decline in investment is
are marginal in countries with low carbon intensities (EU,
lower, as the increased investment in low-carbon technologies
Japan) that already implement relatively ambitious policies
and energy efficiency counterbalance some of the investment
in the Reference scenario. Countries can also benefit from
losses due to reduced economic output. Lastly, the endogenous
increased low-carbon technology exports (e.g., wind turbines
technical progress for low-carbon technologies has limited, but
in Germany and Denmark) as the global clean energy market
positive impacts on global GDP, as it reduces the costs faced
becomes significant.
by households and businesses to purchase new low-emission
To put scenario results into perspective, the global GDP growth technologies and energy efficient equipment.
rate remains high: the 2.70% yearly growth in the Reference The 2DEG scenario has limited impacts on aggregate
scenario over 2015-2050 is marginally reduced to 2.62% in 2DEG. employment, driven by two contradictory trends: on the one
The Paris GDP impacts are minimal for major economies, with hand, declining economic activity tends to reduce employment;

FIGURE 12 | Decomposition of global GDP changes in 2DEG relative to Reference for 2030 and 2050. The contribution of each component reflects its change from
Reference levels expressed as a share of GDP in 2030 and 2050.
on the other, the economy moves toward a more labor-intensive the EU benefit from a decline in fossil fuel imports and from
structure as renewable technologies and energy efficiency have increased exports of low-carbon equipment, mainly solar PV
higher labor intensity on average compared to fossil fuels (China) and wind turbines (EU). The trade impacts also arise
(Fragkos et al., 2018). The trade-off between jobs lost in some mostly from the fact that in the reference scenario, the climate
sectors and jobs creation in others would lead to a modest ambition of the EU is relatively higher compared to major
impact on economy-wide employment (Figure 13). As outlined non-EU economies as the European NDC is more ambitious.
in OECD (2017), the job effects projected by various studies In contrast, in the 2DEG scenario a universal carbon price is
depend on the modeling approach (neo-Keynesian vs. neo- imposed, so that the ambition is the same across all countries, but
classical), the climate policy ambition, the way to recycle carbon it increases (from Reference scenario) at a lower rate in the EU, as
revenues, the flexibility of labor markets and the availability of shown in Figure 5. This means that production of the EU energy
labor with the right skill set for the emerging green sectors (to intensive industries (Basic metals, Chemicals and Non-metallic
avoid mismatch between labor demand and supply). minerals) is increased by 7.4% in the 2DEG scenario as compared
In GEM-E3-FIT, global decarbonization would lead to limited with reference over 2020–2050. The leakage rate in production of
employment effects, with global jobs declining by 1.2% and energy intensive industries is estimated at 22% (23% in ferrous
1.8% compared to Reference scenario in 2030 and 2050, metals, 16% in non-ferrous metals, 33% in chemicals and 9%
respectively. Developed economies would face minimal impacts, in non-metallic minerals). In addition, the net exports (trade
as negative job effects from reduced GDP are to a large extent balance) of the EU energy intensive industries are improved
counterbalanced by the creation of green jobs (Karkatsoulis by 0.5% of GDP in cumulative terms over 2020–2050. Despite
et al., 2016), which include jobs in the manufacturing of low- the higher production of European energy intensive industries,
carbon equipment, thermal insulation of buildings, construction the higher climate ambition in 2DEG scenario in all countries
and O&M of RES plants, biofuels production and in biomass (Figure 5) implies a decrease in GHG emissions as the carbon
feedstock supply. Recent analyses (IEA, 2019a; Fragkos et al., intensity is improved by about 35% (mainly due to the fuel
2018) show that RES technologies are more labor intensive than substitution away from fossil fuels).
fossil fuels when jobs in the entire chain of related activities Carbon pricing impacts negatively the fossil fuel sectors, due
are considered; thus, expansion of low-carbon technologies that to the shift toward low-carbon energy sources and the more
replace fossil fuels tends to mitigate the adverse impacts of high efficient use of energy; thus, the global output of fossil fuel
carbon pricing on labor markets. supply sectors would decline by about 45% from Reference in
The mitigation effort of the 2DEG (relative to Reference) 2050. The electricity sector output modestly declines by 4% in
differentiates by country, with impacts on competitiveness and 2030 (due to higher energy efficiency), but in the longer term
international trade (Paroussos et al., 2015). The balance of trade it increases by 5% relative to Reference scenario to provide the
of major energy exporters (Russia, Saudi Arabia) deteriorates required electricity for mobility and heating services, but also to
driven by reduced fossil fuel exports. In contrast, China and support the emergence of green hydrogen. The output of energy

