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Global Commission’s Climate Economy Report Addresses CGE Model Limitations, Cites Synapse Review

The Global Commission on the Economy and Climate released a report last week that finds that low-carbon economic growth is possible for countries at all levels of development, if governments and businesses work together over the critical period of the next 15 years.

Standing in the way of climate policy that will be essential to this progress are models that estimate climate policy costs based on over-simplistic assumptions about current economic conditions. The commission’s report, Better Growth, Better Climate: The New Climate Economy Report, discusses the limitations of computable general equilibrium (CGE) models, citing a Synapse critique of one such model used in the U.K.

“Most CGE models start from the assumption of an economy where resources are already efficiently allocated, for the good reason that it is not easy to model properly the real and dynamic world of multiple imperfections and numerous market failures,” says the commission. “The effects of policy reforms are thus judged against the assumed starting point of an efficient economy...Such shortcomings have been examined, regarding the use of UK Treasury’s CGE model to assess the short-run cost of UK climate policies.”

In the study cited in the report, Synapse reviewed the HM Revenue and Customs (HMRC) CGE model, an economic model developed to analyze tax policies that has been applied to British climate policy proposals (and has found these proposals to be quite expensive). Synapse identified omissions and biases that result in an exaggeration of the costs and dismissal of the benefits of climate protection measures. For example, the model assumes there can never be any net job creation benefits from climate policy, because it assumes that everyone already has a job. It assumes that health and environmental benefits do not have any economic value. The model also analyzes the U.K. in isolation, despite the global nature of the problem and the fact that it must be combatted in part through international cooperation—as demonstrated by the commission’s report.

You can read more in (Mis)understanding Climate Policy: The role of economic modelling, a Synapse report prepared on behalf of WWF-UK and Friends of the Earth.