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Team 3 - Model-Based Macroeconomic Frameworks for Assessing Climate Impact

ICD,RES, and AFR, propose developing model-based macroeconomic frameworks with user-friendly toolkits to help assess quantitatively the macroeconomic, and distributional effects of climate change and associated mitigation and adaptation policies in developing countries.

- The models will be in the tradition of neoclassical dynamic general equilibrium models and will build on ones developed at the Fund (e.g., DIGNAD by RES/ICD and RSM-CRA by ICD/WHD). They will incorporate frictions relevant for developing countries (e.g., the reinforcing impact of agriculture on climate change, fuel and fertilizer subsidies, subsistence consumption and its impact on labor productivity, and issues related to income distribution) and key externalities in the supply/production and demand side, associated with energy inputs and consumption. These models will be used to understand the impact of (i) shocks simulating both one-off events (e.g., natural disasters) and slow-onset developments (e.g., continuous changes in temperature that affect productivity) related to climate change; (ii) adaptation policies (e.g., investing in resilient infrastructure); and (iii) mitigation policies (e.g., carbon pricing and investing in clean energy, including an analysis of the transition risks as countries shift from high- to low-carbon-intensive energy production).

- This work will focus on developing countries as well as small and fragile economies. Some of these countries are more vulnerable to natural disaster shocks as well as other climate-related changes. While most developing countries are not among the group of large CO2-emitters, most of them are committed to achieve climate goals, including in the context of the Paris Agreement. Whilst climate adaptation and mitigation policies need to be accelerated in developing countries, they may put further pressure on already high debt levels, scarce resources to meet developing countries' growing population growth trends, and limited policy space. More broadly, there is a need to understand the macroeconomic and distributional impact of climate change and associated policies, identify policy trade-offs and challenges, and provide potential appropriate measures in these countries.

- The models would allow for country-specific calibration and tailored policy analysis. This should be informed by empirical work on the topic as well as guidance from IMF country teams. Once the models are developed, they will be piloted in a few AFR countries to road test the models given the direct relevance to Sub-Saharan Africa's economies and see how they can be used in the context of work related to Article IV missions and country programs, among others.

- The frameworks would help Fund staff and country officials integrate climate change into their macroeconomic analysis and inform various capacity development activities. More specifically, these models will provide quantitative assessments of the impact of climate change shocks as well as of mitigation and adaptation policies on key macroeconomic and social indicators (such as economic growth, labor productivity, consumption, public debt, food security, and poverty). They would also provide building blocks for internal training to Fund staff, external training to country officials, and technical assistance (TA) on macroeconomic frameworks.

- We will also aim to develop user-friendly toolkits (such as the Financial Programming Environment (FPE) currently being developed by ICD, or other excel-based user interfaces) to facilitate the dissemination and simulation of the model for policy scenario analysis by IMF teams and country officials, along the lines of the recent work of the DIG or DIGNAR models. Output from such toolkits could be similar to the model-based assessment of temperature increases under different policy scenarios in the Oct. 2017 WEO (see attachment).



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