Methodological Foundations of policy-making in

sustainability transitions

Dr Jean-Francois MercureDeputy director, 4CMR

Hector Pollitt (Cambridge Econometrics) - Macroeconomics

Jorge Vinuales (University of Cambridge) - Environmental Law

Andrea M. Bassi (Knowledge Srl) - Environmental Policy

Neil Edwards (The Open University) - Climate Sciences

Paper available at: 4CMR working papers, no 10 (2015), www.4cmr.group.ac.uk

Global Energy-Economy-Environment system

Mercure, Pollitt, Bassi, Vinuales & Edwards, 4CMR working paper 10 (2015)

State of the art energy/economic modelling

- Normative optimisation/equilibrium models

- What is the difference?

Behavioural diversity – System complexity

- Why/what do we optimise?

- Disconnect: using normative models for descriptive purposes

- Positive science in economics: behavioural economics

- Optimising at the system level or the agent level?

Mercure, Pollitt, Bassi, Vinuales & Edwards, 4CMR working paper 10 (2015)

How to usefully inform the climate policy process

- Can we predict the effectiveness of emissions reduction policies?

- Policy effectiveness behavioural science

- The diffusion of innovations

- Do policies interact with one another?

- Is carbon pricing the optimal policy, or do we also need renewables targets?

- What are their impact across sectors?

- Will biofuels policy increase the price of food?

- Will electric cars increase electricity prices?

- Will jobs be created by low-carbon industries?

We cannot inform these questions with current methodology!

Mercure, Pollitt, Bassi, Vinuales & Edwards, 4CMR working paper 10 (2015)

What is missing in our analysis? 2 main themes:

- Behavioural science: the adoption of innovations

- Complexity science: complex processes and uncertainty

Two main methodological pillars missing:

+ = ?

Mercure, Pollitt, Bassi, Vinuales & Edwards, 4CMR working paper 10 (2015)

Pillar 1: consumer diversity in markets

Mercure & Lam, Environmental Research Letters (2015)

Pillar 1: consumer diversity in markets

Mercure & Lam, Environmental Research Letters (2015)

Pillar 2: Complexity sciences and the economy

- Macroeconomics in crisis:

- The 2007 financial crisis and the great recession

- Climate change and the economics of technological change

- Economics of the sustainability transition:

- Economic outcomes of climate change mitigation ultimately depend on

assumptions on the availability of finance

- Neoclassical economics: constant investment imposes crowding out

- Post-Keynesian economics: endogenous money allows investment cycles

- Post-Schumpeterian (evolutionary) economics: cycles clustering of innovation

- Can we find a unified non-equilibrium theory?

J.-F. Mercure et al., (2015) http://arxiv.org/abs/1310.4403

GUIDEPOST

Model input Emulator 1 Emulator 2 Emulator 3

e.g. emissions e.g. carbon cycle e.g. climate e.g. land productivity

a. b. c. d.

Pillar 2: statistical representation of uncertainty

Holden & Edwards, Geophys. Res. Lett. 2010

J.-F. Mercure et al., (2015) http://arxiv.org/abs/1310.4403

- Inherent uncertainty with complex models:

- Complex models are path-dependent

- Small changes in starting parameters lead to large changes in outcomes

Can this include

economic models?

Conclusion

- Methodological foundations for environmental policy-making:

Diversity – Complexity – Uncertainty

- Diversity: take account of behavioural economics & diversity

- Complexity: go beyond the economic equilibrium (incl. finance)

- Uncertainty: treat economics with uncertainty analysis (like the climate)!

Mercure, Pollitt, Bassi, Vinuales & Edwards, 4CMR working paper 10 (2015)