FIGURE 13 | Macro-economic impacts of the 2DEG scenario in major economies.
intensive industrial (EITE) sectors is projected to decline by skill levels combined with policies to ensure that the workforce
2.5% from Reference levels by 2050 due to their carbon-intensive has the required skills for the green transition minimizing
production structure. In these sectors, energy costs represent mismatches between labor demand and supply. The impact on
a high percentage of their total costs and thus carbon pricing services is driven by reduced GDP; the reduction in service-
leads to high increases in production costs. The reduction is related jobs is limited in relative terms, but it affects millions of
limited in metals sectors, as they feature in the production chains people, as services account for about 45–50% of worldwide jobs.
of low-carbon technologies and energy-efficient equipment. The Jobs in the electricity sector are impacted by decarbonization.
2DEG scenario has limited impacts on the output of services, In the medium-term, energy efficiency drives a reduction in
as the sector is characterized by low carbon intensity per unit electricity demand and hence in electricity sector output and
of output. Energy efficiency improvements require construction jobs. However, in the longer term, the increasing electrification
services directed to building retrofits and renovation; thus, of end-uses and the uptake of green hydrogen would lead
the construction sector registers only marginal losses despite higher power requirements with electricity jobs increasing by
reduced GDP. Large positive impacts are projected for low- 6% relative to Reference levels in 2050. Sectors providing inputs
carbon manufacturing, triggered by the increased demand and to mitigation strategies, including construction (renovation
production of Evs, batteries, advanced biofuels, wind turbines, of buildings and installation of renewable technologies) and
and solar PV (Figure 14). agriculture (production of advanced biofuels) would benefit from
Model-based results show that decarbonization leads to decarbonization. In addition to the effects on sectors directly
large structural shifts in employment across sectors (Figure 15). related to energy transformation, decarbonization would also
Negative job impacts are found in fossil fuel supply and EITE impact workers at various levels of the supply chain (indirect
industries, while additional jobs are created in low-carbon effects) or in sectors that observe a knock-on impact through
manufacturing, and the effects are ambiguous and limited in multiplier effects (induced effects). Larger impacts will be felt
other sectors. Decarbonization leads to positive employment within, rather than between sectors implying changes to current
effects in the electricity and mechanical and electrical engineering jobs and skills requirements (OECD, 2017) which may require
sectors to manufacture and develop renewable energy and energy re-training or topping up of skills (e.g., architects integrating
efficiency technologies, including PV, wind, EVs, energy-efficient energy-efficient materials and technologies in building design),
equipment, and green hydrogen. In contrast, high carbon pricing while existing skills may be used to shift between sectors (e.g.,
directly leads to job losses in coal, oil and gas supply sectors workers from oil & gas using welding and outfitting skills within
and increases the energy costs thus reducing the output and the wind sector).
employment in EITE sectors, including cement, steel, and The high decarbonization effort in the 2DEG scenario
chemicals. The profound changes in labor markets induced by results in limited deviations in the composition of global
decarbonization require extensive re-allocation of workforce and and national value added with increased share of high-skill

FIGURE 14 | Impacts of 2DEG scenario on global production by main sector.
FIGURE 15 | Impacts of 2DEG scenario on global employment by main sector.
occupations, while the share of low skilled decreases. The replacement of labor-intensive and low skill occupations, like
transition to a low-carbon economy increases the demand coal mining, oil and gas extraction, by skill-intensive processes
for high skilled labor (e.g., managers, engineers, technicians), (Fragkos and Paroussos, 2018) related to the research, design,
which receives relatively higher wages. The transition involves manufacturing, development and installation of low-carbon

technologies. The model-based analysis shows large job losses modeling ambitious emission reduction targets to meet Paris
in fossil fuel industries, while gains are projected in electricity temperature goals and EU Green Deal.
sector and in clean energy development and manufacturing. The implementation of high carbon pricing leads to an
These activities demand higher skill levels relative to fossil fuel extensive restructuring of the global energy system, which is
sectors, including occupations like manufacturing and software driven by: (1) Large-scale expansion of renewable energy toward
engineers, project designers, advisors and other professional or a decarbonized power system by mid-century, mostly through
managerial positions. The GDP reduction in the 2DEG scenario PV and wind complemented with storage and CCS capacities to
results in lower labor demand that increases unemployment provide balancing and flexibility services, (2) Energy efficiency
across all occupations (Figure 16). The sectors that serve the improvements in end-use sectors, driven by investment in
low-carbon transition (i.e., construction, electricity, clean energy) energy renovation in buildings, uptake of more efficient cars
have limited impacts in labor demand, but register a higher and appliances and fuel switching to more efficient carriers, (3)
share on technicians and managers occupations as compared to Increased electrification of energy services both in developed and
carbon intensive sectors and fossil fuel industries. This means in developing economies, driven by the large-scale expansion of
that unskilled occupations suffer from a higher increase in Evs and heat pumps, (4) Low-emission energy carriers, including
unemployment levels due to decarbonization, as compared to advanced biofuels and hydrogen to decarbonize sectors with
technicians or other skills required for the transition. limited availability of mitigation options (e.g., freight transport,
heavy industries, aviation).
Decarbonization is a complex process requiring large changes
DISCUSSION in the way we produce and consume energy, but also in
global economy, trade, labor, and capital markets. It involves
The Paris Agreement has been adopted by 196 Parties at COP21 the substitution of fossil fuels by products and services
in Paris and its goal is to limit global warming to well-below 2, related to renewable energy and energy-efficient equipment.
preferably to 1.5◦ C, compared to pre-industrial levels. Research The transformation requires increased investment to low-
has shown that to achieve the Paris goals, global emissions carbon technologies combined with innovation, development
should peak as soon as possible and decline rapidly thereafter and high diffusion of low-carbon technologies and consumer
to achieve climate neutrality by mid-century. This requires an willingness to change behavior and purchase energy efficient
unprecedented effort to transform the global energy demand and equipment, while policy makers should set clear, predictable,
supply systems with a rapid reduction of fossil fuel use combined and ambitious climate policies. The economic restructuring
with accelerated expansion of renewable energy, electrification, toward a more capital structure may be costly in the short-
energy efficiency and low-carbon fuels. These changes will term with increased energy costs that drive upwards the
transform our economies through multiple channels affecting general price level and putting stress on the capital market,
sectoral production, labor and capital markets, consumption while reducing competitiveness. However, GEM-E3-FIT also
patterns, investment dynamics, trade flows and international captures the potential long-term positive externalities which can
competitiveness. The socio-economic impacts of climate policies be driven by low-carbon technology progress and industrial
have been extensively analyzed using macroeconomic models, maturity dynamics. The short-term increase in energy prices can
which have provided useful insights on policy impacts on provide new opportunities for low-carbon R&D and commercial
economic activity, investment, and other macro-economic uptake of low-emissions, energy-efficient technologies, whose
variables. However, these models often do not represent in detail costs improve through increased uptake, while new industries
the energy system and technologies, technology progress, low- may emerge in specific countries with extensive innovation
carbon innovation and spillovers and fail to include real-world and industrial base. These effects can boost EU and global
modeling of labor and capital markets. economic growth and alleviate the “crowding-out” effects in
In this study, we use the well-established GEM-E3-FIT other productive sectors.
model to improve its simulation capabilities and consistently We find that high carbon pricing toward achieving Paris
capture the complex socio-economic impacts of decarbonization. goals would have limited global GDP losses that amount
The main modeling improvements, compared to conventional to 1.4% of Reference GDP over 2020–2050. The imposition
CGE modeling, include: Enhanced representation of energy of universal carbon pricing ensures that the global target is
system (e.g., electricity supply, energy efficiency, transport by met with the lowest possible costs, but the socio-economic
mode and technology, electrification), detailed representation of impacts are more negative in large hydrocarbon exporters
sectors manufacturing low-carbon technologies, endogenization that lose export revenues (e.g., Russia, Saudi Arabia) and in
of technology progress based on learning by doing and learning developing economies with large reliance on coal and high
by R&D, enhanced modeling of labor markets, including skill energy and carbon intensity, including China and India. In
levels, and Improved representation of energy and climate contrast, decarbonization implies opportunities for additional
policy instruments. The enhanced energy system representation growth in countries with large innovation base and exports
enhances the credibility of CGE modeling for climate policy of low-carbon technologies. Decarbonization impacts on total
analysis as the substitution patterns in energy supply and demand investment is minimal, driven by reduced economic activity
are based on bottom-up modeling of technologies rather than and increased requirements for investment in renewable energy,
restrictive functional forms. This is increasingly important when EVs and energy efficiency. Overall, our analysis confirms that

FIGURE 16 | Changes in global unemployment by occupation in 2DEG compared to Reference.
meeting the 2◦ C goal is compatible with robust economic growth aviation and maritime sectors, which currently are costly and lack
both in developing and developed economies, as its impact on commercialization but may be needed for the transition to carbon
annual growth rates is minimal. The trade balance is affected neutrality. The inclusion of novel mitigation options in the next
by decarbonization, with large export losses for major fossil fuel GEM-E3-FIT version will enable the socio-economic analysis of
exporters and some gains for clean energy exporters like China the Paris goal to limit global warming to 1.5◦ C in future research.
and the EU, for solar PV and wind turbines, respectively.
Decarbonization results in different impacts by production
sector, with large reductions projected for fossil fuel supply DATA AVAILABILITY STATEMENT
sectors and energy intensive industries, implying high challenges
The original contributions presented in the study are included
for their workforce which is also highly geographically
in the article/supplementary material, further inquiries can be
concentrated in most cases (e.g., coal regions). In contrast,
directed to the corresponding author.
decarbonization may create possibilities for expansion and
job creation for clean energy manufacturing (to produce
PV, wind, EVs, etc.) and electricity sectors due to increasing AUTHOR CONTRIBUTIONS
electrification of end uses. Sectors featuring in the supply chain
of low-carbon products also benefit from decarbonization, All authors listed have made a substantial, direct, and intellectual
e.g., construction (related to building retrofits) and agriculture contribution to the work and approved it for publication.
(to produce biofuels). The employment impacts of mitigation
are minimal as reduced economic activity is to some extent
counterbalanced by higher labor intensities (on average) FUNDING
of renewable energy compared to fossil fuels (IEA, 2019a).
The low-carbon transition through high carbon pricing This research was funded by the European Union’s Horizon 2020
would result in a more labor-intensive economy driven by research and innovation programme under Grant Agreement
low-carbon investment. No. 730403 (INNOPATHS) and under Grant Agreement No.
GEM-E3-FIT results crucially depend on assumptions made, 821124 (NAVIGATE).
e.g., on the values of elasticities used in production or trade
functions. A comprehensive sensitivity analysis on the values of ACKNOWLEDGMENTS
these elasticities is required to consistently evaluate the socio-
economic impacts of mitigation policies. In addition, the model The information and views set out in this paper are those
can be expanded to represent novel mitigation options, including of the authors and do not reflect the official opinion of the
Direct Air Capture, clean synthetic fuels or electrification of European Commission.

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ORIGINAL RESEARCH

published: 25 April 2022

Analyzing the Macro-Economic and

E3 Modelling, Athens, Greece

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FIGURE 1 | GEM-E3-FIT structure.

Modeling Enhancements including capital costs (CAPEX),1 Operation & Maintenance

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Transport consumer’s decision to purchase durable goods depends on the

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FIGURE 2 | Decision tree of households, including energy and mobility services.

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2020–2050. The global unemployment rate is assumed to decline constraint.

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FIGURE 3 | Share of major economies in global GDP in 2020 and in 2050.

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FIGURE 5 | GHG emission reductions from Reference scenario across economies.

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toward less-polluting modes. Reduced energy consumption Macro-Economic Effects of the

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FIGURE 8 | Power generation mix in major economies in the 2DEG scenario.

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FIGURE 9 | Share of electricity in final energy consumption in the 2DEG scenario.

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FIGURE 11 | Low-carbon technology costs in the 2DEG scenario (indexed to 2015).

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FIGURE 13 | Macro-economic impacts of the 2DEG scenario in major economies.

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FIGURE 14 | Impacts of 2DEG scenario on global production by main sector.

FIGURE 15 | Impacts of 2DEG scenario on global employment by main sector.

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FIGURE 16 | Changes in global unemployment by occupation in 2DEG compared to Reference.

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